In this essay I shall conduct an analysis of the external environment from BMW perspective and identify the capabilities that BMW have that will enable it to sustain a competitive advantage in automobile industry.
I shall first start by introducing a general view of the automobile industry to explain the complexities of this industry; next an analysis of the external environment from BMW perspective shall be done using the elements of external environment from the SWOT analysis in addition to Porter five force analysis. Further understanding of the external environment is conducted through analyzing the strategic decision of the Rover venture. In the next section, I shall look at what competitive advantage BMW has from three different perspectives and recommend which capabilities should be considered as competitive advantage for BMW.Automobile industry structure:Automobile industry has undergone major changes during the last four decades especially in the period extending from 1990 to 2001.
Consolidation was moving forward very rapidly and almost 69% of the automobile market was owned by six international giant companies.European market specifically faced a fierce competition, the high technological advancement and the level of quality achieved by most manufacturers drastically decreased the opportunity for product differentiation. In addition, consolidation led to an enormous increase in productivity (20 m automobiles in a 14 m European market)8. These factors made price competition the prime strategy for manufacturers even if this will mean a loss to the company for example Ford Europe losses reached 117 $ m in 1999.
Customers, environmental constraints and petrol prices also helped in creating this harsh environment and obliged many companies, mainly mid sized players like BMW, to rethink their business strategy in order to survive.BMW overview:Bayerische Motoren Werke Group (BMW) is one of the world’s leading luxury carmakers. Founded and based in the Germany, BMW employs 820,000 workers in plants in Germany U.S.
A and South Africa. In 1959 Herbert Quandt bought BMW, when the company was in financial difficulties, now they own 46% of the BMW shares. BMW turnover was around ï¿½15.5bn; its productivity reached 820,000 vehicles in 2000.
The powerful reliable performance and their luxurious design made BMW “The ultimate driving machine”. Until 1990 BMW strategy was to focus on the high performance of its products however the high competition and the rapid development of its competitors forced BMW to think of expanding its range of products to join the ranks of the auto industry super power. In 1994, the German carmaker BMW bought Rover from British Aerospace. The strategic thinking was that the acquisition would allow obtaining significant economies of scale however things did not go according to plans after and BMW sold Rover in 2000.
External Environment, BMW perspectiveLong term survival is the result of an organization ability to adapt to the forces and influences exerted on it by the external environment2, in responding to these forces companies formulate strategies to cope with competition, maintain or increase its market share and retain their profitability. Understanding the strategic decisions made by BMW will provide us with means to analyse the external environment from BMW perspective.Two major strategic decisions were undertaken by BMW to deal with the external environment, the first is the acquisition of Rover, the second came out after the failure of the Rover venture and was stated by the company’s CEO that BMW will continue to grow under its own power.In what follow I shall conduct an analysis of the external environment from BMW perspective.
Analysis of the strategic environment shall be done using two strategic tools 1) SWOT analysis for common strategic environment and 2) Porter five force framework to analyse the industry environment2.SWOT ANALYSIS:SWOT analysis summarizes the key issues to the analysis of the business environment3,. Environmental factors internal to the firm can be classified as Strengths (S) and Weaknesses (W) and those external to the firm can be classified as opportunities (O) and threats (T). This section will discuss only the O & T factors.
Threats & Opportunities:Threats:”A threat is a major unfavourable situation in the company’s environment which form a critical obstruction to the firm’s desired position”3. The following threats are realized in the BMW Automobile case:> Merger threat: Merger activities have generated a ï¿½138.7bn in 857 deals between 1998 & 2000. Ex.
the GM acquisition of 20% of Fiat automobile division, Daimler Chrysler acquired Mitsubishi of Japan. These actions set examples of how major manufacturers are trying to survive in the mass market through mergers and acquisitions. Larger automobile companies can survive the long term because they are able to produce the industry threshold of 2 million units a year. Smaller automakers like BMW may not be able to last through the long haul turning them into a takeover target.
> Market share: One of the biggest threats that BMW realized was the increasing number of competitors that are now directly competing with it in its market segments namely ‘executive’ and ‘luxury’. Volkswagen produced models which competed, with BMW in the executive saloon segment. At the luxury end, Daimler-Chrysler’s Mercedes brand competed with BMW 7-series. Toyota directly targeted BMW through introducing their luxurious Lexus model.
With its low cost, high performance and quality Toyota was able to compete with BMW at most of its market segments.Opportunities:An opportunity is a favourable situation for the company6. Through analysis of the external environment several opportunities were detected by BMW that led to their decision of acquisition of Rover and also shaped the strategy they decided to follow after that acquisition. However further discussion on the strategy and the way BMW analysed the external environment to make the decision of acquiring Rover will be discussed later in this essay.
