BUSINESS STRATEGY ASSIGNMENT 1 Executive summary:
The word ³automobile´ has its unique identity. Automobiles execute a vital role in shaping people¶s life and are looked upon as a status symbol even in this modern day scenario. The evolution of automobiles over the years has a success story of its own. With its technological advancements, swanky designs and products automobiles have gained a special and respectable place in the market. This case revolves around BMW group- a prominent European carmaker and its three prepositions wiz. Increasing the output of production, the production of smaller cars and maintaining quality. BMW a renowned car manufacturer was in the maturity stage of its industry life cycle and needed modifications strategic implications to retain in the race. The automobile industry was suffering from lethargic economic growth coupled with geopolitical dilemmas that was having an adverse effect e ffect on the industry globally. This report covers ±
y
Firms
macro and micro external environment that shapes the competitive position and
bring out the key drivers of change y
Firms
organizational strengths and weaknesses and analysis of its resources and strategic
capabilities that put a light light on o n the critical success factors and key success factors y
easons R easons
that may cause ultimate u ltimate demise of the firm
Efforts are also been made to made to recommend the factors that may overcome the factors that may cause ultimate demise of the firm. firm.
SAURABH - 10164266
Page 1
BUSINESS STRATEGY ASSIGNMENT 1
Contents
The PESTEL Framework: ramework:........................................................................................................... 3 Porter¶ Five Forces Analysis Analysis:: ...................................................................................................... 6 Key drivers drivers of change: ................................................................................................................ 8 The industry industry life cycle: ............................................................................................................... 9 Cycle of competition: competition:................................................................................................................ 10 Strategic Strategic Drift Drift ........................................................................................................................... 11 esources: ................................................................................................................................ 12 R esources: Strategic Strategic capability capability of BMW:.................................................................................................... 13 Sources of cost efficien efficiency: cy: ........................................................................................................ 14 Value Value network of BMW:........................................................................................................... 17 17 SWOT analysis of BMW: ......................................................................................................... 20 Critical Critical success success factors factors of BMW: .............................................................................................. .............................................................................................. 21 Key success factors factors of BMW: ................................................................................................... ................................................................................................... 23 Factors that
may cause ultimate ultimate demise demise of firm: firm: ........................................................................ 23
eferences: ............................................................................................................................... 24 R eferences:
SAURABH - 10164266
Page 2
BUSINESS STRATEGY ASSIGNMENT 1
The PESTEL Framework:
When there prevails high level of dubiety due to intricacy or brisk changes, it becomes difficult to predict the external environmental that might affect the firm¶s strategies. Thus scenario analysis is done to evaluate the likely alternate views to predict the organizations future business environment (Hejiden, 2006). In order to reach this conclusion PESTEL analysis is done to identify the key drivers of change that can be used to predict the scenarios for the future. PESTEL stands for political, economical, social, technological, environmental and legal and forms a tool for analysis of the macro-environment of the o rganization (Thomas, 2007). a. Political factors:
Political factors highlight the probable government laws and regulations, security measures and restrictions that can apply to the industry as a whole. The probable factors that affect the automobile industry are:
y
Laws and regulations had affected the automobile industry since its outburst. These laws generally revolved around the environmental norms that were to be fulfilled by any car industry. Thus the car manufacturers had to take care of the environmental issues during manufacturing of cars.
y
Taxes and government foreign policies are critical for the automobile industry. The foreign polices help us to decide the probability of success in the global market.
SAURABH - 10164266
Page 3
BUSINESS STRATEGY ASSIGNMENT 1 y
Introduction of new schemes in the US and Europe automobile industry wherein regulations were led to produce high mileage cars along with increase in automobile sales and production (Hill, 2008).
b.
Economic factors:
Economic factors relate to the exchange rates, economic growth globally and the business setting prevailing in the industry. Economic factors for the industry are:
y
There was excess capacity of cars produced thus giving rise to high amount of revenue in marketing and new product designs. Thus there was lot of revenue withheld even though demand was less than supply.
For
example the UK auto
market had 80% excess capacity in 2003 which freeze 1.3 billion euro of the automobile industry (Autofacts, 2004). y
The total increase in the GDP globally from 2.0 % to 3.1% in the year 2008 (Statistics, 2009)
y
Decrease in the exchange rate of Euro has hampered the European car makers in a big way (Allen, 2006)
y
Economic downturn in the US market (Copper, 2008)
y
Surplus capital and buying power in the developing economies like India and China and their personal emergence in the Global market-place.
