- Revenues:
Revenues and profits. Profit maximisation:
Average revenue (AR) = Price
Marginal revenue (MR) is the extra revenue earned by selling one extra unit of output.
If price is constant, MR=AR
If price must be reduced to sell more, MR will be less that AR.
Exhibition 5
A company will continue to make extra profit by producing and selling more if MR exceeds MC. MR will never rise as more units are sold, but may fall.
Profit can be measured as:
Profit per unit AR-AC
Total profit (AR-AC) x Q
When profits are maximised at a level where AR> AC, the profit difference is profit in excess of normal profit, or supernormal profit.
When profit s are maximised at a level where AR<AC, there is a loss, but strictly we mean that the firm has failed to achieve a normal profit, since in economics, AC includes normal profit.
- Market Structure:
Casual observation reveals that market structures vary markedly among industries. Knowledge about market structure can tell managers a great deal about potential profitability, and can be central to drawing strategic conclusions. In the following discussions the objective is to show how a framework of ideas can lead to important strategy conclusions.
Perfect market:
Perfect market means there are millions of suppliers and consumers in the market. Perfect competition refers to a situation in which all firms in the market are price takers, because they do not have the ability to influence the market price, and must accept the ruling market price for their product.
Exhibition 6
Monopoly:
At the other extreme the industry is comprised of only one producer, the monopolist, whose demand curve is the industry demand curve for the product. This demand curve slopes from left to right because the company is not a price taker, i.e. it can sell more by lowering the price. Exhibition 7 can help in visualising how profits are made in monopoly.
Competition among the Few: oligopoly
When there are relatively few competitors in a market the likely reaction of competitors to changes in pricing and marketing strategy must be taken into account. One outcome is the kinked demand curve. In this market the outcomes cannot be predicted because they depend on the reactions of the individuals; for example, a price increase by one company as a result of higher costs may result in all other competitors raising their prices by a similar amount, or one of the companies may see an opportunity to grab a larger market share and may therefore reduce price.
Exhibition 7
The indeterminate outcomes in this situation could result in the potential monopoly profits, which exist because of market imperfections being bidden away.
Exhibition 8
2. UK economy and automobile industry
- UK economy
UK did still flirt dangerously with an economist's definition of a recession earlier in 1999. The economy expanded at a quarterly rate of just 0.1 per cent in the fourth quarter of 1998 and was stagnant in the first quarter of 1999 - and so avoided two consecutive quarters of falling output by a very narrow margin.
The recessions have in the past been made deeper by tight monetary policy needed to rein back inflation. But the combination of the strong pound - making imports cheaper - and fear of a recession keeping a lid on wages meant that underlying inflation stayed within half a percentage point of the government's inflation target.
Exhibition 9
Anyway, some of the strongest increases in consumer spending have come in durable goods - cars, audio-visual and photographic equipment - as buyers take advantage of price competition on the High Street and the strong pound for imported goods. The result, unless the Bank watches closely, may be a bulging trade deficit and an eventual fall in the pound. Refer to Appendix I UK Economy, for UK economy data, exchange rate and automobile industry concern information.
- UK automobile industry structure
The supply chain of UK automobile industry is evolving at a steadily increasing pace.
Exhibition 11
It is currently comprised of:
- Global Tier 1s (e.g. Bosch, Calsonic, Delphi, Denso, GKN, Lear, Magna, Magneti Marelli, TRW, Valeo, Visteon) supplying value-added integrated systems.
- Local Tier 1s supplying value-added sub-systems or assemblies.
- Local Tier 2s supplying component parts.
- Global Tier 3s(major raw materials suppliers) supplying chemicals, metals etc.
- Local Tier 3s (machine shops, components, etc.).
- UK automobile industry
The UK automotive manufacturing base has changed dramatically over the past 20 years. Looking back to the late 1970s and early 1980s, observers might shudder at the memory of a UK industry that was characterised by strikes, poor labour relations and low productivity, further distinguished by complacent and ineffective management and a reputation for quality problems. Refer to Appendix I for detail statistics of UK automobile industry.
