Syed Jafri Dated- 26/11/07

ID. No.-20257651 (IBM)

Analysing BMW and the Automobiles

Industry
BMW – the Bavarian based luxury car producer is seen as one of the most prestigious,
stable and admired companies in the world. By 2008 the company sold 1.2 million
automobiles under its largest brand – the BMW. In 2001 it very successfully launched the
new Mini which is the only brand kept after the failed acquisition of the Rover group
with sales rising to over 230 thousand in 2008. In 2003 Rolls Royce was added to
BMW’s portfolio and sold 1,212 units in 2008 – an increase of 53% compared to 2004
(BMW Annual Report 2008, pp6-7). The company has not only one of the strongest
brands worldwide and exclusively high profit margins of 8 – 10% but since 2007 it has
been the world’s top seller in the premium class (Hawranek, 2008).
Automobiles market in the 2000s
The next chapter will investigate the main trends within the automobile market starting
with a general overview, followed by wider analyses of the environment as well as
investigation of the competition in the car market.
General overview
In the 21st century the car industry can be described as mature, highly competitive and
very dynamic. Despite being considered as global, automobile industry constitutes of
three major areas – USA, Japan and Western Europe which together accounts for 80% of
total sales (Lynch, 2006, p698) as well as almost 90% of total output (Donnelly et. al.,
2002, 31). New markets, such as China, South America and Eastern Europe are
emerging; however, as Lynch points out (2006, p697) the level of wealth differs among
the various regions leading to highly varying customer preferences which need to be
considered when entering new markets.
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As a result of the fierce competition, the structure of the car industry has been changing
radically. Extensive consolidation through acquisitions, joint ventures and strategic
alliances has been taking place. According to Lencioni (2005), in given circumstances
taking into account the BMW’s size and product range the company was at risk of being
taken over, however, it successfully managed to expand their product range through
internal growth as well as acquisitions.
Increased cooperation could not only be found among car manufacturers but also with
their suppliers. Wide-ranging 1st tier outsourcing, including R&D, modularization, and
supplier parks were being commonly used in car industry (Jung and Lee, 2006).
Furthermore by the 21st century the quality and technology of the cars had risen to
similar standards. In addition, companies were increasingly using the same platforms and

Varun Jain I.D. No.-20267351

Varun Jain I.D. No.-20267351
other components in different models in order to increase profitability. The consequences
were that cars produced by different companies looked very similar and the low
differentiation led to increased price competition. (Lencioni, 2005). In addition to that,
overcapacity had also become a concern within the industry (Oliver and Holweg, 2008).
As a result companies were lowering prices as well as offering incentives which,
however, had negative influence on the profitability of the whole industry. At the same
time it stimulated a shift of competitive advantage to product design, marketing and
brand-building (Lencioni, 2005). This was also true for the premium segment with new
entrants and models coming in, particularly from the Japanese companies.
In the meantime the product variety and customer service had also increased. An
investigation by ISDP identified that the sales of cars with exact specification had
increased from 31% in 1992 to 78 % in 2002 while build-to-order car sales rose from
10% to 43% and the service level (in the dealer perception) increased from 80% to 95%.
(Turner and Williams, 2005). A wider variety and increasingly heterogeneous market
have in turn implications on car manufacturer’s organisation and technology. Assembly
plants have become smaller, more flexible and new methods, like lean management, just-
in-time (JIT), kanban and others have been introduced (Morris et. al., 2004).
Environmental analysis
For the company to be successful, it is crucial to analyse the wider environment carefully
in order to anticipate changes and be proactive. The concept of PESTEL will be
employed to analyse the different but overlapping and interrelated areas (Johnson et. al.,
2008, pp54-57).
Ecological environment
The ‘green agenda’, including such issues as pollution, waste, climate change and
resource deficit, has become an important topic in the 21st century. Given that the road
transport contributes 20% to the EU’s CO2 emissions while passenger cars account for
approximately 12% (EU Press release, 2007) there is a general concern about the future
of the car industry. The producers of large, premium automobiles such as BMW that very
often are very fuel-consuming are seriously affected, particularly in the long-term.
Economics
With the car being highly sensitive to price and consumer income, the car industry is very
vulnerable to economic changes (Akpinar, 2007, p175). The global economic downturn
in the beginning of 21st century led to lowering demand for cars, however, as Hawranek
(2008) argues that premium cars are usually not as much affected as mass-market. In fact,
BMW’s performance was quite remarkable. (Lencioni, 2005). However, it has proven not
to be the case in the most recent recession where the luxury car makers, particularly
Mercedes-Benz and BMW have been hit hardest with BMW sales declining by 18%
(Hawranek, 2009). Additionally increasing fuel prices have major implications on car
manufacturers (Lynch, 2006, p701). Firstly the car makers, especially the luxury ones,
will be pressurized to build more fuel-efficient cars. Secondly the demand is shifting
towards smaller sized cars (Thanasuta et. al., 2009, p. 358), which has led BMW to
introduce the Series 1 models.

