This report is based on the reviewing of the case study of BMW Automobiles.

The report
addresses the industry, the market trends and the external and internal environmental factors that
have been referred to in the case study. Also, the direction of BMW’s strategic advancements
will be evaluated hence, giving the opportunity to make recommendations to BMW.

Industry and Market Trends

It was only after World War II that the automobile industry began to rise and become a major
employer but it was only from 1961 that BMW started to get out of their troubles and establish,
with a reputation for outstanding engineering. It was during the post World War period that most
of the countries concentrated all their resources on reconstruction the infrastructure and providing
people with consumer goods. This helped the automobile industry to gradually spread itself from
US to Europe to Asia and particularly Japan, making it global towards the end of the 20th
century. This lead to the world’s automobile industry to be mostly shared by General Motors,
Ford, Daimler-Chrysler, Toyota and Volkswagen.

Like all industries the automobile industry was also affected by the environmental factors
especially during the beginning of the 21st century. One of them being an abrupt decline from
2001 till 2003 after which things started to pick up, mainly in US. This lead to the fall in equity
prices till the late 2003 along with geopolitical tensions and doubt in the economic and political
environments continued to grow. As a result, sales in the automobile industry took a plunge
around the world leaving US intensely damaged. Yet, for UK, China and some Scandinavian
countries sales jacked up above average.

The mid 1990s forced the manufactures to concentrate on improving engineering and quality of
the automobiles as means of competitive advantage. But years later differentiation was still
exceptionally low in the automobile industry pushing many of the big players in the industry to
accelerate price competition by cutting down on prices and giving incentives such as free
insurance, zero per cent interest on hire purchase etc. but managers become aware of the situation
and realise that the price war was only weakening the profitability of the industry and no one was
gaining any advantage. Consequently they were selling few cars at lower prices causing a

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“nightmare scenario”. But, by the mid 2000s the industry had to change from concentrating on
quality to design and brand appeal making design a major weapon to be used in the industry.
This paved the way for another competition to lure top-level designers. Nevertheless, all new
found weapons are bound to have its disadvantages and in this case manufactures had to put
severe pressure on their resources making it hard for them to build the brand at the same time
since it became clear that brand identity had become one of the effective ways to compete along
with heavy advertising.

The automobile industry faced a lot of problems from the World War to a downward spiral to
factors of the environment and even the lack of differentiation injured the profitability but at the
same time helping the industry to find its weapon and develop itself from there and survive the
crowded industry, BMW being one of them. Bavarian Motor Works (BMW) is an independent
German company which diversified from being an aero-engine manufacturer into the
manufacture of automobiles and motorcycles. It is the parent company of the MINI and Rolls-
Royce brand and once the owner of Rover. BMW started from July 21, 1917 but it wasn’t till
1927 that they had their own car. To study BMW further the external environment is examined
using the PEST and Porter’s Five Forces analysis tools.

The external environment consists of “factors (conditions, trends and farces) essentially outside
the control of organizational members. External environmental scans are conducted to identify
important factors in the external environment.”

www.fiu.edu/~pie/sec8appglossary.htm
PEST Analysis

In this case it is the environment in which BMW operates. PEST is an acronym for Political,
Economical, Social and Technological factors of the external environment. These factors are
normally out of the firm’s control, which affects all firms. These changes can either create new
opportunities or be a threat to the firm. PEST analysis is a simple but important and widely used
tool that helps the organization to understand the bigger picture. It ensures to keep the firm in
track with the rapidly changing world.

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 http://www.mindtools.com/pages/article/newTMC_09.htm
Political Factors

Political factors can have a direct impact on the way BMW operates its business. Decisions made
by the government affect the everyday running of BMW in the form of policies or legislations. A
few political factors can be identified from the case study. The automobile industry was faced
with some geopolitical factors like the concerns about the oil prices. Since oil and vehicles are
complementary goods the increase in the oil price will affect the demand for automobiles
resulting in a fall in sales. Also seeing as oil is controlled by the cartel OPEC, oil prices will
continue to increase putting more pressure BMW’s sales because of the war in the Middle East.

Legislations put forth by government can affect the organisation in many different ways and one
of them being tax laws. Due to changes in the tax provision law BMW’s annual surplus went
from 3.2 billion euros down by 3.6% which is almost 3.1 billion euros. Definitely a huge amount
for a firm but, considering that the industry was in a recession at the time, BMW’s performance
was comparatively better its competitors.