The change in Britain's automotive industry over the last 15 years has been particularly impressive. Hitting a low point of 888,000 cars in 1982, the industry reversed the downward trend and by 1998 Britain's output reached 1.7 million vehicles and is projected to increase to 2.2 million by 2002.
Registrations in 1998 were over 2.2 million cars and 294,000 commercial vehicles. In raw terms, it puts the UK in third position in Europe on registrations (behind Germany and Italy), and for production (behind Germany and France). For much of the early 1980s, Britain's automotive exports (vehicles and components) hovered at the US$6.5 billion (£4.1 billion) mark. By 1997 they reached a record US$30.7 billion (£19.2 billion).
British automobile production rose 2% (to 1,786,623 units) in 1999 for the eighth consecutive year. Still, despite this, it still falls far short of the record set in… 1972 (1,921,000 units). The reason behind this is the decline in British production through the 1970s and 80s with the downfall of the British Leyland group, Rover's predecessor.
According to the Office of National Statistics (ONS), the number of cars produced in 1997 was 1.7 million, the highest number ever. Growth, however, had slowed to 0.7% over 1996, very much in line with the situation in the US. But exports went up from 54% to 57% of vehicles manufactured, a trend which is forecast to continue.
Another continuing trend is inward investment into the UK by automotive companies. Since 1997 announcements have been made committing some £6 - 8 billion (US$9.6 - 12.8 billion) to automotive investments. While Ford has announced cut backs in production in the UK, the high level of expansion in the UK by other players, including Honda, Toyota and many of the Tier 1s, show that the UK is still one of the most dynamic, competitive and open automotive environments in the world.
The turnaround in the 90s can be attributed primarily to the development of Japanese transplants which now represent 34% of British production. The arrival on British production lines of the Nissan Almera in 2000 (following the Toyota Corolla in 1998) should expand this development.
- The price and tax comparison between UK and EU
The UK Competition Commission raises its highly critical 737-page report said car prices are 10-12 per cent (up to 40 percent) higher than in other European nations such as Portugal or Denmark. Private buyers ar paying an average £1,000 too much for each new model --- even after discounts, part exchange deals and financial packages are taken into account. UK consumers are being ripped off by £1 billion a year.
Nevertheless, the Commission's car price report focuses essentially on pre-tax prices. When taxes are added, prices in countries that appear as cheap in the Commission's report - such as The Netherlands, Portugal or Ireland - are often higher than in the UK. This clearly demonstrates that car tax disparities - with rates varying from 15% in Luxembourg to 200% in Denmark - are key important cause of price differences in the EU. Manufacturers' commitment to provide customers in these countries with cars at affordable prices implies that pre-tax prices must be kept artificially low, thereby creating sometimes significant price differences with other countries.
Exhibition 13
Motor Vehicle Taxation Levels in the EU
Tax as a percentage of the net price of the car
Source ACEA Updated April 2000
Exhibition 14
- BMW group
BMW was launched in 1916 in Munich, Germany, from the merger of two small aero engine makers. In 1923 it diversified into the automobile business and the first bike was produced. Its car business started with the Dixi in 1928, which was produced in Eisenach, Germany. BMW’s internationalization started with the launch of the South African plant in 1972. The other worldwide subsidiaries and manufacturing plants including Germany, Austria, the UK, the USA, Mexico, Brazil, South Africa, Egypt, Thailand, Malaysia, Indonesia, the Philippines and Vietnam. The UK division will be concentrated in this report. Refer to Appendix II, BMW
Today BMW is successfully manufacturing medium and high-end cars. The performance saloon cars such as its 3, 5, 7 and 8 Series ranges include many different models. The company also produces high specification motorcycles and aero-engines.
