Instructor’s Manual

CASE TEACHING NOTES

BMW Automobiles in the mid 2000s

Valeriano Lencioni

1. Introduction

This case explains the elements that make up BMW’s 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 BMW’s 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.

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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 Porter’s 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 BMW’s competences compare to these? Was BMW able to
acquire and maintain a sustainable competitive advantage?

4. Discuss BMW’s 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.

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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 Porter’s 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 Porter’s 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.

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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 5–6
years to the end of the decade were largely further intensification of the trends
identifiable in the mid 2000s.

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• 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 BMW’s 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?

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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 BMW’s 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).
BMW’s major competence in the mid 2000s was its brand management and
communication.

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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 Rolls-
Royce – even considering that all the group’s 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, Rolls-
Royce 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
group’s 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.

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