Due to the growth of industries around the world the amount of pollution caused has amplified
tremendously causing global warming to speed up. Therefore, it is likely that Governments all
round the world will be imposing new legislations to prevent it from acting even faster. These
new legislations will compel the industries to reduce the amount of pollution being produced
which in the automobile industry means producing cars which are more fuel efficient and which
emit less hazardous fumes like carbon monoxide. If these legislations become enforced then the
automobile industry’s costs will rise as they research ways to produce such cars at reasonable
costs.

BMW’s marketing strategies and decisions are strongly affected by the developments in the
political and legal environment. BMW faces major problems and distractions in the Asian
market since the existing local regulations and high import tariff duties stop them from charging
into the market and because different countries have different regulations they must comply and

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satisfy the different regulations. The Chinese government doesn’t allow the direct marketing of
BMW’s products forcing BMW to sell its products to a governmental organisation for
distribution. Whilst in India tariffs are so high that it makes it impossible for BMW to import a
painted body into India. All this puts limitations on BMW’s aim to be global. But, with WTO’s
regulations, trading between countries has become easier and cheaper which can help BMW to
fulfil their dreams of globalisation. (Walker, Boyd, Mullins and Larreche, Marketing Strategy,
Fourth Edition, Tata McGraw Hill publishers.)

The impact of the European political situation on labour costs has caused BMW to have
difficulties on controlling their costs forcing them to expand production facilities in US and push
the Spartanburg plant to its maximum potential and recruit labour from China at a lower cost than
in the West to give them a greater profitability.

Economical Factors

All businesses are affected by economical factors nationally and globally. Interest rates and
fiscal policy will have to be set accordingly. Consumer confidence and behaviour can also be
affected by an economy either being in a boom, recession or recovery. The economy that BMW
was operating in was at the moment in a downturn but it only lasted for a couple of years causing
equity prices to fall and a fall in the supply of oil causing oil prices to shoot up increasing costs in
the uncertain surrounding. All this leads to lower consumer spending and a fall in demand.
The economy that BMW was manufacturing in was at a price war during the first few years of
the 21st century, when Lexus had entered the US market, because automobile producers were
trying to improve differentiation within their products but it continued to remain low which then
started the price war. Prices were cut down and incentives such as free insurance, zero per cent
interest on hire purchase etc. were given. Unintentionally this stared to dilute the profitability of
the industry and ultimately managers become aware of the situation and realise that no one was
gaining any advantage by competing with price. Consequently it affected their credit rating and
increased the cost of borrowing creating what was called a “nightmare scenario”. After which
BMW was driven to cut cost to keep profitability high.

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Another economical factor is the strength of the Euro compared to the US Dollar. The strength
of the Euro over the US Dollar cost BMW 2.1 per cent of their turnover. If it wasn’t for the
exchange rate the turnover would have been 4.2 per cent more than last year. This cost BMW
half of their turnover which means that their profits margins are lower hence costs seems higher
than they are.

Socio-cultural Factors

The socio-cultural dimensions of the environment includes of customs, lifestyles and values that
characterise the society in which the firm is operating. These factors influence the ability of the
firm to obtain resources, produces its goods and services and function within the society. As time
went by consumers’ tastes and preference changed from the quality of the brand and model to
design and brand appeal. Therefore, BMW was required to concentrate on the appearance of the
car or create a powerful brand or risk loosing market share, hence the discovery of the design
weapon.

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Technological Factors

Technological advancement has changed the way a business operates, the internet having the
most effect on the firm. This technological revolution enhances the speed at which information is
exchanged which is advantageous for the firm as it allows them to react faster to the changing
environment. The previous environment depended on quality. As technology advanced it
created a new environment that depended on design. To create designs that “grabbed the
customers’ attention” top level designers were sought out and found and were offered high-tech
design labs and art studios of advance technology so that market share wasn’t lost and luckily
BMW has advance technology.

The overall result from the PEST analysis is unstable and unfavourable to BMW forcing it to
either cut costs to keep their profit margins high or turn to new strategies to survive in the highly
competitive market. The political situation is unstable as the industry is just recovering from a
war, the changes in legislation and the continuous increase in oil prices, not allowing BMW to
cut costs. The economical environment is also unstable due to the oil supplies and the price
competition making them to cut costs in any way possible. The strength of the Euro compare to
the US Dollar is also affecting BMW negatively. Even the socio-cultural factor has changed due
to the change in consumers’ tastes. However, the technological advancement helps BMW to
satisfy the consumers’ new tastes. To carry the analysis further a Porter’s Five Forces analysis is
conducted.