SAURABH - 10164266
Page 4
BUSINESS STRATEGY ASSIGNMENT 1 c. Social factors:
Social factors include the changes in cultures and demographics globally apart from change in the buying pattern and capacity of the consumer. Social factors having an impact on the auto industry are:
y
Changes in the customer predilection from car being a status symbol to fuel efficiency and low emission cars
y
Changes in buying pattern o f the consumers due to recession in mature markets.
y
Environmental issues and awareness of the harmful emissions through automobiles
d.
Technological factors: y
Increase in use of technology to gain a clear competitive advantage
y
Use of new and sophisticated design to overcome the decreased margins in the industry
y
Modifications or restriction on technology causing environmental po llution
e. Environmental factors: y
Increasing effect of awareness of global warming, greenhouse effect and burnout
among patrons (Organization, 2008) y
Shift in consumer¶s tastes and preferences towards use of more eco-friendly cars,
hybrid
cars, fuel cell cars etc.
SAURABH - 10164266
Page 5
BUSINESS STRATEGY ASSIGNMENT 1 y
Stern application of the EUR O norms set up to curb pollution in developing
countries
f.
Legal factors: y
R estrictions
and strict pollution norms set up in European and US markets
y
Strict implications of the EUR O norms in developing countries e.g. formation of BHAR AT norms on the lines of EUR O norms in India (CEN, 2006)
Porter¶ Five Forces Analysis:
Potential entrants (Threat of Entry)
Bargaining power of suppliers
Competitive rivalry
Bargaining power of buyers
Threat of substitutes
SAURABH - 10164266
Page 6
BUSINESS STRATEGY ASSIGNMENT 1 Threat of new entrants:
Threat of new entrants is dependent on the challenges faced during entry into the industry or entry barriers. The threat of new entrants in case of automobile industry is less as large capital cost is required to set up a manufacturing plant and assembly liner. Also it takes time for new entrants to get a place and the reputation in the minds of the consumers Threat of substitutes:
BMW has a brand image of being powerful and luxurious. It is positioned in the exclusive car
range where there exist many substitutes for BMW like Mercedes, GM
and Toyota. Thus the threat of substitutes for BMW is high. Bargaining power of buyers:
BMW and its competitors are positioned as in exclusive product range. Here the bargaining power of buyers is high because the consumers can decide the product according to the price range and buy the products accordingly. Also with environmental issues hovering over the industry the buyers have the last say with ample substitutes available. Bargaining power of suppliers:
BMW had a good supply chain management system and had long relationship with suppliers. The bargaining power of suppliers is high in this industry as the suppliers can dedicate the price tag for the raw materials. Though long time associations with suppliers can prove fruitful, the final word lies more or less with the suppliers. Competitive rivalry: SAURABH - 10164266
Page 7
BUSINESS STRATEGY ASSIGNMENT 1 The industry has cut throat competition for its products, with its products targeting the same segment and positioned in a similar way. Competitive rivalry was high in the industry with the dominant US and European markets facing stiff competition from the Asian market.
Key drivers of change:
From
y
the PESTEL analysis and the five force analysis, the key dr ivers of change are: Huge deployment of infrastructure and manpower concentrated on automobile industry after the dusk of the Seco nd World War
y
Consumer preferences for product excellence and cost of ownership
y
Use of design as a chief asset
y
Technological advancements
y
Environmental issues
y
Increase in the implication on brand management rather than product excellence
SAURABH - 10164266
Page 8
BUSINESS STRATEGY ASSIGNMENT 1
The industry life cycle:
BMW
(Gerry Johnson, Kevan Scholes, R ichard Whittington, 2008) The implications of the five forces analysis varies with the industry life cycle. The elements that underline the industry life cycle are development stage, growth stage, shake-out stage, maturity stage and the decline stage. During start up the company is the development stage with high differentiation and innovation as its assets followed by growth stage where the firm experiences high growth with low bargaining power of buyers and less threat of new entrants. In the shake-out stage the growth is slower and the
SAURABH - 10164266
Page 9
BUSINESS STRATEGY ASSIGNMENT 1 key assets for the firm are its managerial and financial activities. In the maturity stage the growth is almost stagnant with high entry barriers, high competition but less unit costs and higher market share. Finally in the decline stage the firm is likely to face extreme rivalry with the rational and emotional approach k ey for the firm. BMW was in the maturity stage of the industry life cycle. The growth of BMW was stagnant but its standardized products like the 1,3,5,7 series having huge market share and brand identity in mature as well as developing markets. There were high entry barriers in comparison with BMW. But BMW had considerable market share and reputation for being an engineering excellence, an asset of BMW in the maturity stage.
