This report will look at BMW's position in the European automobile industry and it will analyse the internal factors in the form of strengths and weaknesses and external factors in the form of opportunities and threats.

THREAT OF POTENTIAL NEW ENTRANTS (very low)

The ease of entry into the auto market is not a great concern of other automakers since it involves expensive start up costs and is usually very difficult to finance such a large investment. However, the possibility of new firms entering the auto industry does affect the competitiveness of current automakers. The largest threat to BMW is the propensity for other existing companies to develop a new line that directly competes for market share. It is fortunate that the auto industry possesses characteristics that protect the profit levels of firms in the market and inhibit additional rivals from entering the market. Some other unique characteristics that reduce the rate of entry of new firms are governmental agencies, which create and enforce laws and regulations. In addition, patents and proprietary knowledge serve to restrict entry into the industry. Asset specificity also prevents new firms from entering the auto industry. For instance, auto manufacturing requires highly specialized technology, plants and equipment that are very costly and difficult to finance.  Organisational economies of scale can prevent new entries to the auto industry and is typically measured by the Minimum Efficient Scale. This is the point of which unit costs for production are at a minimum. BMW group operates at less than Minimum Efficient Scale but is able to do so because of high product differentiation and premium selling prices. As for companies that wish to exit the auto industry, selling out to a larger company is a much better alternative since assets are specialised and exit costs are high.    

INTENSITY OF RIVALRY (very high)

According to Porter, rivalry is marked as the centre of his theory whereby it can take on several forms such as being highly competitive or subdued. Developing successful marketing strategies requires automakers to be aware of existing competitors. In order to remain highly competitive, automakers must be cognisant of its competitors, their strengths and weaknesses and marketing strategies. Drawing customers away from competitors by offering superior value to them is one way of gaining market share, however retaining those customers should also be a primary initiative in any marketing activity. There are many competitors in the auto industry for the largest share of the market.  Many compete by offering low financing rates, cash rebates or market vehicles by highlighting quality, fuel efficiency, none of which have a significant share of the market. In other words, the auto market is highly fragmented and competitive. In pursuing an advantage over its rivals, auto manufacturers can choose to compete by improving products by using advanced technologies or by differentiating products that are aimed at untapped niche markets. In the case at BMW, the auto manufacturer has implemented several product innovations specifically aimed at affluent buyers seeking an integration of luxury with high performance. BMW’s core competency is engineering and manufacturing “Ultimate Driving Machines.”  The auto industry is characterised by a large number of firms competing for the same customers.

BARGAINING POWER OF SUPPLIERS ( low)

Another force in Porter’s framework is the bargaining power of suppliers.  Suppliers are a key competitive force because they can determine the price or quality of parts or raw materials. When a few suppliers control a large share of the market, as in an oligopoly, buyers may have to accept a price increase or a lower level of quality.  However, increasingly auto manufacturers like BMW is always looking for suppliers willing to work closely with them to help them deliver value to their customers. The suppliers of parts for the car industry in Europe are numerous. BMW has the possibility to choose among many suppliers without taking a lot of time or money. However the majority of manufacturers are heavily dependent on their suppliers.

BARGAINING POWER OF BUYERS (high)

Buyer power is another force in Porter’s framework of competition.  Bargaining power of buyers can create a competitive advantage.  Under such market conditions where there exist several suppliers, buyers are able to set prices.  In particular, buyers are more powerful when there are fewer of them and they purchase a significant proportion of the output.  Buyers can force prices down, bargain for higher quality or more services, and set competitors against each other.  Where as a small buyer may have to live with a price increase from a supplier, a large buyer may have the power to demand a lower price.  

