3.0 New Product Strategy 13
4.0 Financial Plan 14
4.01 Break-Even Analysis 14
5.0 Recommendations 15
BMW is a multi-product, global manufacturing company. The BMW marque is well established as a maker of high quality automobiles. To maximize the performance of the company, its products need to be evaluated and classified so as to decide whether to invest, hold, or withdraw support from them. These are strategic decisions, and are made according to the information derived from the analysis of the company portfolio. The tools that will be used in the portfolio analysis and management are as follows:
- Product lifecycle analysis
- Boston Consulting Group Growth-Share Matrix
- General Electric Multifactor Matrix
These are all flexible tools that can be used to analyze both products and brands. The first step is to analyze BMWs product portfolio. BMW has a range of products, some currently on the market, and some awaiting launch (Mini CooperS). Below is an array showing BMWs current product portfolio, this will form the basis of the analysis of BMWs current and future market.
The array above describes BMWs current portfolio in terms of the products themselves, but what about the markets. Each product follows the product lifecycle, each will be at a different stage of that cycle, and each will have different market characteristics.
Although it is attractive to have all the products within a portfolio at the peak of their sales at the same time, this does create problems. BMW knows the importance of making sure that not all of its products are at maturity at once, as this might result in the products beginning to decline at the same time.
It is clear from the time scale chart above, that BMW has staggered the lifecycles of three products. These are the 3, 5, and 7 Series saloons. This staggering not only helps to ensure a more constant income, but also allows for the development of replacement products, such as the imminent replacement of the 7 Series.
BMW has also been expanding its portfolio recently and this can be seen by the presence of some new product launches in the last few years. The Mini being the most recent, and the Mini Cooper still to be launched.
In order to classify BMWs products, an analysis of the portfolio is needed. The first formulated, and most simple is the Boston Consulting Group Growth-Share Matrix.
The Boston Matrix shown over the page consists of four quadrants derived from Market Growth rate and Market Share. Market growth rate is the vertical axis of the matrix. This indicates the annual growth rate of the market sector in which each product falls, and can be used as a proxy for Market attractiveness. Market share is the horizontal axis of the matrix. This indicates the Market share of each product relative to its biggest competitor. The Boston Consulting group argued that the cash flow generated by a product is dependant on which quadrant the product falls in.
BMW has a fairly settled portfolio of products. Each product is more a family of slightly different models, varying by specification. The BMW 3 Series is placed within a very crowded sector of the automobile industry; the ‘Luxury small saloon’. The 5 and 7 Series are larger and more expensive saloons than the 3 series, and are placed within slightly less volatile sectors of the market.
The 3 Series is positioned just below the Star, in the Cash Cow quadrant in the matrix. The current 3 Series model is a market leader in a mature market sector. Its high market share leads to a high cash flow rate, and its position in a mature market means that investment support in areas such a product and process development is low. The 5 series too, is comfortably positioned as a Cash Cow. It is a mature product, placed and sold in a less volatile market than the 3 series.
This means that the 3 and 5 series family of products have extremely high profitability, due to their high level of sales, and the low level of expenditure needed to maintain the sales levels.
The 7 series however is a model in decline in terms of its lifecycle. It is found at the ultimate destination of all products, a pet. The product does have market share, but its desirability is waning and its performance relative to its competitors is not what it once was. The market for the 7 series however, is still performing well. This means that BMW should, and will review the model with a view to re-launch in the near future.
The above products are all fairly settled. Many of them have been being manufactured for many years now with several re-designs and re-launches. BMW has however recently begun expanding its portfolio, and the result of this is some new star and problem children. One of these stars is the X5. The X5 is a new market area for BMW. The 4x4 market can be extremely profitable, especially the ‘On-road’ 4x4 products. This market is very large and growing, and BMW have made an attempt to get a slice of the cake with the X5.
The Z3 and Z8 are very similar products. They are both small sports cars, differing in the Boston Matrix in terms of market share and price. The Z3 is a star, but the Z8 could be described a problem child. More affordably priced than the Z8, and with a larger share of the growing market, the Z3 is a product beginning to mature and generate a good positive cash flow. The Z8 however has a tiny share of the same market. This is not due to overpricing, or poor performance. It is because BMW has taken the step of deliberately limiting production to ensure a high level of prestige and desirability for the product. Why do this?