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Finally the car makers are influenced by the currency changes (Lencioni, 2005). The
strong rise of Euro and the week Dollar have both had negative impact on many
manufactures, particularly BMW as it still mostly produces its cars in Germany.
Political and legal issues
There are governmental regulations that affect most manufacturers, including car makers,
such as health and safety, employment laws etc. Additionally different tax levels are
imposed depending on vehicle efficiency (Thanasuta et. al., 2009, p358). Emission
reduction regulations have also had major influence on manufacturers to produce
environmentally-friendlier cars as well as develop new alternative technologies
(Pilkington and Dyerson, 2006, pp81-87). Recent development even foresees fines for car
manufacturers if their models exceed a certain level of CO2 emissions (Curry, 2007).
Further developments, such as congestion charges on vehicles (with exception of the
hybrids) in the city, for instance in London, or subsidising electric vehicles are all
affecting the future strategies of the car manufacturers (Ewing, 2008).
Technological development
There are a range of new materials (composite, ceramics, plastics etc.), new product
developments, such as more fuel-efficient engines and car frames, sensors and other
devices in the car as well as new manufacturing procedures that aim to increase the
competitiveness of the car makers. New models, like electric, hydrogen driven or various
hybrid cars are being developed; however, there are many problems with most of these
new forms that have to be overcome. It is also not yet clear which of these technologies
will become the most successful in the future, although there seems to be a general belief
that electric cars are the ones that will take to the mass market (Ewing, 2008). So far
Toyota’s hybrid-vehicle strategy over the last decade has turned out as one the best.
(Lynch, 2006, pp315-318).
Social development
The 21st century customer has become very informed, more sophisticated as well as more
aware of different developments, such as ecological, human and other social issues. With
the ageing and always changing society, it becomes more important to study the
developments of customer lifestyle and attitudes.
As Daimler CEO Zetsche points out people even if they are sufficient wealthy no longer
feel that it is appropriate to drive a big car (Hawranek, 2008). Prestige for many people
nowadays means that their luxury cars are not only fast and safe but also environmentally
friendly or even trendsetter for green technology. However, it should be also noted that
there are regional differences, for instance in China, the trend is just opposite – the
consumers want the biggest cars they can buy (Hawranek, 2009).
Competitive forces in automobile industry
The following chapter is dealing with the analysis of competition in the car industry. To
achieve this five forces framework developed by Porter will be used (Johnson et. al.,
2008, pp59-65; Mintzberg et. al. 1998, pp100-102).

