BMW in 1999: Victim of Poor Strategy or Poor Implementation

The scenario
Mr. Pischetsrieder resigned as Chief Executive of Bavarian Motor Works (BMW) The company failed to deliver after buying Rover in 1994 The strategy failed even after a calculated move to buy Rover

The World Motor Industry

World supply of cars to exceed demand by 2002 Highly concentrated industry with 5 largest companies sharing 54% of the world market BMWs positioning
an apsirational brand More of High end customers High quality engineering Premium pricing

Market Conditions in 1999: A Mature Industry

Demand & capacity to grown by 20% from 1999 to 2002. Excess capacity leading to more intense competition. Cars are losing their individuality due to look alike features, sourcing from same component manufacturers. Survival depended on volume, strong marketing and cost reductions. The way of survival was to build desirable cars or to fight out in the market place. Larger markets were reaching saturation. Toyota and Honda making inroads in American markets.

New Entrants: The Suppliers Challenge

From in-house manufacturing of parts Car makers started sourcing components and sub-assemblies from system suppliers. These system suppliers were taking a global role alongside the car assemblers System suppliers are providing plenty of benefits to small as well as big car makers.

Government Influence on the Industry

Legislation for cleaner cars, increased taxes on fuel and charges for usage of Cars. Discouraging people to use cars. Reducing financial support from Government and tightening regulations also posing problem for Car makers from both supply and demand side

Which Strategy to Follow for Survival?

Growth by Acquisition or Merger
As organic growth hits the limits, mergers and acquisitions were the way to grow E.g.. Mercedes Benz Companies widened portfolio by acquiring smaller manufacturers and weaker competitors

Survival by Staying Small & Specialist

Few detractors skeptical about growing inorganically Acquisitions and Mergers only spread the costs over a large volume. Reduces the ability to respond to the market As more automation is coming around, minimum size of a efficient plant is coming down which can allow small manufacturers to stay efficient

The BMW Story

At first manufactured Aero-engines and motor-cycles Constantly supported by Quandt family which has a major stake

Engineering Excellence
High quality engineering BMWs DNA Excellent in production process, reputation of product quality, brand awareness and preference among its customers Late 1960s BMW was started to be seen as a manufacturer of excellent cars with driver appeal a high build quality sedan which is fun to drive 1980s- BMW became a fashion icon and large volume sales began to happen

Financial Strength
Support of Quandt family Healthy order book Sustained profitability Good financial backing from Bankers in Germany

BMW in 1994
Small player in a big car markets Good image but not narrowly typecasted BMW needed a new strategy to sustain, because of Merger boom in industry and fear of takeover Aggressive product development by rival Benz Changed its product offering from 3 variants to a spectrum of variants (A class to S class) Was ready to face the challenges of Benz and Audi as it had good market in luxury sports car segment and executive car segment 1994 Acquired Rover from British Aerospace

ROVER
Rover the result of many mergers of English Companies Held by the Leyland group, then formation of Rover Group where in Michael Edwards brought the company back to life After costing a lot to tax payers it was transferred to British Aerospace and then sold to BMW British Aerospace saw Rover as non-core business The sale Rover gave an owner who can stick to it on hard times and also avoided the speculated acquisitions of Rover by Honda

The Purchase of Rover by BMW

BMW saw Rover as mean to increase scale of operation in the wake of rising costs and pricing pressure from volume-car makers. Saw Rover as New area for development. Rover would be dealt as a separate unit and would produce lower end models to compete with Toyota, Ford and Volkswagen while BMW to retain its position in high priced segment Land Rover was in conflict with BMWs upcoming SUV (internal competition in SUV segment) In the End
Results post acquisition were not so good. Waste of capital and management time.

Questions
BMW is a successful company with an excellent brand image and loyal customers. Could it have survived on its own in an industry where giants were teaming up to create mega-giants? How should BMW have assessed the suitability of potential acquisitions or partners? How good a fit was Rover with BMWs strategic need for a suitable acquisition? Would any other company have been a better fit if BMW had moved in time? If you had been an adviser to Mr. Pischetsrieder in 1994 what advice would you have offered him to make Rovr acquisition a success? How would you rate the Rover acquisition strategically in the light of subsequent events?