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES (low)

• Threat of substitutes in the auto market relates to products, materials or resources that may cause the demand for a product to shift. For example, auto manufacturers that are competing for share in the premium car market are considered close substitutes to BMW. These brands typically are Mercedes Benz, Lexus, Cadillac and Jaguar, which possess similar technologies, features and characteristics commonly offered in a luxury vehicle. Many auto manufacturers are also planning to replace conventional gasoline combustion with alternative fuel cells such as hydrogen or electric. BMW is already ahead of the game with a number of joint-partnerships with companies that have the technology and expertise to develop hydrogen combustion technology and electric cells
• There is small threat of substitute products. It is likely that people will be using cars as their primary transportation for a long period of time. However, due to heavy traffic and environmental concerns, people might prefer motorcycles, bicycles or public transportation. Public transportation in Western Europe is quite efficient, however it can’t be considered a factor that can affect seriously a car company’s sales. So the leverage the substitute products can exert is rather low.

3. STRENGHTS (see appendix 1 on page 9)

• Powerful brands are the foundation for the success of the BMW Group. With a brand that carries a strong heritage and world class recognition, BMW is well known for its long-standing engineering quality. Powerful brands are the foundation for the success of the BMW Group. This has allowed BMW the advantage of being a specialty manufacturer of automobiles, a brand recognised by many as the “Ultimate Driving Machine.” By producing a product that combines luxury with the latest technologies and high performance attributes, BMW has been able to compete on both quality and technology, however, not on price. The BMW group has been very successful at creating a niche market using several integrated marketing activities such as sustaining relationships with prospective buyers, current owners and repeat customers. Typically, BMW owners are very brand loyal with two thirds being repeat buyers.  Currently BMW is ranked second in the world for number of vehicle turnovers linked with their high margins on luxury brands (priced 10%-30% higher than comparable models). As for the near future, BMW plans to broaden their product offering by introducing several new lines.
• The economic pressures of 2001 did not seem to affect BMW’s financial position since 2001 figures indicate that the number of vehicles sold are up from previous years and profit margins are also up to 8.4% from 5.5% in 2000.

WEAKNESSES

• BMW compared to many other auto manufacturers is considered a small company because of the number of vehicles produced annually. In the United States, sales of all BMW vehicles were 194,713 for 2001. In contrast total worldwide sales for 2001 was 880,677 up 7% from 2000. This production output is less than half of the two million a year vehicle threshold for long-term survival. Fortunately BMW is therefore far able to overcome this slight disadvantage of being a smaller auto producer by offering a differentiated (high profit margin) premium product. BMW for many years has remained small because of its continuous rejection to alliances and mergers. This poses an issue for BMW since many of the larger auto makers today are a synergy of smaller auto makers (General Motors family includes Saab, Fiat, Mazda, etc.) that joined at one time in the past. One other final weakness that could we found with the BMW automaker is their deficiencies in the marketing department as seen with the failure of the Rover brand. Poor marketing of Rover was partly to blame for the BMW group’s loss of $6 billion since the acquisition in 1994.

CORE COMPETENCES

In the motor industry all manufacturers have the competence to build motor vehicles but BMW has core competences in design, engine technology and marketing which is the basis for it’s reputation for high quality, high performance cars.

These core competences allow the company to charge a premium price and are the basis of the organisation’s competitive advantage.  

4a). STAKEHOLDERS (see appendix 2on page 11)

Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and whom, in turn; the organisation depends (Johnson & Scholes, 5th edition 1999)

Various groups of people will have an interest in BMW’s business. Such groups are referred to as stakeholders. The interest stakeholders have in BMW’s business will vary according to the nature of their stake. The following are the possible stakeholders that can be identified in BMW’s business. They include:

• Shareholders want a high return on their investment with minimum of risks. They are more likely to be concerned with maximising profits and seeking only moderate growth.
• BMW’s employees will want higher pay, more benefits and job security. Employee’s rights, especially in Germany, are to a great extent laid down by laws and regulations.
• Customers demand safe and reliable products. Car safety has been of paramount importance at BMW.
• Suppliers are another group of claimants who want assurance that their products and services will be purchased. For efficient car production, the availability of nearby supplier is crucial. This makes close cooperation with suppliers easier and keeps transport costs low.
• Government can influence BMW’s business in number of ways. A certain amount of legislation is aimed at business in order to protect shareholders. Health and Safety regulations are designed to protect employees in the workplace. Unlike in the US, German businesses work closely with state and federal government in an effort to facilitate the achievement of joint objectives.
• The community demands that enterprises be “good citizens” by providing jobs. For example, a car company in southern Germany was prevented from closing it’s plant because of the negative social impact on the community. Therefore, particularly, German employers like BMW must take the needs and demands of the citizens into account in their decision-making. Other claimants to the BMW may even include competition who have a legitimate claim for “fair play” in the market place. It is clear, then, that many of these claims are different with each other, and it is management’s role to integrate the objectives of these stakeholders.