Porter’s Five Forces Analysis

To understand where the power lies in a business the Porter’s Five Forces tool which is simple
yet very prevailing can be used. This analysis will help get a good idea regarding the strength of
the current position and the strength of the competitors, suppliers and buyers. By carrying out a
clear and well defined analysis, an understanding of the strengths and ways to improve the
weakness can be developed. It helps prevent taking wrong steps in the wrong direction. It is an
essential tool for the assessing the prospective profitability of BMW. There are five vital forces
which were introduced by Michael Porter for the analysis which are:

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 Supplier Power: The power of the suppliers to drive up the prices of the raw materials.
Buyer Power: The power of the customers to drive down prices.
Competitive Rivalry: The strength of competition in the industry.
The Threat of Substitution: The extent to which different brand can be used in place of
BMW.
The Threat of New Entry: The ease with which new competitors can enter the market.

Supplier Power

A producing industry requires raw materials such as labour, components and other supplies. This
leads to a buyer supplier relationship between the industry and the firms providing the raw
materials. Suppliers, if powerful can wield some influence on the producing industry by selling
raw materials at a high price in order to acquire some of the industry’s profits. The greater the
bargaining power of the suppliers the less attractive the automobile industry becomes. BMW has
made sure that supplier buyer relationship is strong as they have a firm control on the supply
chain and a long lasting relationship. In this case the bargaining power of the supplier seems to
be low as the switching costs from one supplier to another is low as there are a lot of suppliers in
the industry who can provide the same component. The raw materials used by BMW don’t
necessarily need to be supplied by a sole supplier.

Buyer Power

The power of buyer is the impact that customers have on a producing industry. In general buyer
power is strong when there are many suppliers and few buyers. In this case the bargaining power
of the buyer is high because demand for cars is low and the supply of cars is high. This gives the
buyers an advantage to demand for lower prices as there is an excess supply in the industry. This
affects BMW because costs are already high and by having to sell at a lower price their profit
margin goes further lower.

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The attributes that make up a car include power, design, quality, performance, fuel consumption
and comfort. For a model or brand to sell these attributes should match consumer needs
however, there are very few ways to differentiate between the brands and models available in the
industry forcing BMW to provide models in the design that the buyer wants once again allowing
the buyer to bargain making only small gains.
Competitive Rivalry

The intensity of the competition between existing firms in the industry can be analysed. Since
BMW has close substitutes BMW will have little power unless they find a way to offer
something that the competitors don’t have. High competition results in prices and margins hence,
the profitability of the industry. In this case competition is extremely high since there are many
players of the same size such as Lexus, Mercedes-Benz, Volkswagen etc., as shown in Exhibit 2,
and since demand for cars is low they all are competing for the few customers that there is. Since
the producers are almost the same size and offer the same automobile with the same features
competition increases tremendously. Product differentiation is when consumers are made to feel
that a certain brand is different to another but in this case there is very little to differentiate
between BMW and the different brands resulting in the price based competition. Instead of
basing the competition only on prices the producers have started to compete in terms of model,
features and brand image striving to differentiate.

Threat of Substitutes

Substitutes are goods or services that satisfy the same customer needs. A threat from substitutes
exists if alternative products with lower prices of better value satisfy the same need. They tend to
attract a portion of the market hence reducing the number of sales for the existing players. In the
automobile industry the substitutes would be the competitors. As there hardly is any product
differentiation with many competitors the threat of substitutes is high however, the BMW brand
has got a “distinctive identity”. It is possible that the customers remain loyal to the brand but if
customers find a competitor’s car better or cheap or fuel efficient it is likely that the customer
will change brands due to the lack of differentiation.

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Threat of New Entries

Competition in an industry will be higher if entry into the industry is easy therefore barriers to
entry are present to protect the high levels of profits. These barriers reduce the rate of entry of
new firms allowing the existing firm to enjoy levels of the profits. Threat of new entrant depends
on the extent to which there are barriers to entry. The lack of differentiation in the automobile
industry pushes price competition. It also acts as barrier to entry as a potential entrant may feel
that competition will be too intense. In order to compete at low prices BMW has reduced it costs
by moving its production to growth markets and recruiting qualified cheap labour in China
allowing them to produce at lowers and by doing so BMW can enjoy higher profit margins. A
firm trying to enter the industry will see the costs as a barrier and may not enter the market.

