Main BMW markets was Germany and USA, having almost the half of the total annual sales of the company. As mentioned above, Germany’s incline in VAT reduces dramatically the demand for this country, while USA’s attacks for petrol made oil prices even higher. Other major markets are Europe, Japan and the Pacific Region, while a significant increase in BMW automobiles showed up in China for the range of 7 and 5 series models.
The organisation of BMW decided to reduce cost of production in order to make a significant profit on each car. They decided the increased use of the Spartanburg plant in US and the utilisation of Chinese cheaper labour force. Also, in 2002 the new CEO of the company Helmut Panke, committed himself and the company to a strategy of internal growth achieved by product and market development. Moreover, some difficulties in controlling the cost of its labour force in European political climate led the company to invest more in US production than EU. The company was aiming to find buyers in US and Asian markets, and increase the production in China, where labour cost was relatively low. As a result, in 2003, BMW finally becomes the number 1 producer of premium cars, leaving Mercedes ranking at the second place.
Oil prices during the period 2002-2006
Source: Reuters Online, BWM Annual Report 2006
Competitiveness is perceived to be one of the most important factors in the concept of strategy. Gaining a competitive advantage over rival companies is one of strategy’s primary aims. To gain a competitive advantage ‘an organisation must either perform activities at lower cost, or in a way that leads to differentiation, and a premium price(more value)‘ (Brown and Crossley, 2007). As it is known, BMW had a reputation of ‘the ultimate driving machine’ competing with top sport cars and luxurious high-performance saloons each in their market segments. Porter’s five forces framework, which was used as a way of assessing the attractiveness of various industries, ‘helps identify the sources of competition in an industry or sector’ (Johnson, Scholes and Whittington, 2005). However, Porter’s framework must be used at the level of SBU (strategic business unit) and not at the scope of the whole organisation.
Using Porter’s five forces framework, we are now going to see an analysis of the competition in the automobile industry, particularly in 2004.
Threat of entry: In this section, the barriers to entry will be examined, which act as a delay for entry and not as a permanent barrier. In automobile industry there are few potential entries. This can be reasoned by the facts that the capital requirement for entering the automobile industry is very high, the cost of entry however, will vary from country to country. Globalisation make capital and labour mobilisation easier. For instance, in India there is high-skilled labour force with low cost, in China also. As we have seen that has be explored by BMW organisation as an attempt to reduce the costs of production. Another barrier to entry is economies of scale. In automobile industry and in BMW organisation in particular, economies of scale are crucial in producing massive automobiles and reducing the costs of production. The advantages an existing company has, will not apply to newcomers in the industry. In BMW corporation, there is customers and suppliers loyalty, customers can easily trust a name such as BMW for their automobile, while suppliers can rely in BMW for immediate purchase and payment. Experience of an existing company and differentiation are also some barriers to entry. BMW has managed to give the perception of significant differences in customers minds. However, an emphasis must be paid to the fact that premium price of products attracted competitors like Jaguar, Audi and Volvo.
Power of buyers: Usually prices are fixed. There is no negotiation taking place. However, buyers such as BMW that buy in bulk and suppliers are constant, have bargaining power to lower the price levels, but power of individual buyers was extremely low. In the automobile industry in general, the cost of switching suppliers is relatively high, so the power of buyers is getting lower.
Power of suppliers: in BMW case, the power of suppliers are low due to the fact that suppliers produced specifically for BMW corporation, not suitable for other buyers in the market. Moreover, the costs of switching the suppliers are high, thus suppliers power is also high, while carmakers were capable for backward integration.
Competitive rivalry: Competitive rivalry in the automobile industry is high. Intense advertising, commercials and a strong promotion of the brand can make the difference. Design and brand identity was a source for competitive advantage in the beginning of 2000, where automobile’s quality was no longer an issue in customer’s minds. Product differentiation make it difficult for customers to switch to different product. Competition is also increasingly done on price, and barriers to exit were very high due to high exit costs and political reasons.