4b). OBJECTIVES FOR BMW FOR THE NEXT 5 YEARS

Taking the above into consideration a set of specific objectives for BMW for the next five years is provided below. It will be built on the strengths of the group by making most of the opportunities by improving the weaknesses and avoiding threats. Objectives for BMW could be as follow:

• BMW should develop new models. The company already has new ones, using it’s engineering strengths and it’s technology capabilities. Because of the luxury car image, the company can charge premium prices for satisfying the demand for luxury cars. As consumers become wealthier, they trade up to more expensive models. The rapid development in the electronics field can be engineered into new models for fuel efficiency (e.g. electronic fuel injection) and safety (e.g. sophisticated anti-lock brakes). These developments are facilitated by the proximity of well-known suppliers.
• BMW should step up it’s activities in the Asian region in the years to come, since Asia will be the number one growth area for the automotive industry in the next 10 years, particularly after the planned establishment in 2003 of the AFTA (Asean Free Trade Area) generating additional growth and momentum. BMW Group should support it’s product and market offensive through the further expansion of it’s sales and distribution network in the region.
• Strategic expansion of product range: The BMW Group should pursue it’s strategic development for example it should expand the MINI brand. The BMW Group should continue to expand it’s product range in the coming years, relying on the long-standing experience of opening and developing new segments with new product ideas.  The BMW Group should continue to consistently expand it’s presence in the worldwide automobile markets.
• Market Based View

• Focus on consumer preferences

• Stretch the brand through organic diversification

• 2-series

• SUV  (X-series)

• Mini

Future Scenarios

• BMW stand alone

- BMW Diversification

• Merger/Alliance        
• Takeover

5a). GENERIC STRATEGY (see appendix 3 on page 11)

Porter suggested that most fundamental choices facing any business are the scope of the markets that it attempts to serve and how it attempts to compete in these chosen markets. The scope can either be broad tackling the whole market or narrow tackling only a particularly part of the market. He also suggested there are only two effective ways of competing in a market. Companies achieve competitive advantage either by having the lowest product cost or by having products, which are different in ways, which are valued by customers. The (map in appendix) axes are therefore the scope of the chosen market and the basis of competition. Generic strategies outline the three main strategic options open to organisation that wish to achieve a sustainable competitive advantage. If the scope is narrow the distinction between cost and differentiation becomes unimportant so Porter defined just “generic” strategies. The generic strategies are: 1. Cost leadership, 2. Differentiation and 3. Focus

Cost leadership: Toyota is or (was at the time) the low cost producer in the industry. Toyota achieves it’s cost leadership strategy by adopting lean production, careful choice and control of suppliers, efficient distribution, and low servicing costs from a quality product.

Differentiation Strategy: differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitise prices and focus on value that generates a comparatively higher price and a better margin. Product differentiation can be achieved in many ways: examples BMW appeal to customer’s prestige needs.  When a company pursues differentiation, it seeks to distinguish itself along as many dimensions as possible. Therefore, BMW is not just a prestige car; it is also fast, reliable, and technologically sophisticated. When market segmentation is considered the differentiator generally segments its market into many niches.  If it offers products for many market niches, it is pursuing a broad differentiation strategy-as GM does by offering cars for every market niche. BMW still serves a relatively wide range of the total market but it’s cars are differentiated in the eyes of the customer who is prepared to pay a higher price for BMW than for Toyota, for instance, of similar specification.

• BMW and Mercedes employ differentiation strategies, organising their value adding activities so as to create modern design, high technology, high quality products which command premium prices.

Focus: Morgan is an example of a focus strategy. It only addresses a very small part of the market (i.e. those who like getting wet and like the sound of an engine more than conversation). Each of these companies has been successful by pushing a particular generic strategy successfully.