The Z8 could be described as an exercise in marketing itself. It is not about making profit for the company in terms of direct sales, but about raising awareness of the BMW brand and the values BMW wants its customers to believe the brand stands for. Even the placement of this product in a recent James Bond film reiterates this point. An exciting, debonair character, using a BMW during his technology packed adventures. These are all characteristics of the brand that BMW want to imprint upon the psyche of its customers.
The second available tool is the General Electric Multifactor Matrix. Products are evaluated in terms of Competitive Position and Market Attraction.
This matrix shows more clearly how the established 3, 5, and 7 Series are performing.
The 3 Series has a large share of a large, attractive market. Its competitive position is also strong. The short arrow shows that it is only moving from this position slowly, it is maintaining its position. This reiterates the description of the 3 Series as a Cash Cow. The 5 Series is also in a similar position, if weakening more quickly.
The 7 Series however, is different to the previous two models. It has a comparatively small share of a less attractive market. The long arrow shows that the competitiveness of this product is reducing rapidly and it is fast becoming a Pet. Once again the imminent re-launch of the 7 Series confirms this analysis, and BMW will hope it goes some way to improving the position of this product.
The more recently launched, ‘new’ products can generally be found to the right of the main three BMW products. With the exception of the Z3, their competitive positions are still fairly weak, but all three have good market attractiveness. This is logical; as BMW would not have launched products into markets it deems to be unattractive. They show the characteristics of problem children as newly introduced products finding their feet in the market.
The emphasis of product portfolio analysis is the management of existing products to maximize their strengths. BMW also needs to look for new products and markets to remain profitable and grow. The most simple support tool for looking at growth opportunities is the Ansoff Matrix, which combines existing and new products, with existing and new markets to form a matrix. The four quadrants formed describe different strategies for growth. This type of analysis is also known as the Strategic Thrust of the company.
As mentioned previously, BMW has a strong base consisting of three established products. These are the 3, 5, and 7 Series saloons. Along with the Z3, these constitute BMWs existing products being sold in existing markets. The most common strategy used here is to try to increase the market share of these products. This is done by increasing sales, either to current buyers and or finding new customers in the same market. This strategy is intuitive, but may lead to long-term product development problems.
Hence strategies are required whereby new products are introduced to the product portfolio. These products can be aimed at either new or existing markets. The Z8 is BMWs supercar, and is aimed at the same market sector as the more affordable Z3. The intention of this product strategy is not to replace the Z3, as it could appear to be. The Z8 is a special case, intended to reinforce the BMW brand image.
A more risky strategy is a new product for a new market, and this is where the X5 and Mini range fall. The X5 may seem entirely unlike any vehicle BMW has produced before, however it is not total diversification. For example, a four-wheel drive system has already been developed and used on models such as the M5, a high performance 5 Series. This engineering expertise is also coupled with experience in the sector derived from the acquisition of Land Rover, which BMW kept after the sale of Rover.
Also from the ownership of Rover, came BMWs acquisition of the Mini brand. BMW has not produced a small, affordable, ‘lifestyle’ vehicle since the days of the bubble car. The introduction of the mini range is the most risky of all BMWs strategies for growth. BMWs core competences of engineering precision and manufacturing excellence will no doubt ensure that the Mini is well made and functional. It is BMWs ability to inject personality, eccentricity, and fun into the Mini that is the risk. However, the greater the risk, the greater the potential rewards.
A useful tool to analyse the environment of BMW is PEST analysis. PEST is an analysis of the external environment and is useful in identifying potential customers, markets and developing product strategies. BMW believes there is a market gap for a lifestyle vehicle, and PEST will aid the targeting of that gap.
This analysis, although highly subjective, is useful in the decision making process. It confirms the idea of a young, professional customer base, looking for high quality in a small car. Another tool is SWOT analysis.
SWOT is a structured approach to evaluating the strategic position of a business, providing more information in developing product strategies. SWOT identifies a companies strengths, weaknesses, opportunities, and threats. It can successfully be used in conjunction with gap analysis, as it assesses the factors affecting those gaps. For example, BMW does see the small ‘Lifestyle’ car as a very attractive market gap, but SWOT may show that the risks are too high and BMWs resources to low, to enter that market.
