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Introduction This case explains the elements that make up BMWs strengths and weaknesses and illustrates the circumstances that surround the group in the mid 2000s. After an outline of the automobile industry, the case examines the product portfolio and the performance of the automobiles division of the BMW group. Students are likely to relate readily to the issues in this case, since the product and brands of the BMW group are well known. Also, as the products in the case are very desirable to most people, many students are likely to own or desire one. 2. Position of the case The case is best used as part of a strategy course dealing with positioning, branding, product portfolio and corporate strategy. It can also be used as part of courses that deal with strategic marketing issues, specifically brand development and management. The information on the automobile industry is limited, but sufficient for students to attempt some initial industry analysis, before moving on to consider the specific issues of BMWs capability and positioning. The case may be presented to students in two main ways: As an initial scenario that students will explore by themselves, with a general brief that requires them to identify and discuss the issues they see as critical in the case. Students who are used to an independent pattern of learning will favour this approach, and arguably they will learn more than in many other ways. This approach may also be extended to involve students in researching further some of the issues in the case, on the basis of an assessment of the existing information. As a self-contained scenario that is used by students as a source of information to answer a number of specific questions set by the tutor. Instructors Manual 272

Pearson Education Limited 2005 3. Learning objectives The main learning objectives that students should achieve after working through this case study are Practising the competitive analysis of an industry Assessing the strategic capability of a company Practising the segmentation of a market Relating the factors that are key to the success in a market to the resources and competences that a successful player must possess Identifying positioning options Evaluating the importance of brand management as a competence that is critical to successful differentiation Choosing directions and methods for the strategic development of a company. 4. Questions for discussion The case supports a number of questions that together will help students to achieve the learning objectives. The following are questions that students should be able to address from the information in the case. The questions also indicate the type of issues that students should be discussing if the more general teaching approach is used. 1. 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? 2. Using Porters 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 macro-environment. 3. What were the critical success factors in the market segments in which BMW

competed? How do BMWs competences compare to these? Was BMW able to acquire and maintain a sustainable competitive advantage? 4. Discuss BMWs sources of competitive advantage. What route(s) does it appear to pursue on the strategy clock? 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. Instructors Manual 273 Pearson Education Limited 2005 6. Discuss the corporate strategy issues relevant to BMW as a group. 5. Case analysis 5.1 What main trends are identifiable in the business environment in general and in the automobile market in particular in 2004? 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. 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.

5.2 Using Porters five-forces framework, attempt an analysis of the competitiveness 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 macro-environment The first issue that students must address in answering this question is to clarify the part of the industry and market to which they are going to apply Porters model. An accurate segmentation of the automobile industry is hard to perform because of the scarce information. Nonetheless, students should at least pose the question. So at a minimum they should identify some of the segments in which BMW competed, for example high performance saloon and sport cars. 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. Instructors Manual 274 Pearson Education Limited 2005 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. Power of buyers 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. Power of suppliers 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. 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 56 years to the end of the decade were largely further intensification of the trends identifiable in the mid 2000s. Instructors Manual 275 Pearson Education Limited 2005

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. 5.3 What were the critical success factors in the market segments in which BMW competed? How do BMWs 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. 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? Instructors Manual 276 Pearson Education Limited 2005 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. 5.4 Discuss BMWs 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. 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). BMWs major competence in the mid 2000s was its brand management and communication. Instructors Manual 277 Pearson Education Limited 2005 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. 5.5 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. 5.6 Discuss the corporate strategy issues relevant to BMW as a group The corporate strategy issues relevant to the BMW group in the mid 2000s were of two kinds: 1. Portfolio management. The range of products generated by the group could be a cause for concern in relation to the different competences required to market, say, a Mini and a RollsRoyce even considering that all the groups products have in common the fact that they are differentiated. Perhaps more importantly, the expansion of the BMW brand range might weaken the brand that is now also supporting the other two, RollsRoyce and, especially, Mini. 2. Independence. Privately controlled but small in size when compared with the five giants, the group must rely on the loyalty of the family that owns a controlling share of its equity. The groups survival if such loyalty were to falter was very much in doubt, Efforts to increase the size, first by acquiring Rover, then, after its disposal, by churning out models to cover most market segments, seem unsuccessful.