5b). DISTINCT COMPETITIVE ADVANTAGE

The BMW group, one of the world’s well-known luxury auto manufacturer aims to remain as one of the only profitable auto manufacturers in the world. In today’s highly volatile and competitive auto industry, especially in today’s luxury car segment, several companies are producing more vehicles in the luxury car market to compete with market leaders like Lexus and BMW. BMW therefore has been able to sustain a competitive advantage despite the past economic turbulence, which has come from their ability to differentiate products and sustain long-term relationships with BMW owners and prospective buyers. BMW has a competitive advantage over many other automakers because of their ability to integrate several marketing activities in a way that is consistent and interconnected.  

BMW`s core competence is in

......... excellence in development, production, and branding of high performance cars

6. SUITABILITY, FEASIBILITY, ACCEPTABILITY ( see appendix 4 on page 11)

In 1994, the German carmaker BMW bought Rover from British Aerospace. The strategic thinking was that the acquisition would allow obtaining significant economies of scale but however things did not go according to plans after loosing more than £4 billion, BMW sold Rover in 2000.

The first mistake was an inaccurate assessment of Rover’s brand name and engineering capabilities. The second mistake was not pushing for a better integration between the two companies, a difficult task that should have required full top management attention.

The logic of the deal from the BMW's perspective would seem to stem primarily from the opportunity for it’s entry into different market segments of the auto industry with the acquisition of 17 new brands. BMW’s brand strategy seemed to be that Rover would produce the lower end for it’s range. These models had to compete directly with mass producers such as Toyota, Ford, and VW in a market which BMW had no particular competence. The BMW brand would retain it’s strong position in the high priced segments. It also inherits brand names like MG, Austin, and Riley, which it intends to revive. BMW would now have quick and relatively cheap access to the small car markets and without the danger of diluting it’s highly prized brand name. With growing global competition and a fragmenting auto market, it needed to expand into new segments and diversify it’s product portfolio. BMW already had premium products in the upper niches of the market with high profit margins. The one million-unit production level has enabled it to achieve economies of scale in the upper niches but growth opportunities were limited. Increasing competition meant a decline in sales in the largest market of the United States. With limited opportunities in the emerging markets there was pressure to move into lower segments of the market where expansion has been generally forecast. The company had the configuration of a global player and by acquiring Rover's Land Rover range, and Mini and Metro saloons marquees; it definitely became one of the leading players in the global auto industry.

Second, in-house development of a small-car engine and four-wheel-drive sports utility would require several years and large investments in R&D. Unlike its rival Mercedes-Benz, BMW avoided this process through acquisition. Rover has 13.4% of the British car market and its share is forecast to grow in Europe. Together, BMW and Rover will account for 7% of the European market with a product range that few competitors could match. The two companies also made profits in 1993 where most other competitors, including market leader Volkswagen, were running in losses.

Next, during the collaborative years Rover learned Japanese production, engineering, and management methods. With its acquisition BMW directly gains access to this know-how, and also to a low-cost production base in the UK, which can be successfully exploited in future

The deal is advantageous to Rover also, with access to BMW's distribution network giving it estimated extra sales of 100,000 units per year. Furthermore, in addition to technical and manufacturing support from BMW, this acquisition would help Rover in new investments for product development and R&D. BMW has already committed to an investment of £1 billion for the next five years. The BMW-Rover Company would achieve economies of scale by integrating distribution, purchase of components and services activities, and R&D activities. It is estimated that in the short term BMW could cut 5% of costs by jointly purchasing parts that are not design based such as batteries and tyres.