Substitutes: Substitution can reduce the demand for a particular product, automobiles in our case. Customers can substitute their need for a new car with holidays, leisure activities, renewing furniture inside the house or properties like houses etc. However substitution can be in the form of substituting cars with vehicles like boats and motorcycles. In addition, substitution can exist in the form of car alternatives. For instance, instead of buying the BMW Sport car Z4, customers can choose its alternatives Audi TT or Mercedes CLK which fulfil the same need of car type.
The company is faced with future changes regarding the factors in the macro-environment. An intense research for unexploited markets and niches was needed, in collaboration with an intensive highlight in the importance of Information Technology. In addition BMW is faced by that time with the opportunity of increasing its acquisitions and mergers in the automobile industry. In 2002, Helmut Panke becomes the new CEO of BMW, adopting a new strategy of internal growth. In 2003 the company was aiming in 40% sales increase per year by achieving sales in the class of 1.4 million vehicles. This strategy pushed BMW in the first place, making the prestigious brand of Mercedes finally drop in the second place. Barriers such as labour cost in European economies made BMW expand its productions in the US where cheaper labour force could be found. This could give greater earnings to the company since the cost of production would fall. However, a massive increase in its production could drop BMW’s reliance for ‘the ultimate driving machine’ since until then BMW was producing only for niche markets. Also, by producing small cars, thus selling at low prices, the high margins after sales would not still be enjoyed by the organisation. Last but not least, was the issue of quality, since reducing the costs of production and increasing the volume would threat the image of BMW automobiles as cars with best quality.
The critical success factors in the market segments in which BMW competed were various. Product excellence had to be guarantied even before the purchase. Due to the high expense for acquiring a luxurious automobile, automobile companies were offering reliability, engineering excellence, effective design and after-sales services to their customers to keep them even more satisfied. These factors were considered to be standard from the top luxurious automobile companies, not yet differentiate them nor giving them competitive advantage in customers minds.
Critical Success Factors (CSFs) are ‘the certain factors that will be critical to the success of the organisation, in the sense that if the objectives associated with those factors are not achieved, the organisation will fail - perhaps catastrophically so’ (web definition). While all automobiles were reliable and powerful, offering the luxury to its buyers, BMW had to find other ways to compete. What mainly led to the company’s success was the fact that its distribution network was highly controlled, giving thus a bonus in brand management, after-sales services and communication. As BMW was close to its customers, was able to identify their needs and wants across different countries and markets making market segmentation effective and successful. The company’s reputation of ‘the ultimate driving machine’ and product delivery excellence made BMW possess a competitive advantage above other automobile companies. In addition, BMW corporation exercised strict control on the supply chain and relationships with is suppliers who sustained long association with the company. BMW finally managed to acquire a distinctive identity, making its brand attractive to young European professionals. The brand was communicated to its customers as an identity for quality, status and prestige. Additionally, BMW corporation was big enough to sustain economies of scale. Once economies of scale in BMW were achieved, cost was then significantly reduced. All the above factors built a strong advantage over other brands, making the firm reach the top by the late 1990’s. BMW managed over the years to acquire and maintain a sustainable competitive advantage over other firms competing in the same market segment. Sales increased dramatically after the new CEO took the lead of BMW and BMW brand finally achieves to climb at the first position, leaving Mercedes on the second. The competitive advantage that BMW managed to achieve, remained through the years. BMW remains until today the top luxurious automobile manufacturer.
Figure 1: BMW’s market share in 2003
The creation of competitive advantage by a company requires something more than the core threshold capabilities, which are the capabilities essential to the survival in a market. John Agno defines competitive advantage as ’the sum of those attributes that differentiate your business from its competitors. This is your core competence’ (2005). The company must have something that competitors cannot copy, something unique, existing only in their product. Unique resources, according to Johnson, Scholes and Whittington (2005) are ‘those resources that critically underpin competitive advantage and that others cannot easily imitate or obtain’, whereas core competences are ‘the activities and processes through which resources are deployed in such a way as to achieve competitive advantage in ways that others cannot imitate or obtain’.