BMW delivered the record number of 699,400 cars of it's own brand in 1998 plus more than 60,300 motorcycles while Rover delivered 487,700 cars. BMW automobiles accounted for 56% of 1998 revenues; Rover automobiles, 24% vehicle finance leasing, 17%; motorcycles, 2% and aircraft engines, 1%. However, 1999 BMW Group production decreased due to the dramatic slow down of Rover sales, illustrated in Exhibition 15.
Exhibition 15
The BMW group is also summarized in Exhibition 16.
Summary of the BMW Group figures:
Exhibition 16
The UK division
BMW (GB) Limited commenced operations in January 1980 and is the UK subsidiary of BMW AG. The company has a primary responsibility for customer satisfaction, through its role in after-sales service. It seeks to promote brand values and customer service through BMW Dealer Network.
The most significant event in BMW (GB) Limited is the acquisition of Lovel, another automobile manufacturer in 1994. For Rover, the take-over offered the security of long term investment to enable grown range of future products whilst BMW gained instant access to small car and 4 x 4 markets which would have taken years to enter. The two companies retain their separate identities and reinforcing the integrated global nature of the BMW Group.
- The Supply-Demand curve of BMW
- The environment
The fluctuation of the economy is the result of government policy and international economic interaction and reflects on the demand for cars and the exchange rate. In a recession economy, demand for car declines and significantly affects BMW sales. Since BMW GB is a company buying in Deutsch Marks and selling in pound sterling, its profit is affected by the currency exchange rate. A strong pound means car prices are higher than surrounding European countries whilst the reverse is true when the pound is weak. Refer to Appendix I for detail exchange rate information.
The UK government abolished special car tax (8%) in 1992 that boosted sales of cars during the recession by lowering prices and affects the profit margin of all automobile manufacturers in UK market. Furthermore, the increases or decreases in diesel and petrol fund tax changes the ratio of demand for diesel/petrol cars. These affect the sale of diesel and petrol cars significantly in UK market. The UK drivers pay tax of approximately £30 billion annually via fuel taxation, company car taxation, road fund licence and higher than other Europe countries.
Under these influences, the UK automobile kept a decline from 1998, as shown the Demand Curve of BMW obviously will under this range.
Exhibition 17
- Oligopoly market
As production and registration data distributed by car makers shown, in Exhibition 18, 19, the automobile industry of UK is composed of about 20 car manufacturers. Among them, the top six suppliers have accounted about 76% of the market share. According to the Oligopoly theory discussed above, the UK automobile market is an oligopoly one. The UK car prices are keeping 10%-12% higher than the Europe land markets. This situation only can be available under the price stable theory of oligopoly market. Perfect market and perfect competition could not support this.
Based on these analysis, the demand curve of BMW in UK market should be the same pattern as the Exhibition8, the kink curve. The increasing of price will lead to a shrink of the demand curve and market share, while the decreasing of price could only contribute little because of the competitors’ quick response.
Exhibition 19
- Main competitors
Rover (-21%), Ford (-13%) and Nissan (-6%) were down in 1998/1999. Rover suffered badly from not having replaced the 100 in a high-demand segment. Ford suffered from both the collapse of the Escort (replaced by the Focus, not produced here), and the prolonged ageing of the Fiesta.
Of car makers on the rise, Jaguar almost doubled production thanks to the S-Type which does not threaten the big Jaguars, and Peugeot also almost doubled production thanks to the 206 which is produced here to ease pressure at the Mulhouse site. Honda, Toyota and Vauxhall saw more modest growth.
- BMW position and competitive advantages
BMW have its market share as data below. The BMW own products only covers 2.85% share, while Rover, which mainly the small car and 4 x 4 markets accounts 8.63% of UK market.
BMW implemented market focus strategy to maximise its profit margin in UK automobile market. The following elements led to the success of BMW in its UK niche market included:
Traditionally, BMW is the known trademark in luxury car manufacturer in the world-wide market. BMW’s image is based on its luxury design, reliability and functionality, high performance and status provided. The powerful brand image enable to remain its current customer and attract new customer for further expands its market share. This is the point why BMW still remain growth of sale during the recession and further strengthened its demand market share in luxury car market.