There are also some serious considerations relating to the product itself. The model range of Rover 600 and 800 series and BMW 3 and S series are expected to compete head on but Mr Pietchetrieder claimed that 'the independent management of both brands is the most important prerequisite for the success of this new deal. You will not see a 3 series sold alongside a Rover 600 in the same showroom. I want to make sure that there is a clear product positioning of Rover and BMW products.' Motor analysts support the strategy of keeping the Rover and BMW brands separate, 'especially if they are as strong as those of Rover and BMW.'  There have been earlier examples such as Citroen and Peugeot, and Volkswagen Audi, where brands were unsuccessfully merged. BMW's chairman insisted that 'Rover and BMW have product ranges which supplement each other and our differing regional strengths provide a powerful synergy.' Undoubtedly, Rover's success in emerging markets of East Asia and Latin America would provide BMW with access to these markets where its own high-priced range of products have limited success. The proof of the benefits of the acquisition should have been in the results and it is clear that the strategy failed.

CONCLUSION

BMW has earned a reputation for high quality engineering and product development. This reputation combined with innovative and well-targeted marketing has been leveraged to great effect in its major European and North American markets. BMW’s financial profile is strong, supported by significant and consistent cash flows and a conservative balance sheet. BMW has become the envy of most of the auto making industry with impressive sales and earnings improvements in the face of generally tough world car industry conditions.

BMW’s recent operating and financial performance has contrasted with many of the volume carmakers, particularly in Europe, who have struggled to improve relatively thin margins in the face of intense competition and overcapacity in the small car segments. The luxury carmakers like BMW, by contrast, have been able to consistently improve sales and profits in the premium-priced segment of the car market. The attraction of the better margins, faster (and recession-proof) sales growth available in the luxury segment, however, have not been lost on the volume car makers, many of whom have begun to introduce premium-priced products of their own, to compete directly with BMW and the comparable Mercedes-Benz. The competitive landscape, therefore, looks set to intensify. In the near-term the future remains bright for BMW with sales and profits continuing to outperform competitors. The longer-term future, however, contains some significant challenges.

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APPENDIX 1

PESTLE ANALYSIS ON THE AUTOMOBILE INDUSTRY

PESTLE Analysis involves identifying Political, Economic, Social, and Technological influences on an organisation (Johnson & Scholes 2001).

POLITICAL /LEGAL

• The major reasons for this change in strategy were to avoid possible trade restrictions and negative effects of exchange rate fluctuations, according to Eberhard von Kuenheim, BMW’s CEO in 1992. Trade restrictions have always been an issue in the international car business. The most severe restrictions have been imposed on Japanese cars – by U.S. and by European authorities. As tariffs have been significantly lowered and unilateral import quotas banned by GATT rules, the U.S.A. and the EU had negotiated with Japanese car manufacturers about so-called “Voluntary Export Restraints”. The threat to be banned off the U.S. market has never been a major issue for European manufacturers.
• The government no longer imposes an automatic 6% annual real terms rise in fuel duty, but there will be EU agreements with car manufacturers to improve fuel efficiency, together with the possibility of congestion charging and measures to encourage the use of public transport.

• One of the most significant trends in recent years has been the move towards deregulation. By eliminating many legal restrictions, deregulation has lowered barriers to entry and led to intense competition in automobile industry. But at the same time competition caused fare wars.
• Global Agreement on Vehicle Regulations such as Trade barriers.

ECONOMIC

• Additional factors causing the slow growth are the increase of interest rates and the high prices of petrol (ACEA, 2000).
• Global Competition:  Auto makers are global, competition between manufacturers exists internationally and gglobalisation has caused decline in trade barriers and has opened many markets to companies based outside them.

• Backward / Forward Integration:

 The current high growth in the Auto Industry has occurred because many companies have to pushed cars to dealers and to finance companies that show up as being sold.

• All manufacturers are feeling the toll of the slowing global economy, and the worst problem is that there is still no end in sight.  Job losses are occurring everywhere in the supply chain in the face of a continuously strong pound vs. the Euro – a region that accounts for 84% of our exports.
• The continuing strong growth on it’s major international markets means that the BMW Group is increasingly influenced by the overall economic climate in the world and its effect on currency parities and financial markets.
• Fuel prices are influenced to a large degree by market factors and governmental tax policies. This and the constant need to reduce fleet consumption set high demands on engine and product development.
• Government policy has a major impact on prices and profitability – through mandates and regulations in the US and taxes in the EU.