Cycle of competition:
Cycle of competition underlines the various drifts between competitors with time. BMW, the German carmaker had a consistent increase in its annual sales and had the technology at its behest to counter its competitors in the market. BMW¶s competitive advantage lies in its integrated processes and its designs. The use of scientific technology that BMW restores to, can be implemented to gaining higher economies of scale. In terms of competition BMW has Lexus, Mercedes, Toyota, GM, Volvo group etc. as its rivals in the automobile industry. BMW has its product range from a MINI to a
R olls R oyce.
Thus its product range varies from a luxury segment to a
premium segment in the auto industry. In the cycle of competition any core competencies or competitive advantage is temporary and in this scenario the closest competitor of BMW is the Toyota group. Toyota group SAURABH - 10164266
Page 10
BUSINESS STRATEGY ASSIGNMENT 1 has technology, production capacity; profit margins and product range that can give BMW run for their money. It is also a proved product in immature market territory. Thus BMW can strive in the cycle of competition through its core competencies and competitive advantages
Strategic Drift
Drift is trying to go towards a direction however fail to do that. This could be good or bad. Strategic drift is when a company fails to work in line with the environmental changes however incremental development is evidenced but there is a strong influence of the cultural and historical factors. BMW with its emphasis on brand developed incrementally with the changes in the environment when it outsmarted competition. However the path way dependency paved way for the acquisition of R over an English brand. This could be due to the companies need for huge production and the consolidation happened during that time. This would be the strategic drift. The company beaded with the English brand when it was in the flux phase of the strategic drift. But when the new CEO was appointed BMW went for transformation and R over was sold to Ford. After this BMW started to working in tandem with the changes in the environment and developed incrementally.
SAURABH - 10164266
Page 11
BUSINESS STRATEGY ASSIGNMENT 1 R esources:
Every organization or a firm need and possess certain resources and competences required to endure and thrive globally. In other words every firm has its own strategic capability to survive against all odds (Gerry Johnson, Kevan Scho les, R ichard Whittington, 2008). The resources consist of ±
y
Tangible resources underlining the physical chattels like plant, people and
finance of the organization y
Intangible
resources underlining non-physical chattels like information,
reputation and knowledge (Gerry Johnson, Kevan Scholes, R ichard Whittington, 2008) R esource based
R ESOUR CES
analysis of BMW:
CATEGORIES
PHYSICAL R ESOUR CES
BMW R ESOUR CES
BMW¶s technology, conventionally designed and styled, effective segmentation according to the
market,
supply
chain
and
dealership
management FINANCIAL R ESOUR CES
Turnover of ¼ 41.53 billion in 2003, gross margins of ¼ 3.2 billion in 2003, annual surplus of ¼ 3.2 billion in 2003, 7.4% profit margins in 2003
SAURABH - 10164266
Page 12
BUSINESS STRATEGY ASSIGNMENT 1 HUMAN R ESOUR CES
Highly qualified labor force, Young and affluent professionals
INTELLECTUAL CAPITAL
R eputation
for engineering excellence, brand
identity of being powerful , reliable and luxurious, 1104.3 deliveries in 2003, sales of 277000 in 2003
Strategic capability of BMW:
CATEGOR IES
BMW R ESOUR CES
THR ESHOLD R ESOUR CES
Integrated supply chain, young and well heeled employees,
wide
spread
production
and
assembly units THR ESHOLD COMPETENCIES
Quality, reliability, dealings and relationship with supplier
UNIQUE R ESOUR CES
Engineering excellence, high quality labor force,
COR E COMPETENCIES
Technology, speed of production, the ultimate driving machine
SAURABH - 10164266
Page 13
BUSINESS STRATEGY ASSIGNMENT 1 Sources of cost efficiency:
Economies of scale
Experience
Cost Efficiency
Supply chain
Product/Process design
(Gerry Johnson, Kevan Scholes, R ichard Whittington, 2008) Supply costs:
Supply costs play an important role and can influence the firm in the bigger way. Supply costs revolves around the raw material supply, production units efficiency etc. Supply costs can prove to be an important asset where input cost prove to be critically important for success (Gerry Johnson, Kevan Scholes, R ichard Whittington, 2008)
SAURABH - 10164266
Page 14
BUSINESS STRATEGY ASSIGNMENT 1 BMW managed its supply costs by setting up manufacturing units at various locations round the globe namely Germany, USA, South Africa, UK and China wherein they employed 104000 workers (Gerry Johnson, Kevan Scholes, R ichard Whittington, 2008). This ensured that the supply costs are reduced with assembly units operating more flexibly and reducing the transportation costs of raw materials Economies of scale:
Economies of scale play a big part in manufacturing organizations or firms since the need is to recover the high capital costs through high volume of output. BMW achieves economies of scale by increasing its production capacity. BMW had the capability to swing its operations for 60 hours a week during limp demand and whooping 140 hours a week when the demand is at its peak. BMW also had produced an impressive 1.1 million cars in fiscal year 2003 (Gerry Johnson, Kevan Scholes,
R ichard
Whittington,
2008), thus demoing Econo mies to scale to gel with its manufacturing units worldwide. Product/process design:
Product/process design is also a key costs driver. Product design meliorations can help in labor productivity, better yield and maximum utilization of working capital. Product design can also be used to gain competitive advantage over its rivals with simple use of marketing intelligence. BMW was considered to be the best when it came to product/process design and was tipped as an engineering excellence. It was highly dependable, influential and lavish.
