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Managers Making Choices at

BMW

Over the years, BMWs


managers have faced strategic as
well as tactical business
decisions...

WHEN YOU THINK OF CARS THAT COMBINE FINE


ENGINEERING, HIGH PERFORMANCE, AND CUTTINGEDGE STYLING, YOU ARE LIKELY TO THINK OF
BMW.
The Bayerische Motoren Werke, or Bavarian Motor Works,
was founded in Germany in 1916 as a company devoted to
manufacturing aircraft engines. In the early 1920s, BMW
began to make motorcycles. In 1928 it produced its first car.
Today, BMW employs nearly 100,000 workers in 23 factories
in 15 countries to produce eight car models. In 2004, it had
worldwide sales of about $70 billion.
To compete in the automobile market, the managers of BMW
must make many strategic decisions, such as whether to
introduce a new car model. In 2004, for example. BMW
introduced the 1-series, a hatchback that is significantly
smaller than most other models.

Some BMW managers had opposed developing the 1-series


because they believed that it was inconsistent with the
companys image of producing more expensive, higherperformance models. But other managers argued that the
company needed a model that would appeal to younger
drivers and could compete with the Volkswagen Golf and the
Audi A3.
Over the years, BMWs managers have also faced the
strategic decision of whether to concentrate production in
factories in Germany or to build new factories in its overseas
markets. Keeping production in Germany makes it easier for
BMWs managers to supervise production and to employ
German workers, who generally have high levels of
technical training. Building factories in other countries,
however, has two benefits.

First, the lower wages paid to workers in other countries


reduce the cost of manufacturing vehicles.
Second, BMW can reduce political friction by producing
vehicles in the same country in which they sell them. In 2003,
BMW opened a plant at Shenyang, in northeast China, to build
its 3-Series and 5-Series cars. Previously in 1995, BMW
opened a U.S factory in Spartanburg, South Carolina, which
currently produces Z4 roadster and X5 sports utility vehicle
(SUV).

BMWs Net Profit Rises 2.5% As New


Models Benefit Sales
Bayerische Motoren Werke AG posted a 2.5 % increase in
the first-quarter net profit, as the launches of the 6-Series
coupe and X3 sport-utility vehicle boosted sales.
The luxury-car manufacturer, which sells the BMW, Mini
and Rolls-Royce brands, benefited from new products that
allowed it to Daimler-Chrysler AG, in terms of vehicle
sales in the years first three months.
BMWs net profit rose to $632.3 million from $610
million a year earlier. Revenue climbed 4.9% to 10.8
billion from 10.3 billion. The rise in revenue outpaced
the gain in car sales, which climbed 3.2% to 269,973
vehicles from 261,573.

The company, based in Munich, got off to a slow start in


2004 as renovation work at its Munich plant through the end
of January slowed production of the 3-Series. The second
quarter began well, as the company sold 9% more cars in
April compared with a year earlier, Chief Executive Helmut
Panke said.
That jump in car sales suggest that a stronger earnings rise is
in store for the current quarter. Mr. Panke said he expects
earnings growth to roughly track a projected rise in car sales.
The company repeated a forecast for the record 2004
earnings, aiming to top 2002s net profit of 2.02 billion.
Whats encouraging is that they still expect to achieve
record earnings, said Michael Raab, an analyst at Sal.
Oppenheim.

BMWs first -quarter performance was enough for the company


to overcome Mercedes as the worlds leading maker of premium
cars - at least for now. BMWs car sales exceeded those of
Mercedes, although Mercedes had the upper hand in revenue
terms.
BMW is definitely faring way better than Mercedes, but the
two companies are in different stages in their product cycles,
Said Thomas Ryard, an analyst with forecaster World Markets
Research Centre. Im not sure its going to be a long-lasting
trend. By 2005, Mercedes should come back.
Last year, BMW launched its flag-ship 5-Series. This year, it is
rolling out the 6-Series, X3, Mini convertible and 1-Series
compact. Most of the development expenses for these models
have already been booked.

By contrast, Mercedes is at the beginning of the biggest


product offensive in its history. It launched a redesigned CClass in March and is bringing out new versions of its
compact A-Class this fall. In 2005, sport-utility vehicles, a
redesign of the companys luxury S-Class, and a crossover
family, known as the R-Class.
But Mercedes, which produces the Mercedes-Benz, Smart and
Maybach brands, wont realize the benefits of these new
models until later this year and in 2005.
Mercedes first quarter car sales declined 9% to 266,000
vehicles, burdened by the new-model program. But the
Mercedes-Benz brand still topped BMWs core brand, selling
246,000 cars during the first quarter, compared with the BMW
brands 222,000.

Key points in the Article


The Article discusses the strong performance of BMW
during the first months of 2004. the firms sales rose
sufficiently for it to overtake Mercedes for the lead in
production of high-priced, or premium, cars.
The article spotlights the strong sales of the X3 SUV,
which along with the Z8 roadster, is assembled at the
companys plant in Munich, Germany. Renovations of
the Munich plant reduced production of the X3 at the
beginning of the year.
BMW had been introducing new models and also
increasing its capacity to produce existing models.

Analyzing the News


a)We can use the economic model of production possibilities
frontiers to analyze this news article.
First, note that the renovations at the Munich plant meant
that initially the company was operating inside its
production possibilities frontier at this plant. This is
shown in fig 1, where production in early 2004 is
represented by point A. moving to the frontier makes it
possible for BMW to produce more roadsters and more
SUVs.

b) The strong demand for the X3 SUV has caused BMW to


allocate more workers and machines to producing this
model. Once BMW is on the production possibilities
frontier at the Munich plant, its opportunity cost of
producing more X3 SUVs is the reduction in the quantity of
Z8 roadsters produced. ( Actually, we are simplifying a little
here, because at various times BMW has produced other
models in the Munich plant as well. We could show this by
drawing a production possibilities frontier with the quantity
of X3 SUVs on the horizontal axis and the quantity of all
other models produced in the plant on the vertical axis. But
the point would be the same: once BMW is on the
production possibilities frontier for this plant, it can only
produce more X3s by producing less of something else) in
fig 2 the popularity of the X3 causes BMW to move from
point B to point C.

BMWs Net Profit Rises 2.5% as New Models Benefit Sales