The marketing Potential of a product is the maximum number of potential customers. There cannot really be any certainty to the maximum number of potential customers for the Mini. Estimates nearly always come from market research data and evaluation of the markets of similar products such as the VW Beetle. BMW, as a global manufacturer, would be interested in the world Market Potential for the Mini. In Europe and the US, stable, growing economies mean that an already large number of young professionals are on the increase.
The existing usage is the total number of customers purchasing a certain type of product. Data for evaluating this number is usual derived from market research again, as companies are unlikely to reveal exact sales figures to each other. There are really only two rivals competing in the same sector that the Mini will be targeted. This infers that the existing usage is relatively small.
The Usage Gap is the difference between the Market Potential of a product, and the Existing Usage of similar products. If this is a large number, then there is the potential for a rapid expansion in sales. As the market potential for the Mini has been identified as being large, and the existing usage of the ‘Mercedes SMART’ and ‘VW Beetle’ small, then the potential for a successful product is good.
The product gap is created by segmentation of the market via the requirement for different features. BMW is primarily a luxury brand, manufacturing large luxury products. BMW wants to attack a market with the Mini, where the main brand characteristics are eccentricity, and fun. Therefore the Mini cannot be sold as a BMW Mini, a stand-alone brand has been set up, so as to give the Mini its separate image.
The competitive gap for the Mini is a measure of how well BMW markets the brand. The Beetle and Smart have similar features to the Mini, but good customer relations and clever promotion will help to make the Mini a success.
BMW has identified a Product Gap that can be filled by a small ‘Lifestyle’ car. This gap has customers such as Young professionals with a high disposable income. BMW has limited opposition, and as such there is a large usage gap, which means there is good potential for high sales. BMW can target this gap using the Mini brand, as the Mini has the right image unlike any BMW branded products. This market gap has the potential for giving BMW the growth it is striving for.
BMW has core competences of excellence in design and engineering, and as such will be sure to make a product that is technically sound. However, BMW has little or no experience in manufacturing small, fun cars and no knowledge in how to market a product that bears little relation to the typical BMW. Coupled with the limited financial resources of BMW compared to its rivals in this sector, then there is a high risk of the failure of the product if it is not right first time.
BMW has identified an excellent potential new product opportunity. This opportunity is within a new market which BMW has no experience, and the BMW brand has no association. To ensure that BMW is successful in this venture, a specific, structured new product strategy is required.
It is extremely useful for marketing directors and designers of BMW to receive strategic guidance from the senior management about their vision and priorities for new product development. By this report suggesting guidelines about which products and markets BMW should be interested in targeting, management can identify a focused new product strategy.
The importance of making sure that a product is introduced correctly can be seen in the finances of companies that do not introduce their products successfully. Poorly launched products will quickly fail due to high levels of competition. These high levels of industrial competition have come about due to three driving forces. These are international competition, fragmenting markets, and rapid technological change.
Missing the desired launch date of a product, or spending more than planned in its development has the effect of significantly reducing eventual profits. As around 80% of the eventual total product costs are committed to be spent by the end of the concept design stage, spending wisely at the design stage and ensuring launch dates are met will maximize profits.
This financial plan will look forwards three years, and will consider the potential UK market only.
Target Market: The market to be discussed here is the UK Market for a small ‘Lifestyle’ car. This gap has customers such as Young professionals with a high disposable income.
Size: Large Market Potential. BMW has limited opposition, and as such there is a large usage gap, which means there is good potential for high sales.
Projected Acceptance: 2002: 8,000 Units
2003: 5,000 Units
2004: 4,000 Units
Product Cost Estimates: Cost/Unit £10-11000
Fixed Costs: £140,000,000 Machinery, equipment,
Variable Costs/year: £10,000,000 Labour, Materials, rates, promotion, purchases.
The break-Even analysis on the previous page shows that BMW should expect the Mini to start to pay for itself midway through the third year after its introduction.
Current Market:
- BMWs main profitable base range is the 3, 5, and 7 Series.
- Use these profits to develop new products, aiding company growth.
Future Market:
- Enter with a small ‘Lifestyle’ Car.
- Use Mini brand to attack market.
Capabilities:
- Excellence in Design and Engineering.
- Growing customer base in Mini sector.
- Mini brand has the right image for this sector.
New Product Strategy:
- Build up the Mini brand: Personality, eccentricity, and fun.
- Gain sector experience.
- Gain significant Market share.