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The threat of potential entrants
The threat of entry depends mainly on type and extent of the entry barriers. These are
typically considered very high in the car industry, particularly in the luxury segment
(Thanasuta, 2009, p355). Oliver and Holweg (2008, p3) argue, however, that cheaper cars
from India or China might threaten the car industry similarly as Japanese makers did in
the 1970s and the Koreans in the 1990s. They further suggest that due to the high level of
competition in the car industry new entrant are threatened just as much as established
manufacturers.
Due to large investments and very complex and dynamic market environment, such
barriers as economies of scale, knowledge and experience are some of the most important
ones that protect incumbent companies from entrants. Successful cooperation with
suppliers and strong distribution network poses further hurdles for new competitors.
Trade regulations are a further barrier to entry, although, these have been widely
removed, for instance EU removed such trade barriers in the mid-1990s (Lynch, 2006,
p715). However, the primary car producing countries will always try and support their
own markets and companies.
The most important protection for the luxury car makers are their brands. These are used
for differentiation and identification of the company’s products and can bring great
benefits, like customer loyalty, long-term competitive advantage as well as exclusive
brand premiums and in the case of BMW are extremely hard or even impossible to
imitate. As Thanasuta (2009, p355) states brand premiums that customers are prepared to
pay could account to more than 25% of the car prices, which makes this segment very
attractive to mass-market brands. According to Donnelly e. al. (2002) it would be
extremely difficult for mass-market companies to break into luxury car segments, as the
example of failed VW luxury model VW Phaeton shows (Baltas and Saridakis, 2009,
p151).
The threat of substitutes
In order to analyse the threat of substitutes two different levels can be considered –
physical or intrinsic – a means of transport and emotional or extrinsic – owing,
identifying with a car (Thanasuta, 2009, p358). On a physical level public transport, like
bus, tube or train can be seen as substitutes to transport passenger. From a wider
perspective a plane or even a ferry can be seen as a substitute as a means to travel wider
distances, for instance within UK, particularly with emerge of the low-cost carriers such
as Ryanair or Easy Jet. These types of substitutes, however, do not satisfy the emotional
need for prestige and identification.
Motorcycles represent another substitute for cars which would offer emotional
satisfaction, but limited capacity and one that is even a greener substitute – a bicycle or a
mixture of the both. Countries as Germany and the Netherlands have been developing
their cycle road systems since several decades and governments continually encourage
people to use them more frequently. Furthermore Stuttgart has announced to introduce a
rental system of the light electric vehicles (LEVs) – non-polluting electric scooters which
are already being used in India and the US (Schenker, 2008).

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Although people are becoming more aware of environmental problems, given the high
level of comfort that a car provides and emerging new and better technologies, it is highly
unlikely for cars to become widely substituted.
The power of buyers
In a mature and saturated automobiles market companies are under pressure to compete
for customers. The power of the buyer’s increases as they become better informed or
when the product is lesser differentiated.
The widely used platform and component sharing poses a potential threat here. Some VW
customers have realised that they can buy a similar but cheaper product than VW under
its other brands Å koda or Seat (Å trach and Everett, 2006).
Brand building and communication, in particular within the premium segment, could be
considered as a way to increase customer loyalty. However, research (Colombo et. al.,
2000) suggests that premium car customers are rather loyal to the luxury segment
generally than a particular brand.
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The power of suppliers
As already indicated earlier car manufacturer are maintaining a close cooperation with
their suppliers as there is much higher interdependency between them which results in
decreased power on both sides. However, car manufacturers in general enjoy higher
bargaining power, especially with steel suppliers due to low product differentiation and
fragmented market structure (Lynch, 2006, p91). The steel supplier power increased,
however, as China’s economy and thus demand rapidly developed driving the prices of
many materials extremely high.
Considering the further value chain it can be realised that steel producers depend on iron
ore suppliers which again have very high power due to high consolidation (Jung and Lee,
2006). Looking even further all of these companies are energy-intensive and depend on
the very powerful oligopoly or monopoly markets of energy providers.
The extent of rivalry between competitors
As mentioned before the rivalry in the automobile market is enormous. It should be also
noted that regional difference between various areas exist, so in Europe, US and Japan –
the very saturated markets rivalry is higher than in the new geographies with stronger
growth, such as Brazil, China or Mexico.
High fixed costs and additionally the low product differentiation in the early 2000s were
the factors that increased the competition even further.
Companies have been realising that various forms of cooperations offer more benefits to
everybody than fierce rivalry. As Pilkington and Dyerson (2006, p81) emphasize
particularly with regard to the future developments car manufacturers seek to cooperate