SAURABH - 10164266
Page 15
BUSINESS STRATEGY ASSIGNMENT 1 BMW also restored new and modern technology for its products thus making maximum utilization of the working capital available. Experience:
Experience must prove to the key asset of control costs and attaining cost efficiency. Through experience the firm should generate competitive advantage through the collective understanding attained by the firm and its unit costs. The experience curve for BMW is as shown:
Unit
Costs
BMW
Total units produced over time
SAURABH - 10164266
Page 16
BUSINESS STRATEGY ASSIGNMENT 1 The unit costs of BMW are supposed to decline due to the gain of cumulative experience (Gerry Johnson, Kevan Scholes,
R ichard
Whittington, 2008). BMW has been in the
automobile sector since the dusk of the Second World War. With the number of units produced increasing per year with the setup of new assembly units, there needs to happen continual reduction of costs in the competitive market situation. This may not provide the necessary competitive advantage, but is proves to be a threshold capability for survival.
SAURABH - 10164266
Page 17
BUSINESS STRATEGY ASSIGNMENT 1 VALUE
Location
NETWORK OF BMW:
Channel
Customer
value chain
value chain
Design
1 Suppliers
products and
(Assembler)
designs
Core location (Assembler)
Range of
Organizations Suppliers
Price
Price variation dependent on
Value Chain
the product specifications
Location
2 Suppliers
(Assembler)
Location
Product design and price according to the location
SAURABH - 10164266
Page 18
BUSINESS STRATEGY ASSIGNMENT 1
It is difficult for a single organization to manage all the value based activities right from the design of the product to delivering the final product or service to the customer. This process is generally carried out with the help of a value network. A value network can be termed as a combination of inter-organizational process that proves beneficial to create a product or a service (Timmers, 2008). The value network of BMW is as shown. BMW has various assembly locations as well as manufacturing units with each assembly unit having its own supplier of raw materials needed to create a product. Also there exists an internal value chain of the assembly liners within themselves. The finished product is again reciprocated to the suppliers and collectively it gives rise to the organizations or the firm¶s own value chain. The organization has its own channel value chain. The channel value chain for BMW is divided on the basic of design, price and location. BMW offers its potential customers products ranging from a ³Mini´ to the higher end ³R olls
R oyce´.
These products are
priced differently and segmented effectively in response to the target market. BMW also has price variations according to the locations it is striving in.
For
example BMW is
priced on a slight lower side in the Asian markets as compared to the UK or US market. The consumer value chain is based on the channel value chain BMW offers namely price, design and location.
SAURABH - 10164266
Page 19
BUSINESS STRATEGY ASSIGNMENT 1
SWOT analysis of BMW:
Strength:
y
BMW is a renowned company with a high position in terms of branding and gratitude factor.
y
BMW is able to sustain its market position lucratively with its hub of exclusive cars.