* Economy of scale: Rover is a mid sized company almost similar to BMW in terms of unit volume, so through the acquisition of Rover BMW will be able to increase its economy of scale and protect its independence.* Market segment: Through the acquisition of Rover BMW will be able to increase its market share and cover a wider market segments. Rover was competing with BMW in its segments plus it produces cars in segments that BMW was planning to enter. Thus the opportunity in acquiring Rover from BMW perspective was quite beneficial.
* Expansion: BMW geographical expansion and the profits it is gaining in markets other than the European market such as USA, where BMW Sales outsold that of its main competitors, will create opportunities for the company to find new ways of expanding using their own products.PORTER’S FIVE FORCES ANALYSISPorter proposed a five-force approach as a mean of examining the competitive environment of a company. The five forces are threat of new entry, power of buyers and suppliers, threat of substitutes and Competitive rivalry. The effect of each factor maybe more or less prominent depending on the industry or case1The five forces help to understand competition in an industry.
When considering the automobile industry it proves a useful tool to assess the competitive forces to manufactures and identifying the element of threats.Threat of new entry:The ease of entry into the auto market is not a great concern in the automobile industry in general for many reasons. The huge initial overheads such as, the capital requirements for manufacturing, research & development, marketing etc..
., and the high cost of the technology employed in this industry make it hard for new firms to enter this industry. In addition, the economy of scale of a company to survive in this market is very high to be achieved by a new firm. Although BMW operate at less than the threshold production value but it is able to do so because of high product differentiation and premium selling prices.
Power of supplier:Another force in Porter’s framework is the bargaining power of suppliers. Suppliers are a key competitive force because they can determine the price and quality of parts or raw materials. When powerful suppliers control a large share of the market, they can squeeze the industry’s profitability; buyers may have to accept a price increase or a lower level of quality1. However, BMW strategy in sustaining a firm control on the supply chain and in maintaining a long, strong and close relationship with the suppliers renders it safe against supplier control.
Power of BuyersThe power of the buyer group depends on a number of characteristics of its market situation; for example if the product it purchases from the market is undifferentiated then the buyers can always shift to an alternative1. Buyers can force down prices, demand higher quality or more services. In automobile industry the competition is fierce; the number of automobiles produced is much more than the market need this will lead the consumer or buyer to look for more value of his money among the different options available. However, BMW is very important to buyers where quality matters.
The greatest majority of BMW Customers seek product differentiation rather than low prices. Although buyer power is critical in automobile industry but it does not constitutes a big threat to BMW.Substitute products:Threat of substitutes in the auto market relates to products, materials or resources that may cause the demand for a product to shift. Porter identifies members of the same industry as being the group of firms producing products or services that are close substitutes for each other2.
For example, auto manufacturers that are competing for share in the premium car market are considered close substitutes to BMW.Competitive Rivalry:In his article Porter defined the factors that are proportional to the intensity of rivalry. The intensity of rivalry in automobile industry is very high and it depends on a number of factors1:1. Concentration, this variable refers to the extent to which industry sales are dominated by a few number of firms6.
Auto industry is characterized with high concentration were six companies control 69% of the market. This has a direct effect on prices for greater concentration signals low profits2.2. The product lacks differentiation.
This is making it harder for a manufacturer to maintain his customers and protect them from ‘raids’ by others.3. Capacity is augmented in large increments; this has disrupted the demand and supply of the automobile market and lead to periods of price-cutting.4.
Different rivals have different strategies and personalities.5. Slow growth of the industry intensifies the competition between companies for market share2.All these factors were strongly present in the automobile industry and they largely affected the strategy of BMW.
The Rover venture:The analysis of the external environment from BMW perspective could be best illustrated through the strategic decision of BMW to acquire Rover.In a rapidly changing and very competing industry, a company may choose to develop its resources and competences by taking over another company. Acquisition gives the company the opportunity to develop fast rather than the slow internal development process3. The main reason behind the acquisition is to add new resources and skills to the company and to enter a new geographical area2.
Another reason for acquisition, which is seen in BMW case, is to acquire a competitor who is competing in some similar market segments.The logic of the deal from the BMW’s perspective would seem to stem from the following:* Geographically broaden its market and increase its market share.* Benefit from the skills that were new to BMW (Rover manufactured small front wheel vehicles)* Achieve an economy of scale.Two main reasons lay behind the failure of this acquisition.
The first was an inaccurate assessment of Rover’s brand name and engineering capabilities. The second was post-acquisition culture issue; BMW did not push for a better integration between the two companies, a difficult task that should have required full top management attention.Competitive Advantage:Despite its small size relative to other companies, BMW still occupy a position in the automobile industry that any other manufacturer would envy. BMW share price is in continuous increase (from 8.