5
with competitors in order to expand their knowledge, save costs and increase
competitiveness.
BMW and Daimler are being considered to be perfect partners, although until recent
economic crises they refused to work together. Under the threatening circumstances they
have decided on joint purchase of components to save costs; however the initially
planned capital-interlocking plans were not approved by the BMW main shareholder –
the Quandt family. (Hawranek, 2009a).
Premium car segment
As seen in the previous chapter market environment can create opportunities as well as
threats, to the car manufacturers; however, it is the company’s internal strategic
capability that determines its success or failures and that distinguishes it from competitors
(Johnson et. al., 2008, p94).
The next chapter will examine the critical success factors of the luxury car market and
BMW’s performance in order to achieve them.
Critical success factors
Branding and positioning
According to Johnson et. al. (2008, p27) a strong brand allows company to gain a
significant price premium, which in turn can lead to a sustainable long-term profitability.
In premium car market successful branding is one the most important factors. If
developed successfully brand can provide a company with a sustainable competitive
advantage which is difficult for competitors to imitate. According to Nueno and Quelch
(1998, pp62-63) brands are characterised through consistent quality, craftsmanship,
recognizability, exclusivity, reputation, distinctive variation, timing, heritage, as well as
“association with a country of origin”. According to the survey by Market Opinion
Research in 1997, Germany has been considered the best automobile producing country
in the world (Thanasuta, 2009). This certainly has had a positive impact on BMW’s
performance.
Referring to brand building Baltas and Saridakis (2009, p153) point out that car brands
need clear and consistent strategies over longer-term to develop successfully.
Further Lynch (2006, p700) argues that unlike in other segments in premium market
branding is truly global. However, Baltas and Saridakis (2009, p153) argue that the key
to successful global branding lies in understanding the different markets and effective use
of brand strategies accordingly. As noted previously markets can greatly differ regarding
cultural, social, economical and other factors and thus need appropriate strategies.
Another important factor is successful adequate positioning and market segmentation.
This structure enables car maker to serve better their customers, as different modules
match different customer needs. To achieve this, a strong marketing function is essential
as well as sufficiently differentiated products. With regard to premium positioning there
has been criticism about the trend of luxury brand acquisitions by companies like Ford
and GM with aim to create mass demand for niche products. Despite economical appeal
Å trach and Everett (2006, p110) consider it as intrinsically illogical for premium brands.

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Quality and innovation
The quality standard in luxury car market is extremely high as the margins are
substantial. Manufacturers cannot therefore afford to make any mistakes regarding
product and service quality. Nevertheless, due to fierce competition and price pressure,
premium margins can only be earned if costs are kept at minimum.
As Å trach and Everett (2006, p120) state premium cars and their customers cannot be
treated the same way as mass-market products and users because “they are not average”.
Thus they further argue that platform and component sharing in luxury segment is
considered highly inappropriate. While Olson (2009, p213) agrees that platform sharing
can create damage in inter-brand applications, he suggests that intra-brand platform
sharing is safe for the brand and cost effective, however only on products with price
variation between 20% to 25% . In another study, however, he (2008, p1072) discovers
that a unique platform is worth high premium and gain in market share and further
reinforces this by an example of successes of BMW and Porsche, neither of whom do
much platform sharing. Particularly with regards to informed customer, premium price
for a cheaper platform or components cannot be seen as favourable. Nevertheless, recent
recession seems to have enabled Audi to do just that and what it saves in manufacturing
costs can then be spent for luxurious accessories making some Audi models looking more
luxurious than those of Mercedes and BMW (Hawranek, 2009). There is, however, great
doubt that this strategy could be sustainable over the long-term.
Dealer networks and customer service
Although not immediately obvious the service level provided by the car maker’s
networks is essential in the premium market. Christoph Stürmer – an analyst for industry
watcher Global Insight (Ewing, 2008) states, regarding Lexus expansion in Europe, that
buying luxury cars is all about convenience which also means that an professional dealer
that provides high standard service has to be close enough. This means for luxury car
makers in order to be successful need to build up and maintain widely accessible and
dedicated dealer facilities that an offer the necessary quality of service.
BMW’s strategic capabilities
The next chapter will explore how BMW capabilities compare to the success factors
which are critical in luxury segment. As Johnson et. al. (2008, p103) suggest that
competitive advantage is more likely to be determined by competences – the way
company deploys its resources than the resources itself, however, these have to be
available in the first place in order to be used successfully. For the long-term success, it is
important that the competitive advantage is sustainable (Lynch, 2006, p9).
Marketing management
The BMW brand stands for sporty, performance oriented cars of a high level of
craftsmanship and ingenuity. Under the slogan “The ultimate driving machine” BMW has
consistently delivered the same message and brand promise for the last 40 years (Kiley,
2004, p35-107). By establishing a strong brand identity BMW could extend the luxury
feeling even to cars with smaller engines (Lencioni, 4). The key to BMW’s success is
consistency and authenticity of their marketing strategies and policies. Other companies
have experienced a lot of drifts and changes in their strategies due to the product