y
BMW had exceedingly qualified labor force (Gerry Johnson, Kevan Scholes, R ichard
Whittington, 2008) that could qualify as a source for gaining competitive
advantage y
BMW used advanced technology for its products that embarked its products design, quality and price
y
BMW had strong relationship with its suppliers which propagated BMW in maintaining a brawny supply chain management
Weakness:
y
BMW¶s overall image was too serious and conventional in comparison with its competitors
y
Low cost products of its competitors
y
Overdependence on US and Europe market
SAURABH - 10164266
Page 20
BUSINESS STRATEGY ASSIGNMENT 1 Opportunities:
y
The increase in number of products sold in spite of the economic downturn
y
Use of advanced technology for the products
y
Popularity in developing countries like India and C hina
y
Flexibility
y
Low interest rates
in development and manufacturing
Threats:
y
Strong competition in the luxury segment o f cars
y
Economic downturn
y
New entrants in the automobile industry
y
Increase in fuel costs
y
R ising
SAURABH - 10164266
supply costs e.g. steel
Page 21
BUSINESS STRATEGY ASSIGNMENT 1 Critical success factor of BMW:
V A L
U
CRITICAL SUCCESS FACTOR
E
Cost of product
prevention of price
pro duct quality
experience
Managerial
The above graph is used to identify the critical success factors of BMW. The y-axis represents the value and the x-axis represents the elements of critical success factor. According to the graph, the critical success factors for BMW are:
y
Product Quality
y
Cost of product that justifies product quality
y
Experience
Product quality is an inevitable and distinguishing factor for customer satisfaction. The brand is identified by its product excellence and cost of ownership. BMW has a status of being number Uno when it comes to quality, and thus it is one of the critical success factors for BMW. Though the cost of the product i.e. BMW automobiles is high it evidently justifies this through its product quality. The experience of BMW in the industry also is a critical success factor for BMW. With SAURABH - 10164266
Page 22
BUSINESS STRATEGY ASSIGNMENT 1 its years of experience it has developed a brand identity for its products and very integrated and sophisticated supply chain that ensures its products are delivered at the right time and right place.
Key success factors of BMW: The key success factors thus of BMW can be summarized as
y
Business model of BMW
y
Technology
y
Brand image
y
Sustainability
y
Helmut Panke, CEO of BMW
Factors
that may cause u ltimate demise of firm:
y
R ising
raw material prices and High fuel prices
y
Change in customer tastes and preferences
y
Decrease in economies of scale
y
Extreme rivalry and price wars in the maturity stage
y
Stagnation of technology
y
Unfavorable currency effects
y
Stricter regulatory norms paving way for alternatives like hybrid cars, fuel-cell cars, electric cars etc.
y
Mobility precincts in emergent urban areas
SAURABH - 10164266
Page 23
BUSINESS STRATEGY ASSIGNMENT 1 Probab le strategies BMW can restore to re direct profits and to retain en durance for the future are:
1. Market Development 2. Market Penetration 3. Product Development 4.
R estructuring
5.
R etrenchment
6. Liquidation 7. Vertical integration This may help BMW achieve a safer tomorrow and help to sustain its Bmw¶ness for years to come.
R eferences:
Allen, T. (2006, October 17).
R etrieved
june 7, 2009, from Euro area annual inflation down to
1.7%: http://74.125.153.132/search?q=cache:1fhKosuEvHsJ:europa.eu/rapid/pressR eleasesAction.do% 3Freference%3DSTAT/06/137%26format%3DPDF%26aged%3D1%26language%3DEN%26gui Language%3Den+average+rate+of+inflation+of+EU+in+2006&cd=2&hl=en&ct=clnk&gl=in
SAURABH - 10164266
Page 24
BUSINESS STRATEGY ASSIGNMENT 1 Autofacts. (2004). Eurpean Car Market . CEN. (2006, March 2). BHARAT norms v/s EURO norms.
R etrieved
September 18, 2009, from
European commitee of standardization: http://www.cen.eu Copper, I. (2008, August 15). America in recession.
R etrieved
September 21, 2009, from
Wealthy daily: http://www.wealthdaily.com Gerry Johnson, Kevan Scholes,
R ichard
Whittington. (2008). Exploring Corporate Strategy.
Pearson Education. Hejiden, K. (2006). Scenario:The art of Strategic conversation. International studies of management and Organization . Hill. (2008). The new change in automobile industry. The Wasignton Post . Organization, W. H. (2008, July 12). Environmental Pollution.
R etrieved
September 22, 2009,
from World Health Organization: http://www.who.int Statistics, D. a. (2009, July 18). Data and Statistics.
R etrieved
September 20, 2009, from The
world bank: http://web.worldbank.org Thomas, H. (2007). An analysis of the environmental and competitive dynamics of management education. Journal of Management Development vol. 26 , 9-21. Timmers, P. (2008). Creation of value chains. Electronic Commerce , 182-193.
SAURABH - 10164266
Page 25
BUSINESS STRATEGY ASSIGNMENT 1
SAURABH - 10164266
Page 26