Another barrier that a potential entrant will see is the major problems and regulations faced by
BMW in the Asian market since the existing local regulations and high import tariff duties stop
them from entering the market. Different countries have different regulations they must comply
and satisfy the different regulations not allowing BMW to be global at its free will. The entrant
may feel that local laws of the markets will limit there growth and choice not to enter the
automobile industry.
The affect of Porter’s Five Forces can be summarised down to this:

High Low
Supplier Power 
Buyer Power 
Competitive Rivalry 
Threat of Substitutes 
Threat of New Entrants 

Looking at the summary three out of five factors seems unfavourable to BMW. It can be
understood that the profitability in the industry is shared amongst the large number of
competitors as BMW is fighting in a highly competitive market amongst lots of substitutes. We
can also see that BMW gives into the wishes of the buyer and that product differentiation is a
huge issue in the industry. However, no environmental analysis is complete without a SWOT
analysis.

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SWOT Analysis

A SWOT Analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. Strengths and
weaknesses are internal to an organization. Opportunities and threats originate from outside the
organization.

en.wikipedia.org/wiki/SWOT_analysis

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Strengths

These are attributes of the organisation that are helpful to achieving the objectives.

http://en.wikipedia.org/wiki/SWOT_analysis#Internal_and_external_factors

The strengths of BMW are:

Well established reputation for engineering excellence.

Highly qualified and already experience German work force
since they were already in the business of manufacturing engines before the war.
Valuable difference in the minds of the buyers with a
distinctive identity.
Perceived as high performance saloon cars.
Progressive agreements with the workers’ union.
Well qualified and cheap labour force from China.
Flexible work hours in Leipzig from 60 hours a week when
demand was low to 140 hours a week when demand was high.
The image of the “ultimate driving machine” was expressed
regardless of the model bought along with a reputation for product quality.
Close relationship with buyers created an emotional connection
giving strength to the brand name BMW as a brand that “immediately identifies the aims
and aspirations of its customers”.
Good and prolonged relationship with suppliers.
Advance technology.
Weaknesses

These are attributes of the organisation that are harmful to achieving the objectives.

http://en.wikipedia.org/wiki/SWOT_analysis#Internal_and_external_factors

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The weaknesses of BMW are:

No feature or attribute to differentiate themselves from its

competitors.
Comparatively less innovative then their competitors.
BMW is relatively smaller compared to the big five.
Vulnerable to acquisitions because of their size and high costs.

Opportunities

These are external conditions that are helpful to achieving the objectives.

http://en.wikipedia.org/wiki/SWOT_analysis#Internal_and_external_factors

The opportunities for BMW are that:

With WTO in place there is free trade between countries.

BMW can use this to globalise and enter into new markets.
Right now the economy is in a downward spiral but there is a
possibility that it can change for better so that BMW won’t suffer the effects of the
downward spiral.
Since BMW is operating in an environment where there is very
little differentiation they can take this opportunity to find a way to differentiate their
product from their competitors to give them a competitive advantage.
With the advance technology that BMW has they can use that
to reduce costs in storage maintenance and travel through video conferencing, internet etc.
A strong relationship with its suppliers and the firm control
over the supply chain allows BMW to make sure that raw materials are available all the
time without any difficulties.

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 The competency of engine manufacturing from the experienced
and qualified German workers can be used to produce new engines and better engines
than the competitors.

Threats

These are external conditions that are harmful to achieving the objectives.

http://en.wikipedia.org/wiki/SWOT_analysis#Internal_and_external_factors

The threats faced by BMW are:

The fall in oil supply and rise in price and with the continuing
of the war in the Middle East oil prices will remain to be high and oil supply low.
The continuous change and the possible addition of new
legislation threaten to keep BMW’s costs high.
The state of the economy remains a problem until it becomes
stable and helps the industry to grow rather than hold it down.
In the dynamic environment, tastes of buyers continue to
change and since the buyers bargaining power is high BMW where they demand the
price, BMW has no choice but to abide by the constant changes in tastes since demand for
cars is low and supply is high.
That since there are many large players in the industry who are
almost the same size providing the same service it is possible for the price war to continue
without an end until all of them have perished.
In a very competitive market differentiation is important. But
since it is very low, buyers have the ability to buy competitors products.
Also with low differentiation it is possible that the competitors
use the same strategies to increase their sales.
The rapid growth and advancement of technology can be used
to gain competitive advantage by its competitors.

