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BUSINESS STRATEGY ASSIGNMENT 1
Executive summary:
The word “automobile” 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 on the industry globally.
This report covers –
Firms macro and micro external environment that shapes the competitive position and
bring out the key drivers of change
Firms organizational strengths and weaknesses and analysis of its resources and strategic
capabilities that put a light on the critical success factors and key success factors
Reasons that may cause ultimate 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.
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Contents
The PESTEL Framework:...............................................................................................................3
Porter’ Five Forces Analysis:..........................................................................................................6
Key drivers of change:.....................................................................................................................8
The industry life cycle:....................................................................................................................9
Cycle of competition:....................................................................................................................10
Strategic Drift................................................................................................................................11
Resources:......................................................................................................................................12
Strategic capability of BMW:........................................................................................................13
Sources of cost efficiency:.............................................................................................................14
Value network of BMW:...............................................................................................................17
SWOT analysis of BMW:..............................................................................................................20
Critical success factors of BMW:..................................................................................................22
Key success factors of BMW:.......................................................................................................23
Factors that may cause ultimate demise of firm:...........................................................................23
References:....................................................................................................................................24
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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 organization (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:
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.
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.
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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:
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).
The total increase in the GDP globally from 2.0 % to 3.1% in the year 2008
(Statistics, 2009)
Decrease in the exchange rate of Euro has hampered the European car makers in a
big way (Allen, 2006)
Economic downturn in the US market (Copper, 2008)
Surplus capital and buying power in the developing economies like India and
China and their personal emergence in the Global market-place.
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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:
Changes in the customer predilection from car being a status symbol to fuel
efficiency and low emission cars
Changes in buying pattern of the consumers due to recession in mature markets.
Environmental issues and awareness of the harmful emissions through
automobiles
d. Technological factors:
Increase in use of technology to gain a clear competitive advantage
Use of new and sophisticated design to overcome the decreased margins in the
industry
Modifications or restriction on technology causing environmental pollution
e. Environmental factors:
Increasing effect of awareness of global warming, greenhouse effect and burnout
among patrons (Organization, 2008)
Shift in consumer’s tastes and preferences towards use of more eco-friendly cars,
hybrid cars, fuel cell cars etc.
Stern application of the EURO norms set up to curb pollution in developing
countries
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f. Legal factors:
Restrictions and strict pollution norms set up in European and US markets
Strict implications of the EURO norms in developing countries e.g. formation of
BHARAT norms on the lines of EURO norms in India (CEN, 2006)
Porter’ Five Forces Analysis:
Threat of new entrants:
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Competitive rivalry
Potential entrants
(Threat of Entry)
Bargaining power of suppliers
Threat of substitutes
Bargaining power of buyers
BUSINESS STRATEGY ASSIGNMENT 1
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:
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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 the PESTEL analysis and the five force analysis, the key drivers of change are:
Huge deployment of infrastructure and manpower concentrated on automobile
industry after the dusk of the Second World War
Consumer preferences for product excellence and cost of ownership
Use of design as a chief asset
Technological advancements
Environmental issues
Increase in the implication on brand management rather than product excellence
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The industry life cycle:
(Gerry Johnson, Kevan Scholes, Richard 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
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BMW
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 key 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 Rolls Royce. 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
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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 Rover 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 Rover was sold to Ford. After this BMW started to working in tandem
with the changes in the environment and developed incrementally.
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Resources:
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 Scholes, Richard Whittington, 2008).
The resources consist of –
Tangible resources underlining the physical chattels like plant, people and
finance of the organization
Intangible resources underlining non-physical chattels like information,
reputation and knowledge (Gerry Johnson, Kevan Scholes, Richard Whittington,
2008)
Resource based analysis of BMW:
RESOURCES CATEGORIES BMW RESOURCES
PHYSICAL RESOURCES BMW’s technology, conventionally designed
and styled, effective segmentation according to
the market, supply chain and dealership
management
FINANCIAL RESOURCES Turnover of € 41.53 billion in 2003, gross
margins of € 3.2 billion in 2003, annual surplus
of € 3.2 billion in 2003, 7.4% profit margins in
2003
HUMAN RESOURCES Highly qualified labor force, Young and affluent
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professionals
INTELLECTUAL CAPITAL Reputation 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:
CATEGORIES BMW RESOURCES
THRESHOLD RESOURCES Integrated supply chain, young and well heeled
employees, wide spread production and
assembly units
THRESHOLD COMPETENCIES Quality, reliability, dealings and relationship
with supplier
UNIQUE RESOURCES Engineering excellence, high quality labor
force,
CORE COMPETENCIES Technology, speed of production, the ultimate
driving machine
Sources of cost efficiency:
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(Gerry Johnson, Kevan Scholes, Richard 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, Richard Whittington, 2008)
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, Richard Whittington, 2008).
