BMW’s Business Strategy
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Porter’s generic strategies framework explains why the differentiation business model allows BMW to obtain a competitive advantage and reach the value creation frontier. Differentiation protects BMW from competitors when customers develop brand loyalty for its products. This is a valuable asset that allows the company to charge a premium price (Hill & Jones 2012). BMW is likely to experience problems with powerful buyers because they offer distinctive vehicles that command brand loyalty.
The BMW’s differentiation strategy is designed to protect its market niche, particularly from Japanese, South Korean and American competitors. It is important to note that BMW has succeeded historically by producing a narrow line of more exclusive cars for the price-insensitive and quality conscious customers. Thompson (2005) says that BMW has widened its range of cars in recent years without fundamentally changing their business strategy. All automotives available from BMW evidently target customers who are willing to pay premium prices for alleged higher quality (Thompson 2005).
BMW still serves a relatively wide range of the total market, but its motors are differentiated in the eyes of the customers who are prepared to pay a higher price for a BMW than for Toyota, Honda, Ford and Mazda. BMW has over the years pursued its competitive advantage through the differentiation, which means creating differences in motors or services that customers are willing to pay a premium price (Lane et al. 2012). BMW creates differentiation through multiple ways such as a reputable brand image, proprietary technology or state of the art product features and provision of outstanding service networks (Lane et al. 2012).
BMW trades off cost leadership against differentiation. Thompson (2005) argues that differentiation adds cost in order to add value. With differentiation, BMW achieves superior performance by serving its customers’ needs differently, ideally and uniquely (Thompson 2005). The more unique the difference, the more sustainable is any advantage which accrues. Differentiation at BMW inevitably adds costs, which are recouped because the customers are willing to pay the required premium prices (Mun 2010).
BMW achieves good engineering design and high performance of its vehicles through product innovations and provision of superior quality and service. These factors are then sustained and leveraged through creative advertising, brand building and strong strategic alliances. Harrison & John (2009) established that although reliability and performance may be BMW’s primary focus, the company cannot ignore its cost positions. When costs are too high relative to competitors such as Mercedes, Honda and Ford, the company may not be able to recover enough of the additional costs through higher prices. This means that BMW must carefully manage costs across its entire production process from idea inception to delivery but particularly in those areas that are not directly related to the sources of differentiation (Mun 2010).
Harrison & John (2009) argued that BMW’s differentiation strategy leads to increased sales only if buyers value the attributes that make the vehicles unique enough to pay a higher price for it, or if they choose to buy from BMW preferentially. The major risk associated with a differentiation strategy centres on the difference between added costs and incremental price. Harrison & John (2009) noted that customers may not sacrifice some of the features, services or brand image possessed by BMW because it costs too much.
The differentiation strategy protects BMW from competitors when customers develop brand loyalty for its products. Hill & Jones (2009) established that differentiators are unlikely to experience problems with powerful buyers because they offer a distinctive cars, tracks and services that command brand loyalty, and only they can supply them. BMW’s differentiation and brand loyalty also creates an entry barrier for other automobile companies seeking to enter the industry (Hill & Jones 2009). A new automobile company must find a way to make its own cars and tracks distinctive to be able to compete with existing players such as BMW and Mercedes Benz.
Subsequently, Ferrell & Hartline (2010) noted that in the case of product differentiation, reality is often not as important as perception. Firms that enjoy a solid image or reputation such as BMW can differentiate their vehicles based solely on the company or brand name alone. A good image is not only one of the best means of product of differentiation; it is also a major sustainable competitive advantage (Ferrell & Hartline 2010). BMW product has characteristics that customers associate with its automotives and other vehicles include reliability, durability, ease of use and trusted brand name.
The Unique Resources and Capabilities that Support BMW Differentiation Strategy
The decision to pursue differentiation at BMW raises the company’s cost structure and results in a higher unit cost (Hill & Jones 2009). This implies that managers at BMW must choose a premium pricing option that compensates for extra costs of differentiation. The managers must ensure that the prices are not so high that it chokes off the increase in expected demand that is to prevent customers from deciding that the extra differentiation is not worth the higher price (Hill & Jones 2009).
Strategic alliances are unique resources and capabilities that support BMW’s differentiation strategy. A strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities for the purpose of creating a competitive advantage. Hitt, Ireland & Hoskisson (2012) noted that strategic alliances involve firms with some degree of exchange and sharing of resources and capabilities to co-develop, sell and services products. BMW uses strategic alliances to leverage its existing resources and capabilities while working with partners to develop additional resources and capabilities as the foundation for differentiation. Strategic alliances have become a cornerstone of BMW’s differentiation competitive strategy (Hitt, Ireland & Hoskisson 2012).