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By examining the SWOT factors of BMW it is understood that BMW has some powerful tools
within which if played to well can be used to gain competitive advantage in the industry like their
labour force, the brand image, advance technology etc. However, they do have a few weaknesses
but these can be overcome using good strategies. But looking at the external environment there
are a large number of threats that can have great impacts on BMW nevertheless if they take
advantage of the opportunities that they have it is possible to overcome these threats and move
forward.

Strategic Development

BMW directed their production forward and chose to use organic strategies to develop their
productions to grow internally. This strategy deals with the expansion of the current business.
The objective of the strategy is to focus on the main business while making the organisation to
grow. It focuses the growth of the product or similar products into a new or already existing
market by using its core competencies in a new market or by creating new core competencies.
There are four organic strategies: market penetration, market development, product development
and diversification. Out of the four BMW is going for market and product development.

Market development

Market development is where the firm tries to sell its existing products into a new market by
building on existing competencies and skills. BMW’s close relationship with its buyers helped
them to segment the market appropriately allowing BMW cars to be “positioned differently and
priced differently” in the several national markets. By taking a 50 per cent joint venture in China
BMW is planning to invest heavily in this new market to produce the 3 series cars and later on
the 5 series. These were two of the most successful models whilst in the Chinese market the 5
series was in great demand. By entering into the new market it helps BMW to increase their
market share and keeping the risk of failure low since they are concentrating on an existing
product. BMW can also take this opportunity to differentiate their cars accordingly to give them
a competitive advantage over their competitors.

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Product development

Product development is where the firm tries to introduce a new product into an existing market or
develop new competencies and develop modified products which can appeal to existing markets.
This is generally used to prolong the product’s life. BMW was predicted to grow further in 2004
and was one step close with the successful launch of the new 5 series, the consolidation in Europe
and Asia for the BMW Z4 and with the introduction of the BMW X3. Two more, the new BMW
1 series and the BMW 6series cabriolet, were scheduled to launch early 2004. This worked well
for BMW because they already had a well established brand name hence buyers were certain of
the quality and worth of the product.

To develop further BMW wanted to launch a new model every three months through to 2005 in a
range of premium cars to raise sales by 40 per cent a year for the next five years and to have sales
of 1.4 million cars pushing BMW to be the number one producer of premium cars. However,
BMW also tried to market the 7 series by adding a small but expensive modification, the iDrive,
but it turned out to be a grave lose since customers found it hard to use. This was done to
increase the usage of the car.

The overall strategy that BMW followed was to expand their production to US and fully utilize
the plant in Spartanburg and recruiting cheap but qualified labour force from China along with
market and product development giving BMW a higher profitability and making them
invulnerable to acquisitions.
Recommendations

Bearing in mind the above analysis and the strategies used the following recommendations were
made:
With the current laws changing and new laws being formed it is recommended that BMW
starts to invest in the research and development (R&D) of environmentally friendly
products. For the R&D of these cars BMW can use the extra profits made by cutting
costs. By researching and developing these environmentally friendly cars before such

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laws are enforced BMW will have a competitive advantage when it does since
competitors will have only started to R&D such products whereas BMW has already
produced the product.

Since there is no differentiation in products BMW should try and differentiate their cars
from competitors by offering extra services or free addition of a TV, high tech stereo
system etc. into the car by requesting. They could even introduce product ordering via the
internet giving them a competitive advantage as they can be the first to offer such
services.

They could study and analyse the small cars market enter. At the beginning they may
struggle to compete but by playing to their strengths it is possible to survive as they have
a well established reputation and brand name.

As BMW is looking to cut costs they can use their advance technological expertise to
build a robot work force. It may be a huge investment initially but with it labour costs
can be cut and productivity and efficiency can increase as robots can be error free.

BMW could also try to use different strategies instead of only market and product
development. They could merge with the third largest competitor to become number one
and stay there by increasing market shares further and without having the threat of the
competitor merging with another intensifying the competition.

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