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Cost
Efficiency
Economies of scale
Product/Process design
Experience
Supply chain
BUSINESS STRATEGY ASSIGNMENT 1
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, Richard Whittington,
2008), thus demoing Economies 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.
BMW also restored new and modern technology for its products thus making maximum
utilization of the working capital available.
Experience:
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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:
The unit costs of BMW are supposed to decline due to the gain of cumulative experience
(Gerry Johnson, Kevan Scholes, Richard 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
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Unit Costs
Total units produced over time
BMW
BUSINESS STRATEGY ASSIGNMENT 1
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.
VALUE NETWORK OF BMW:
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Channel value chain
Customer value chain
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
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Location 1
(Assembler)
Core location
(Assembler)
Location 2
(Assembler)
Organizations
Value Chain
Location
Price
Design
Product design and price according to
the location
Price variation dependent on the
product specifications
Range of products and designsSuppliers
Suppliers
Suppliers
Suppliers
Suppliers
Suppliers
BUSINESS STRATEGY ASSIGNMENT 1
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 “Mini” to the higher end “Rolls Royce”. 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.
SWOT analysis of BMW:
Strength:
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BMW is a renowned company with a high position in terms of branding and
gratitude factor.
BMW is able to sustain its market position lucratively with its hub of exclusive
cars.
BMW had exceedingly qualified labor force (Gerry Johnson, Kevan Scholes,
Richard Whittington, 2008) that could qualify as a source for gaining competitive
advantage
BMW used advanced technology for its products that embarked its products
design, quality and price
BMW had strong relationship with its suppliers which propagated BMW in
maintaining a brawny supply chain management
Weakness:
BMW’s overall image was too serious and conventional in comparison with its
competitors
Low cost products of its competitors
Overdependence on US and Europe market
Opportunities:
The increase in number of products sold in spite of the economic downturn
Use of advanced technology for the products
Popularity in developing countries like India and China
Flexibility in development and manufacturing
Low interest rates
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Threats:
Strong competition in the luxury segment of cars
Economic downturn
New entrants in the automobile industry
Increase in fuel costs
Rising supply costs e.g. steel
Critical success factor of BMW:
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V
A
L
U
E
BUSINESS STRATEGY ASSIGNMENT 1
Cost of product prevention of price product 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:
Product Quality
Cost of product that justifies product quality
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
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
Business model of BMW
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CRITICAL SUCCESS FACTOR
BUSINESS STRATEGY ASSIGNMENT 1
Technology
Brand image
Sustainability
Helmut Panke, CEO of BMW
Factors that may cause ultimate demise of firm: Rising raw material prices and High fuel prices
Change in customer tastes and preferences
Decrease in economies of scale
Extreme rivalry and price wars in the maturity stage
Stagnation of technology
Unfavorable currency effects
Stricter regulatory norms paving way for alternatives like hybrid cars, fuel-cell cars,
electric cars etc.
Mobility precincts in emergent urban areas
Probable strategies BMW can restore to redirect profits and to retain endurance for the
future are:
1. Market Development
2. Market Penetration
3. Product Development
4. Restructuring
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BUSINESS STRATEGY ASSIGNMENT 1
5. Retrenchment
6. Liquidation
7. Vertical integration
This may help BMW achieve a safer tomorrow and help to sustain its Bmw’ness for years to
come.
References:
Allen, T. (2006, October 17). Retrieved june 7, 2009, from Euro area annual inflation down to
1.7%: http://74.125.153.132/search?q=cache:1fhKosuEvHsJ:europa.eu/rapid/
pressReleasesAction.do%3Freference%3DSTAT/06/137%26format%3DPDF%26aged
%3D1%26language%3DEN%26guiLanguage
%3Den+average+rate+of+inflation+of+EU+in+2006&cd=2&hl=en&ct=clnk&gl=in
Autofacts. (2004). Eurpean Car Market .
CEN. (2006, March 2). BHARAT norms v/s EURO norms. Retrieved September 18, 2009, from
European commitee of standardization: http://www.cen.eu
Copper, I. (2008, August 15). America in recession. Retrieved September 21, 2009, from
Wealthy daily: http://www.wealthdaily.com
Gerry Johnson, Kevan Scholes, Richard Whittington. (2008). Exploring Corporate Strategy.
Pearson Education.
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BUSINESS STRATEGY ASSIGNMENT 1
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. Retrieved September 22, 2009,
from World Health Organization: http://www.who.int
Statistics, D. a. (2009, July 18). Data and Statistics. Retrieved 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.
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