BMW emphasised the new product development and launched out new series during a period of time. Through the diversification into series of car range, enables BMW expands its market share and penetrate new market by attracting new customer in stead of winning competitor customer.
The BMW dealer network ensures the effectiveness of distribution of BMW in UK market and essential to its growth of sales. Furthermore, the dealer network ensure the effectiveness of distribution by providing better customer services included the exhibition of new series, customer trial, delivery and after sale services such as maintenance and technical helps. Through this, BMW is able to gain customer satisfaction and remain its current customer. Moreover, the dealers network providing protection to weather the deterioration in profitability during the recession.
In UK market, BMW’s price is lower than other brand of luxury car competitor and enable BMW manage the competition in luxury car market. This is essential to remain the growth of sales and wider buyer public since UK market facing recession at the moment. Furthermore, BMW enable to create the reputation in value for money compare to other competitors.
These influences had helped BMW to shift its demand curve right.
- BMW’s Price and quantity
The main products of BMW are its 3 series, which are priced near 20,000 pounds in 1998/1999. Although other series are normally more expensive that this, the portion of Rover will lead to opposite influence. We assume the average price of BMW models to be 20,000 pounds as the time 1999 we plot the Supply Demand Curve. At this position, the UK’s registration of passengers is about 258000 for total BMW in 1998. So we assume the BMW current position –AR point, as Price: 20,000 pounds, Quantity: 258,000 units.
- BMW scale and the pattern of AC curve
BMW’s production are distributed in Germany, Austria, the UK, the USA, Mexico, Brazil, South Africa, Egypt, Thailand, Malaysia, Indonesia, the Philippines and Vietnam. Derail refer to the Exhibition … Based the data and the background information of automobile industry, Economy of Scale theory is the main effect to the supply curve. The supply curve of BMW has a wide pattern for AC curve.
Exhibition 21
- Factors affect the AC curve
BMW emphasis the cost control in its production process by reducing the overheads, expenditure and personnel costs to ensure the maximum benefit from its expenditure. Through this, BMW enable to cover the taxes charged (included import, flue, company car taxation) and remain its lower price marketing strategy in luxury car market.
The high labour cost in UK, (mainly affect the Rover part,) will force the AC curve to be higher.
The depreciation/devaluation of the UK pounds vs Germany DM from mid-1998 will be a disadvantage for BMW to import cars from its international production bases. This is an increasing force for the Supply Curve.
- BMW Supply Demand Curve
As discussed above in the part of UK vs EU price comparison, the average cars price are about 10-12% higher than the Europe land. Obviously, it is caused by the car suppliers power in oligopoly market. As the key competitor in UK market, BMW also earns a super profit as about 10% (Assume the EU market gives normal profit to car-makers.). Based on the AR point assumption, the AC point is priced at 18,000 pounds.
After combine the image of AC/MC, kinked AR/MR and the AC/AR relation, we get the final Demand Supply Curve of BMW in UK market in 1999.
The point ‘a’, is the intersection of MC and MR. According to the economical theory, it is the Max. Profit point and fit for the focus strategy of the company. The point ‘b’ is the intersection of AC and MC. It is also the min. position of the AC curve and fit for the cost leadership strategy. At this quantity, the manufacturing will be the most efficient. The point ‘c’ is the intersection of AC and AR. Only normal profit (no super profit) can be archived. Any quantity less than this position (AC<AR), show a super profit, while the opposite direction (AC>AR) being loss. Competitors who want to expand its market share may be positioned at this point. The differentiation strategy competitor only shows a higher supply curve with a even higher demand curve compare to the competitors or market average.
According to the competitive position analysis and the strategy in UK market, BMW is targeting maximum profit, as the ‘b’ position shown in the Exhibition 22.
