Week 3 seminar BMW suggestion

3BM020 – week 2 seminar

BMW


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 microenvironment.
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 custommade, 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.