7
separation from the brand and image or slogan changes, for example because of the
changes in personnel or ownership. In fact, the long-term ownership by the Quandt
family has certainly supported the steadiness and strengths of the company. BMW’s
contribution to motor sports and appearance in films has also been key practises that
helped develop the brand (Kiley, 2004).
Further BMW uses customer profiling in a certain way. They go beyond pure
demographic statistics and carefully track the personalities, lifestyles and tastes of their
customers. People who drive BMW are very particular about the brands they using,
image is a high priority and a part of the deal (Khermouch and Welch, 2004, p6). They
are affluent, young or young-minded people who are driven in their lives, just like the
BMW. (Kiley, 2004, pp109-138).
BMW is also very successful in segmenting the market and positioning their models
appropriately. As mentioned earlier the problematic product range in the beginning of
2000s could be solved efficiently, as they launched new model every three months from
2003 till 2005 (Lencioni, 2005). The acquisition of the Mini brand enabled BMW to enter
a very different and totally unique segment of the automobile market whilst maintaining
their existing brand (Simms and Trott, 2007, p299). The other additions Rolls Royce
uniquely defines luxury and are perfectly suites BMW’s way of doing business (Kiley,
2004, p263). Thanasuta et. al. (2009, p355) investigated how brand names affect
consumers “Willingness to Pay” and found out that Mercedes, BMW, and Audi brands
were ranked accordingly, the highest. With such a strong brand as BMW the company
was able to earn some of the highest margins in the industry.
Engineering and product development
BMW – a company dominated by engineers always puts product before anything else and
is deeply committed to that principle. There are three main principles which they deploy
while developing a product: balance, power-to-weight-ratio and braking power.
Technical issues like this are the heart and soul of the company and something BMW
engineers are obsessed with (Kiley, 2004, pp3-15). This is how they ensure the high
quality of driving experience which is the base for its strong brand position.
In addition BMW has achieved a small lead in the fuel-efficient technologies, including a
start-stop automatic transmission and recovery of braking energy (Hawranek, 2008).
With regards to the main future developments BMW has decided to adapt combustion
engines run on liquid hydrogen as this is seen as the only engine that meets BMW’s
requirements in terms of dynamics (Wüst, 2006). However, there is still long way to go,
as it takes a very long time to change a global energy system.
Human resources and organisation
In order to implement strategy successful company will always relay on people, from top-
managers till down to line workers. With a highly diversified workforce and matrix
organisational structure BMW is ale to achieve a high degree of flexibility (Kiley, 2004,
p22). Additionally BMW has possibly the most flexible working hour models
(Hawranek, 2008) as well as flexible plant in the industry (Kochan, 2006, p113). Another
measure BMW deploys to improve innovation has been awarding creative error of the
month award to its employees. This way they aim to bring about cultural change, where
challenging accepted practice in the name of improving business is accepted and

8
favoured even if the idea fails (Kley et. al. 2006, p29). To enable such a policy a very
open and trustful organisational culture is needed which has to be supported from top to
bottom. And as a powerful global brand, BMW has attracted some of the best
management talent in the industry (Khermouch and Welch, 2004, p5).
Supplier and distribution strategies
BMW has built a strong dealer network and always executed firm control over its supply
chain, to include distribution as well as suppliers. This also enabled effective market
segmentation, efficient brand building and high standard after-sales service (Lencioni,
2005). BMW like other car manufacturers also seek close cooperation with their suppliers
in order to
Ensure high quality standards as well as efficient manufacturing. For instance, BMW
built a supply centre on the Leipzig site, where the supplier is highly integrated in the
manufacturing process and supply parts just-in-sequence (Kochan, 2006, p113).
Operational and financial efficiency
Unless operational strategies are in line with the overall strategy, no matter how well it
developed it is, it cannot succeed. It is at the operational level that real strategic
advantage can be achieved. Efficient collaboration with suppliers and outsourcing,
extensive automation (Kochan, 2006, p112) and high process quality standards makes
BMW a performance company throughout. In order to maintain financial efficiency,
BMW has moved part of the production to low-cost countries and expanded in the USA
(Lencioni, 2005).
Future outlook
In the last 50 years BMW has built a powerful brand image and distinctive competitive
advantage. However, with rising fuel prices and climate change BMW will have to work
hard to develop an environmentally-friendly car that still supports the values that the
company has been standing for.
Despite the fact that recent recession has hit hard the luxury market BMW considers itself
in fundamentally good shape as it began preparing for a downturn in early 2008 (Ewing,
2009). However, there are no reliable predictions on how long the crises will last and
how the automobile industry will develop in the future but the direction BMW has to
work to is certainly clear – to a greener, more environmentally-friendly Beemer.