Exhibition 22
5. Trends, alternatives and recommendations
5.1 Trends
There are a lot of factors influencing the Supply Demand Curve of BMW. And the detail impacts are discussed in previous sector. Among them, two trends is relative tremendous: the recession of UK economy and the price gap between UK and EU.
The demand curve of the BMW will obviously low down. But there is no evidence for BMW to get breakthrough in its cost structure, i.e. the labour cost of UK will still be high. The supply curve of BMW will remain the same level in near future.
Then we get the estimated Demand Supply Curve of BMW, as shown in Exhibition 23.
Exhibition 23
5.2 Alternatives
There are two alternatives for BMW in 1999 and near future: withdraw from present market or keep developing in current market.
BMW is recommended to define its strengths and weaknesses and hold on to its strength while divesting its weaknesses. This results in the company concentrating on its core business. For example, BMW decide to sell Rover due to the decrease of its sales and losses faced and concentrate on its own BMW business. Thus, enable BMW put all its efforts and resources to remain BMW market share.
By the time we prepare this report, Rover is just sold by BMW, this had demonstrated our analysis.
5.3 Recommendations for developing in current market
BMW is recommended to defence its market position in UK market through defensive and attack marketing strategies to increase its market demand, the sales of BMW. The recommended defence strategies such as
BMW is recommended to maintain its competitive pricing policy and promote the product more effectively through its dealer network and other advertisement channel to maintain and increase its sales, based on the product differentiation offered and customer satisfaction gained. The marketing assets such as BMW strong brand names and reputation provide a strong defence against other competitor in the recession UK market.
The best form of defence is to attack first. BMW is recommended concentrate its continuous innovation and product development to launch out new series of car to tackle different market segmentation to win competitor market share. This is feasible through the support of its strong dealer network and marketing policy.
Heavy price-cutting or prices offer is another recommended marketing strategy to maintain BMW sales within a recession market. This recommendation is feasible based on the value for money reputation and its strong brand images and enable to attract new customer.
The recommended attack strategies to increase demand of BMW are:
The frontal attack marketing strategy is to win BMW’s competitor customer and market share based on its clear and sustainable competitive advantage. BMW distinct differential advantage provides the basis for superior customer value with lower price in luxury car market. Furthermore, BMW’s dealer network is able to support its aggressive marketing strategies such as price deduction, launch out of new series car and heavy promotion. Moreover, BMW has adequate resources to withstand the trade battle and the market recession by heavy marketing investment to increase its sale.
Based on the supply-demand curve, it is clear that BMW production is little affected and maintain in the curve. However, BMW production is essential to back-up its marketing strategies to increase BMW market demand and sales. The following recommendation is to maintain BMW profit margin in UK recession market.
Since the UK government offered various taxes to automobile business, BMW is suggested to minimise the costs to cover the taxes charged and remain its profit margin in the sales. The costs including production costs, overhead costs, waste and delay, delivery costs and inventory costs. Different operation strategies such as lean manufacturing, flexible manufacturing, JIT and TQM approach is able to implement based on different situation. The point is, the reduction of the costs is enable to support the reduction of the price while remain certain level of profit margin in the recession market.
Product development is essential for BMW to cope the competition in the luxury car market. Through the continuous launch out of new series of car, enable BMW attracts more and new customer and expands its market share. This is based on BMW competitive to support the recommended marketing strategies to increase the sales. Furthermore, through the diversification series of car, BMW gain higher chances to survive in the recession car market.
Bibliography:
-
Towards a new map of automobile manufacturing in Europe: new production concepts and spatial restructuring
Ray Hudson, Eike W. Schamp (eds.).
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Japanese automobile industry : a business history
Koichi Shimokawa.
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Driving over a cliff? : business lessons from the world's car industry
Graeme P. Maxton and John Wormald.
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Whisler, Timothy. British motor industry, 1945-1994 : A case study in industrial decline.
Reference:
Invest in the UK magazine
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Financial Times online
Biz/ed, business and economics service for students and
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