Week 3 seminar BMW suggestion

What main trends are identifiable in the business environment in general and in the automobile market in particular in 2004 that might affect BMW strategy?. The information in the case i

3BM020 – week 2 seminar

Week 2 seminar: BMW

Q1 What main trends are identifiable in the business environment in general and in the automobile market in particular in 2004 that might affect BMW strategy?

The information in the case is limited, but it is clear that:

 the industry was in the mature phase, therefore fiercely

competitive, mostly on price, except for companies that

managed to differentiate their products

 The industry, characterised by global convergence, driven by technology push and market pull, was highly consolidated, with a few companies generating most of the output

 The consolidation was driven by the need to generate

economies of scale and of scope Most suppliers of

automobile parts were undergoing the same process.

Q 1: continued

Two important related features of the

market were the search for differentiation through design and the trend towards

customisation, implemented on the back of

a few major ‘platforms’

Given the maturity of the market, quality was no longer a differentiator, and

branding was a major competitive tool

Q 2:

Using Porter’s five forces framework, attempt an

analysis of the competition in the automobile industry

in 2004; adopt the BMW perspective Consider the

time horizon of strategic planning, and attempt to

identify what future changes are likely for that period

in the light of the factors at play in the

micro-environment.

 The first issue that s must be address in answering this

question is to clarify the part of the industry and market to which you are going to apply Porter’s model An accurate segmentation of the automobile industry is hard to perform because of the scarce information Nonetheless, you should

at least pose the question So at a minimum you should

identify some of the segments in which BMW competed, for example high performance saloon and sport cars.

Q 2: potential entrants

These segments were already crowded,

made attractive by the premium price that the products sustained and increasingly

attractive to players that could produce

and promote differentiated automobiles

Examples were VW with Audi models and Ford with Volvo and Jaguar models Ford

had entered the market of luxury cars with

a low-cost strategy

Potential entrants were a significant threat

Q 2: Product Substitutes

Products competing for buyers’ disposable income in the segments where BMW

competed ranged from other vehicles (e.g motorbikes, boats) to leisure products (e.g cruises), to properties (e.g timeshare

holiday homes) This is another significant threat

Consider more than the direct substitutes, indirect substitutes should also be

recognised

Q 2: Power of Buyers

In answering this part, be clear as to who the buyers are in this scenario

The power of individual buyers was very

limited, since they had little bargaining

power: they did not represent a threat

However, especially in the performance/

executive saloons range, fleet managers

and car rental companies were powerful

enough to exercise pressure on companies’ profitability

Q 2: Power of suppliers

In answering this part, be clear as to who the suppliers are in this scenario

Suppliers had little power: the attempt by some to differentiate their products by

supplying ‘systems’ rather than ‘parts’ (i.e the whole dashboard rather than some of the instrumentation) had given them little power, as their products were

custom-made, thus unsuitable for most other

buyers Also, carmakers were capable of

backwards integration

Q 2: Competitive Rivalry

 This was fierce

 The industry was in a mature stage, with no growth, with

little scope for differentiation, apart from (increasingly costly) branding, as quality had become a requirement, rather than

an option

 Design was also becoming a necessary requirement, but the increasing use of the same platforms for a number of models

to reduce costs made many cars look very much the same

 Exit was difficult, given the high asset intensity prevalent in the industry, and possibly political issues

 In these conditions, competition for non-differentiated

products was increasingly on price (often in the form of

incentives), which had the effect of depressing the

profitability of the whole industry.

Future changes

 The changes that one could envisage taking place in the strategic time horizon of 5–6 years to the end of the decade were largely further intensification of the trends identifiable in the mid 2000s.

 Further consolidation of the industry, with smaller

companies being acquired by the few big groups.

 A search for niches, on a global scale.

 Growth of cooperative links (joint ventures, strategic alliances), especially to enter new markets.

 Increased importance of IT in strategic decision

making, in developing and managing knowledge (e.g CRM), in managing the supply chain and in controlling operations.

Q 3:

What were the critical success factors in the market

segments in which BMW competed? How do BMW’s

competences compare to these? Was BMW able to

acquire and maintain a sustainable competitive

advantage?

 The competences needed to underpin the critical success

factors of players in the segments in which BMW competed were:

 Sound management of the supply chain and of the value

system, through vertical integration and/or effective

cooperation links to generate a high perceived value for

buyers

 BMW achieved this by controlling most of the activities in the value chain, to ensure the high level of quality that buyers expect.

Q 3:

Effective distribution network

 The control exercised by BMW on the distribution network contributed to its high global visibility, ensured top quality customer service and precious market intelligence.

Size: the successful company is big enough to

achieve high economies of scale and to deter

predators

 BMW was large enough to achieve the desired economies

of scale and scope that were required to be competitive in the segments in which it competed The size, however, could be cause for some concern In the mid 2000s the Quandt family seemed to be determined to keep its

control of the group Could this attitude change? What

factors could influence it?

Q 3:

Above all, a strong brand that buyers associate with

quality, prestige, status

 The BMW brand was very powerful: customers associated it with solid German engineering and craftsmanship The brand was very prestigious – ‘The Ultimate Driving Machine’ – and reassuringly expensive: it was perceived as a must by

successful executives around the world, and by those who aspired to become so The vigorous product development

was exploiting the power of the brand to extend the reach to other segments, still with differentiated products What were the limits of such a strategy?

To sum up

 BMW appeared to possess the competences that related to the critical success factors: its continued growth in the face

of a generally stagnant automobile market testified to that.

Q 4:

Discuss BMW’s sources of competitive

advantage What route(s) does it appear to pursue on the strategy clock?

 BMW was very successful in pursuing route 4 – differentiation – on the strategy clock The

sources of competitive advantage that sustained such strategy were:

1 Improvements in product

 Through design expertise, vigorous R&D, solid craftsmanship, continuing use of manual input in production operations were perceived by buyers

as value-adding factors.

Q 4:

2 Marketing-based approaches

 The ‘differences’ of BMW, Mini, Rolls-Royce automobiles were effectively communicated to the markets: the

concept of the ultimate driving machine was used to

summarise the benefits accruing to buyers.

3 Competence-based approaches

 BMW seemed to exploit effectively the interrelationship

of its strong R&D, design capabilities, and sound

engineering Unlike many other German companies,

BMW was successful in appropriating the additional

revenue accruing to its products as a result of being

produced in Germany (or under strict company

supervision) BMW’s major competence in the mid 2000s was its brand management and communication.

Q 4:

To sum up

In the mid 2000s, BMW was successfully

pursuing a differentiation strategy It did so

by offering a (perceived) improved product, which was realised through core

competences embedded in the

organisation and the benefits that the

product would bring to buyers were

effectively communicated to the market

The brands of the BMW group drove the

buyers’ choice and generated extra

revenue through their willingness to pay a premium price

Q 5:

What directions and methods of strategic

development does BMW appear to follow? Evaluate their effectiveness in light of your understanding of the market segments in which the group competes.

 BMW was following simultaneously a strategy of product development and market development The continuous development of new models in new segments was

coupled with entry into new markets, in particular China, Eastern Europe and India The strategies appeared to be very effective and the response given by the markets

demonstrates this A question mark on the wisdom of

the strategy in relation to its long term effects on the

power of the brand is appropriate.