BMW sources of competitive advantage were well established in the minds of the customers. Except from the threshold capabilities, BMW needed in order to compete in luxurious automobiles segment, which were reliability and design, some core unique resources had to be exploited in order to develop competitive advantage. While BMW was highly perceived as one of the top luxurious automobile companies, something more was needed. The distinction from other brands was made in 1961 when the BMW 1500 - an ‘expression of success and lifestyle’ (Reading, 2002) - came out. This model was the reason why BMW until today has a strong reputation for its automobiles’ engineering and technical excellence making customers feel secure with BMW automobiles. According to John Wyckoff (2005) ‘BMW’s cars appeal to consumers interested in performance, engineering excellence and quality’. In addition, companies in Germany like BMW were highly benefited in the 21st century, by the country’s unique national resources - the highly qualified labour force. All the above, in collaboration with the strong BMW brand appeal, gave a competitive advantage to BMW organisation, developing a distinctive identity from other brands competing in the same market segment. Differentiation was finally achieved through R&D, solid engineering and effective communication of the brand’s differences.
Source: www.zanthus.com/databank/strategy/docs/bowmans_strategy_clock.ppt
Bowman’s Strategic Clock is one more way to analyze a company's competitive position compared with its competitors. Bowman, like Porter, considers competitive advantage in relation to cost advantage or differentiation advantage and he demonstrates 8 different routes on the clock.
As mentioned earlier in this paper, BMW appears to be following a differentiation strategy which according to Johnson, Scholes and Whittington (2005) is defined as ‘a strategy that seeks to provide products or services benefits that are different from those of competitors and that are widely valued by buyers’. The benefits that BMW brand was offering were effectively communicated to its customers through intense marketing. In the automobile market in particular, key requirement from customers and a critical success factor was reliability. The tight control of its distribution network benefited significantly the brand management, communication and after-sales service. As BMW was maintained a close relationship with its customers, helped them make a more effective market segmentation than its competitors. All these helped BMW built a strong brand, communicate effectively product quality to its customers and became able to identify its customers expectations and inspirations.
BMW as all organisations, follow some development directions in order to expand and increase their sales. Development directions are directions that an organisation can follow, regarding the products and markets of coverage, considering both the strategic capabilities of the organisation and stakeholder’s expectations. There are four strategic directions, listed as following:
- Protect and built on current position
- Product development
- Market development
- Diversification
BMW chose to follow two strategic directions at the same time, product development strategy and market development strategy. A product development strategy tries to deliver modified existing products or brand new products to already existing markets. This strategy is usually followed when there are changing needs of customers, when the product life cycles are short and when new core competences need exploitation.
BMW developed its automobiles, bring them to a new level of product quality and engineering excellence. For example, the BMW E46 Generation automobile came out in 2007 with ZHP Performance Package benefit, offering to its customers a new experience, as well as the 5-Series Touring with M Sport Package also in 2007 and the development of the new 5-series in 2004. However, except from product development, BMW was growing to new segments, opening its wings to new markets as well.
As mentioned above, BMW was simultaneously following a market development strategy, Market development takes place where existing products are offered in new markets. Reasons that drive an organisation’s development into new markets are capability and market considerations. While USA, western Europe and Japan were the major markets of BMW, new markets were to be exploited. BMW model Z4 reaches the Eastern Europe and Asia markets and BMW X3 is introduced, where the demand in the Chinese markets for higher end models like 7 and 5-series had to be covered. India was also a new market for BMW to launch its new automobiles. Moreover, UK, Italy and France were fast growing markets waiting for exploitation.
Source: BMW Annual Report 2006 Online resource, www.bmweducation.co.uk
Conclusion
As we see from the BMW analysis above, a corporate strategy is always significant and essential for the success of a company. Strategy always includes planning, organising every detail, making the business plans for the future, getting ready for futures changes and catch the unexpected. A short-term strategy and a long-term should be drawn by the company in order to have everything under consideration and control, increasing market shares and sales at the same time. BMW managed over the years to become one of the major luxurious brands in its segment, capturing new markets around the world, consolidating the corporation as one of the strongest in the automobile industry. This case study analyses BMW’s past and future and its opportunities for further development, always according and following its corporate strategy.
References
Brown D. and Crossley B., Management 220, Lecture in Strategic Management, 2007
Clive Reading, Strategic Business Planning: A Dynamic System for Improving Performance …, 2002.
Johnson G., Scholes K. and Whittington R. (2006), Exploring Corporate Strategy, London: Prentice Hall
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