BMW Case Study Answers
As per the case provided by Lencioni (2005), the industry was faced with a 30 % excess capacity and too many companies were chasing fewer customers. The global economy experienced a sharp downturn in 2001 and this lasted will into 2003. Equity prices had fallen and this combined with concerns of oil supplies had created an atmosphere of uncertainty. Sales of automobiles had declined in almost all the markets. BMW was listed 6th in the largest manufactures list and had a sold 1. 12 million vehicles in 2003 with sales of 41.
52 billion Euros while General Motors which stood first had sold 8. 5 million vehicles and had sales of 157. 19 billion Euros (p. 735). Please refer to the following illustration for details. There was bitter rivalry among the manufactures and they indulged in price wars and the bid to lower the price, while costs were rising were hurting the finances. All the manufacturers made good quality cars that had less than 53 defects per 100 vehicles and clearly the cars lacked unique differentiators and customers had little way of knowing which was what.
Clearly only cars that had very good designs and looks were favoured. All the companies wanted to reduce costs and a few companies had shifted the base to China and India. BMW with its reputation for excellent German engineering and good designs had a slight edge (p 735). Suppliers The suppliers of the industry included the hundreds of vendors, job workshops, parts suppliers and so on. They did not have much of an advantage or bargaining power since the car manufacturers were themselves in trouble and they could easily switch suppliers if a need arose (p. 736).
Potential Entrants The treat of potential entrants was not very strong as new manufacturers could not scale to the global level quickly. But companies such as Toyota had created a strong brand awareness for quality, fuel economy and service and cars made by Toyota had become increasingly popular, at least in the mid class of cars. Potential entrants would have to devote enough resources for the engineering and then again spend on advertisements and companies were spending up to 50 billion USD on advertising and marketing and this worked to $ 2, 900 for each car sold.
BMW had already created an image for excellent quality cars that were powerful, had good design and also very less problems (p. 737). Buyers It was a totally buyers market and there were hundreds of varieties of cars made by leading manufacturers and they could demand excellent quality. In addition, the buyers also demanded discounts, free insurance, zero percent interest loans and many other services. BMW cars were priced at the mid and the upper levels and in this category, buyers were extremely brand conscious.
BMW has new versions such as the X5 and Z6 models along with other brands, but it was seeing declining sales. Research conducted in 2003 showed that consumers based their indirect and direct experience measured different brands performance against the criteria of brand excellence and cost of ownership (p. 736). Substitutes The problem with the automobile market was that the customers could not make out any difference between the cars since all the manufactures gave an emphasis on quality and had dedicated design engineers.
In the low and mid class segments, the problem was much worse but BMW did not operate in this class (p. 737). Future Changes The future changes as described in the case and with reference to BMW is the distinctive identity that young and affluent European professionals had a desire for. Most drivers perceived high performance saloon automobiles as synonymous with BMW and it was a sign of affluence to own one of the vehicles. There was a pressing urgency to control costs and BMW had manufacturing bases in countries such as China were skilled labour was available at lower costs.
It had plans to produce 1,50,000 cars by 2008 from its plants in China and was planning to invest 480 million USD by 2005 (p 738). However, there was pressure to reduce the costs and orders to divest the expensive and ill Rover acquisition that was bleeding talent and money. There was pressure to sell the expensive models in China since Europe was saturated with high brand vehicles.
Q 2. WHAT DIRECTIONS AND METHODS OF STRATEGIC DEVELOPMENT DOES BMW APPEAR TO FOLLOW? Lencioni (p.740) has pointed out that that BMW was in a tight financial position. In spite of the great sales talk, it still lacked the big money required to get the better of the big companies. The company was still a niche player and did not have the large volumes required and it had only a few models. Also the size of the company was modest and the future lay in the hands of the Quandt family that had propped up the company. They were vulnerable to acquisition if the Quandt family decided to dispose of the company or sell of their shares.
The company was actually operating in the niche segment and in 2002, it decided to roll out a new model every 3 months and the models would range from the mini size to the Rolls Royce Class of vehicles. There were certain risks as increasing the output at the level planned by the company could threaten the very reason for BMWs great success, a strong but simple theme summarized by the line ‘the ultimate driving machine’. The company had been able to exploit this brand identity very profitably and globally wherever their niche could be found.
The brand could be extended but there was a fear of diluting the brand. Also there was a fear that by introducing too many closely positioned brands there was the fear that one brand would cannibalise the other. Also by increasing the production of smaller cars could have the effect of reducing the historically high margins enjoyed by BMW as moving into the smaller cars meant earning lesser margins. Competitions in this lower segment were volume driven and operated with much lesser costs.
Another issue was quality and with pressure on costs, the risk of quality lapses was bound to increase. The consequences of quality defects in the premium segments could be very heavy. Another route was outsourcing of components but again this meant a compromise on quality (p. 741).
REFERENCES Lencioni Valeriano. 2005. BMW Automobiles. (eds) Exploring corporate strategy, by Johnson, Scholes and Whittington. pp: 734-741 Mc Donald Malcom, 1996.
Mc Donald Malcom, 1996. Strategic Marketing and Planning. Cranfield Management Series. ISNB 0749420960