8 $ to 30 $ through the 1990’s) and its sales in 2000 rose by 8% worldwide and by18 % in USA. Based on these figures we can deduce that BMW possesses several capabilities that are allowing it to compete in the market, but how can we judge how these capabilities give BMW a competitive advantage?The process of determining the sources of any competitive advantage of a firm has followed a historical path of evolution2. Several theories have been developed in this domain, in this section I will discuss the capabilities of BMW and discuss how it is considered as a competitive advantage based on different theories.Cost drivers/Differentiation drivers:Porter specified two basic types of competitive advantages a firm can possess: low cost or differentiation.
When a company pursues differentiation, it seeks to distinguish itself along as many dimensions as possible7. BMW is not just a prestigious car; it is also fast, reliable, and technologically sophisticated. BMW cars are differentiated in the eyes of the customer who perceive it as “The Ultimate Driving Machine” is prepared to pay a higher price for BMW than for Toyota, for instance, of similar specification. According to Porter this differentiation should be considered as BMW’s competitive advantage.
Core competencies:C.K. Prahalad and Gary Hamel’s stated that core competences of any firm shall be considered as the fundamental source of competitive advantage4.The firm success depends on how well it utilizes its internal resources; this approach is called the resources based view (RBV) of the firm.
The underlying principle is that each firm possesses a unique bundle of capabilities (tangible and intangible assets and organizational capabilities). When developed well, they will constitute the firm’s competitive advantage6.To identify this core competence a full identification of the resources should be done. These resources in BMW are as follow:Tangible assets: Financial resources and production facilities.
Intangible assets: Labour skill, brand reputation and efficient market segmentation (where products are priced and manufactured differently for different locations).Organizational capabilities: It is defined as the ability to combine assets6. In BMW case it is the firm control of the distribution network and continuous R&D.The second step in this approach is to determine which of these resources are valuable.
For BMW this could be examined as follows:Competitive superiority: or how does the resource fulfil customers’ need. In BMW case the high quality and performance of their products have offered a real value for money for the customer.Resource scarcity: Could be identified through the highly skilled work force in BMW plants that almost no other company has.Inimitability: It is a resource that can not be copied.
The reputation and expertise that BMW has developed since the 1960’s are very difficult to imitate. Although some competitors have achieved the same level of quality and technology, yet BMW is still perceived as the ultimate car.BMW management was able to identify the core competency (product quality and brand name) of their organization and utilize them to gain a competitive advantage. This is clear through the strategy they followed in focusing on manufacturing high quality high performance cars although it was time-consuming.
Distinctive capability:John Kay argues that the source of competitive advantage is the creation of a distinctive capability. Kay identified three basic types of distinctive capability one of them is Reputation. This is about conveying information to customers about quality. BMW “over decades, with fanatical devotion to manufacturing quality, a single minded focus on sporty luxury, and careful, conservative nurturing of its brand, BMW had established a shining reputation”8.
This reputation is considered as BMW’s competitive advantage from this perspective.Recommendation:It is obvious from the above discussion that BMW possesses several key features that might be considered as a competitive advantage. The options to sustain a competitive advantage available for BMW are either through 1-Focusing on differentiation; 2- Develop its core competence through combining the available resources; 3- Focus on its distinctive capability namely Reputation.Further analysis of the Rover venture shows that BMW was, other than seeking to expand its market share, hoping to make the Rover brand as strong as its brand.
In other words BMW was considering its ‘reputation’ as its competitive advantage mainly, and it did not look into developing its own products through utilising its resources.However, after the failure of this venture, BMW sold Rover and decided to keep one part of Rover to itself which is the Mini. The new strategy that BMW decided to follow is best explained through its CEO words “BMW will continue to grow under its own power, without requiring any mergers or diversification”. Following and committing to this strategy would be the best option for BMW.
Although internal development is a relatively slow process and the company may lose some opportunities2, but in BMW case it seems to be the best solution. The huge and accumulated resources that BMW have may be well combined to give them a competitive advantage that will strongly support the launch of any new product into the market and guarantees its success, I.e. to expand under their own name.
The big success that the Mini, new brand, achieved in the European market in a short period shows that the real competitive advantage that BMW have is through development and identification of its core competences.ConclusionBMW has earned a reputation for high quality engineering and product development. This reputation combined with innovative and well-targeted marketing has been leveraged to great effect in its major European and North American markets. BMW has become the envy of most of the auto making industry with impressive sales and earnings improvements in the face of generally tough world car industry conditions.
The Rover venture loss has benefited BMW. It highlighted the true competitive advantage BMW have that will enable them to compete not only in luxury segment but in any market segment they might choose to enter. In the near-term the future remains bright for BMW with sales and profits continuing to outperform competitors. The longer-term future, however, contains some significant challenges.