SOCIAL

• The social environment can act as a threat to the car industry; trend toward greater health consciousness will be a threat. Big organisations to reduce pollution and traffic will have great impact on car companies, which will spontaneously cause the company to develop more environmental vehicles.
• Population changes – the rise of the ‘grey pound’ (one third of the population will be  over 50 by 2001)
• New plant, new team, new product, new way of doing things.

TECHNOLOGICAL

• Internet Advancements

- Can now search and put together vehicle on-line

- Digital Dealers

- Able to buy parts and accessories and have them shipped to your door

• Automobile Safety features in innovation:

- Airbags

- Computerized Safety Systems

- Integrated Child Safety Seats

- Stronger Re-Enforced Steel

- Navigation Systems

- Seatbelt Pretensioners and Force Limiters

- Anti-Lock Brakes Standard

ENVIRONMENTAL

• European carmakers are making their vehicles more and more environmentally friendly. As Europe introduces new emissions standards, vehicle manufacturers and their suppliers are stepping up their efforts to go green. Initiatives such as recycling can not only save the environment, but also save manufacturers money.
• London mayor Ken Livingstone has announced the plans for congestion charges, under which any vehicle passing into the UK capital during peak hours will face a charge, will include a discount for alternatively fuelled vehicles. These are most likely to be powered by liquefied petroleum gas (LPG), which is appearing on more and more vehicles.
• The BMW Group is the only automobile manufacturer to establish uniform environmental standards at all its production facilities worldwide: each site is certified according to the DIN ISO 14001 international environment management system, and also have been validated according to the EMAS ecological audit of the European Union.

Where did BMW stand after Rover

BMW After Rover Opportunites and Threats

• Fast market growth: luxury and SUV segment
• Resistant to recessions
• Dependent on major players
• Network and alliances in the industry
• Technological changes
• Formula 1

Good long term share performance

APPENDIX 2

LEVEL OF INTEREST

                                LOW                                HIGH

APPENDIX 3

Basis of Competitive Advantage

                         

Lower Cost                        Differentiation

APPENDIX 4

Post Acquisition

• The main managerial and technological changes instituted by BMW
• Rover’s system was replaced by BMW’s strategic planning
• BMW underestimated the cultural differences
• BMW did not desire to learn from what Rover had learnt from Honda

1 Failure case: “Rover’s  full acquisition by BMW”

• Almost three-quarters of Rover’s top 40 managers have left
• Rover’s failure led to resignation of BMW’s former Chief executive or switched jobs

Witness the clash of cultures, battle of executive egos, disastrous decisions and boardroom bloodshed.

Why did BMW decide to acquire Rover and why did it fail?

BMW and Rover: `Living Together´

A Closer Look

STRATEGIC GROUPS

Above you see an industry grouping for the auto industry. The two dimensions on which each auto brand is categorised are the market segments served and the combination of price/quality as perceived by customers. Mercedes, Jaguar, and BMW serve an elite market. These brands have high price and an image of high quality, serving a few market segments. Hyundai and Yugo represent the other extreme. They serve the low-income market segment with low price and low perceived quality. The larger group consisting of GM, Ford, Chrysler, Nissan, and Toyota serves the broadest number of market segments. This is because each of these brands offers a range of cars reaches as low as the cheapest Hyundai or Yugo, and none reaches as high as the most expensive Mercedes, Jag, or BMW. But between these extremes lies a huge and varied market.

The key point in analysing a strategic group chart like this is that a firm’s strongest competitive threats usually come from the firms within it’s group. But it is important to watch for a possible invasion from firms in one of the other groups. For example, Chrysler’s greatest threats come from GM, Ford, Nissan and Toyota. These brands compete with similar cars aimed at the same target markets. Yet recently Mercedes is aiming some less expensive models at Chrysler and it’s mid market rivals. Chrysler and the others must construct barriers to entry or mount some counterattack to protect their hard won markets. On the other hand, Chrysler may want to launch an attack t the Mercrede’s low-end vehicles. To do so successfully, Chryler executives need to understand Mercede’s strengths and weaknesses, it’s points of vulnerability. This will help them decide how best to mount such an attack.

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