Focusing exclusively on premium motors, BMW uses an international focused differentiation business-level strategy to sell its cars, tracks and motorcycles in multiple geographic regions (Hitt, Ireland & Hoskisson 2012). According to the company’s CEO, BMW relies in part on a host of strategic alliances to further shape BMW’s future, which involves topics such as technology leadership. Among BMW Group’s current alliances are a purchasing cooperation with Daimler AG, a joint venture with SGL Group to produce carbon fibres and a joint venture with PSA Peugeot Citroen (BMW Peugeot Citroen Electrification) to produce four cylinder engines and hybrid components. Through these alliances, BMW has been able to pursue the differentiation strategy globally (Hitt, Ireland & Hoskisson 2012). Active problem solving, reliability and constant pursue of means to reconcile partners’ resources and capabilities to create value are examples of cooperative behaviour known to comprise BMW’s strategic alliances success.
According to Grant (2010), the traditional reason for cross-boarder alliances and joint venture pursued by BMW is the desire of the company to access the market knowledge and distribution capabilities of the local companies. By sharing resources and capabilities between the partners, alliances not only economize on investment, they also allow access to more highly developed resources and capabilities than BMW can create for itself (Grant 2010). BMW must consider the ease with which different types of uniqueness can be sustained. Differentiation does not, however, guarantee a competitive advantage because when customers see little value in the company’s vehicles and motorcycles or competitors copy the features, differentiation fails (Grant 2010).
BMW Group Prospects
BMW Group has positive prospects in terms of suitability, acceptability and feasibility. The BMW’s group profit before tax in 2013 is expected to be on a similar scale to that reported for 2012. The automotive segment is expected to record single digit volume growth with a new sales record in the fiscal years 2013. The EBIT margin is expected to range from 8-10% while the return on capital employed is expected to be greater that 26%. The motorcycles segment is expected to report increased sales volume in 2013 which in turn will result in higher revenues and earnings. In the financial services segment, BMW is expected to report a return of equity greater than 18%. BMW is expected to manage volume growth, innovation and profitability through cost-conscious and efficient research and development. The company intends to adopt a modular strategy which will lead to a threefold increase in model numbers by 2020. The modular strategy will enable shorter development cycles and enhanced flexibility in BMW plants. The modular strategy will increase the company’s suitability in the market and at the same time improve quality, enhance car performance, permit custom order manufacturing, and reduce defect rates (Aaker 2009). The new BMW efficient dynamics engine family promotes high levels of commonality between and within diesel and gasoline engines (Miltenburg 2005).
BMW enjoys a wide range of acceptability because its design architectures permits utmost differentiation between models in terms of design and size and account for about 70% of all production cost. The company’s priority on growth markets includes Eastern Europe, China, India, South Korea, USA, Brazil and Russia. Research shows that China’s premium segment has the top CAGR globally of 11.3% (BMW Group Investor Presentation 2013). Aaker (2009) noted that the BMW brand follows a rather classic branded house strategy. The total BMW delivery of automobiles increased from 1,380,384 units in 2011 to 1,540,085 units 2012 representing a change in 11.6% (BMW Group Investor Presentation 2013). The 6 series recorded the highest number of deliveries with a growth of 146.8% in 2012 compared to 2011. The 1 series brand delivered 226,829 units in 2012 compared to 176, 418 units delivered in 2011 which represented a 28.6% increase. The 3 series brand delivered 406,752 units in 2012 compared to 384,464 units delivered in 2011. The 5 series brand recorded an 8.0% increase in the number of units delivered in 2012 compared to 2011. The X1, X3, X5 and X6 BMW brands recorded increased deliveries, which were 16.9%, 27.1%, 3.5%, and 7.0% respectively while the Z4 brand recorded a decline of 18.9% the total deliveries in 2012 compared to 2011 (BMW Group Investor Presentation 2013).
The financial performance of BMW in 2012 recorded a rise in revenue in the automotive, motorcycles and financial services business segments. The company recorded a growth in revenue from EUR 68,821 million in 2011 to EUR 76,848 million in 2012 an equivalent of 11.7% growth. Automotive recorded a 2.0% growth in 2012 compared to 2011 growing from EUR 7,477 million in 2011 to EUR 7,624 million in 2012 (BMW Group Investor Presentation, 2013). The motorcycles segment recorded a 80% decline in revenue from EUR 45 million in 2011 to EUR 9 million in 2012. The financial services segment also recorded a decline in revenue from EUR 1,763 million in 2011 to EUR 1,558 million in 2012 a decline of 11.6%. The company’s net profit grew by 4.4% in 2012, and the management is anticipating increased growth in 2013. In addition, profit before tax grew to 5.9% from EUR 7,383 million in 2011 to EUR 7,819 million in 2012.
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