BMW: A Strategy built on Premium Brands

BMW: Redefining Premium Brand Identity


MGMT 8700 Strategic Management
MBA Trimester 2, 2011

Patrick Gallagher 20805458
Sion Karta 20182345
Mark Lim 10468237
Wei Zhe Poh 20605321
Jackie Tran 20597931
Janifer Yap 20841177


Table of Contents
List of Tables and Figures............................................................................................................... 4
BMW Case Study ........................................................................................................................... 5
Introduction ................................................................................................................................. 5
Company History ........................................................................................................................ 6
Brand Expansion – The Failure of the Rover Acquisition (1994–1998) .................................... 7
The Turnover (1998–2006) ......................................................................................................... 9
Milberg’s Premium Strategy Brand ......................................................................................... 9
Helmut Panke, Milberg’s Successor ...................................................................................... 10
Revitalizing the Brand: BMW, MINI & Rolls-Royce ........................................................... 12
Building on the Success of the Premium Brand Strategy ......................................................... 13
Strategic Realignment ............................................................................................................... 14
Strategy Number One ................................................................................................................... 16
The Four Pillars of Strategy Number One ................................................................................ 18
1. Growth ............................................................................................................................ 18
2. Shaping the Future ......................................................................................................... 19
3. Access to Technologies and Customers ......................................................................... 20
4. Profitability..................................................................................................................... 22
Future Challenges ...................................................................................................................... 24
Case Study Analysis ..................................................................................................................... 26
Introduction ............................................................................................................................... 26
Strategic Choice ........................................................................................................................ 26
Cost Leadership ..................................................................................................................... 27
Differentiation ....................................................................................................................... 28
Stuck in the Middle................................................................................................................ 28
Focus ...................................................................................................................................... 29
Building a Business Model ....................................................................................................... 30
Value Proposition .................................................................................................................. 30
Resources ............................................................................................................................... 30
Processes ................................................................................................................................ 32
Profit Formula........................................................................................................................ 33

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Crafting a Business Model .................................................................................................... 33
Strategic Change ....................................................................................................................... 35
McKinsey’s 7S Model ........................................................................................................... 37
Recommendations ..................................................................................................................... 38
Brand Identity ........................................................................................................................ 38
Structure................................................................................................................................. 39
Innovation .............................................................................................................................. 39
Talent Management ............................................................................................................... 39
Conclusion................................................................................................................................. 40
Exhibits ......................................................................................................................................... 41
Exhibit 1 – Key Dates in BMW’s History from 1916–1990 .................................................... 41
Exhibit 2 – McKinsey & Co Report: Core Operational Problems at Rover ............................. 42
Exhibit 3 – BMW’s Key Financials at a Glance ....................................................................... 43
Exhibit 4 – BMW Product Life Cycle ....................................................................................... 44
Exhibit 5 – Short-Term (2012) Targets of Strategy Number One ............................................ 44
Exhibit 6 – BMW Priority Growth Market ............................................................................... 45
Exhibit 7 – Premium Segment Growth in Emerging Markets .................................................. 45
Exhibit 8 – Growth of Worldwide Premium Segment .............................................................. 46
Exhibit 9 – MINI E: The Biggest Electric Vehicle Field Test Worldwide ............................... 46
Exhibit 10 – BMW EfficientDynamics ..................................................................................... 47
Exhibit 11 – BMW Global Production Network (2009) ........................................................... 48
Exhibit 12 – BMW Natural Hedging ........................................................................................ 48
Exhibit 13 – BMW Global Brand Valuation ............................................................................. 49
Exhibit 14 – Luxury Auto Market Share in the US................................................................... 50
Exhibit 15 – BMW SCA Questionnaire .................................................................................... 51
References ......................................................................................Error! Bookmark not defined.

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List of Tables and Figures
Table 1 Brief summary of BMW’s brand movements from 2001 to 2006 p. 12
Figure 1 BMW’s strategic realignment p. 15
Table 2 Events and initiatives of the four-pillar strategy from 2008 to 2010. p. 16
Figure 2 BMW’s four-pillar strategy p. 17
Figure 3 Drivers of BMW’s growth strategy p. 18
Table 3 Four main types of accidents BMW identified and solutions provided p. 21
Table 4 BMW Global Brand Valuation p. 24
Figure 4 Porter’s Generic Strategies p. 27

Figure 5 BMW Sustainable Competitive Advantage Profile p. 29

Table 5 BMW VIRO Framework p. 31
Figure 6 BMW Value Chain p. 32
Figure 7 BMW Business Model and SCA p. 34

Table 6 Kotter’s 8-Steps Framework p. 36

Table 7 BMW 7S Model p. 37
Figure 8 Interrelationship between BMW’s 7S p. 38

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BMW Case Study

Introduction
The BMW Group is considered one of the most successful companies in the world, primarily
manufacturing automobiles under its three brands – BMW, MINI and Rolls-Royce. BMW
continues to be a world class performer in luxury automobiles, with growth across all regions
accounting for worldwide automobile sales of 382,758 units in the first quarter of 2011 (21.3%
increase from the previous year) – achieving the best start to the financial year in the group’s
history. With 24 production facilities in 13 countries and a global sales network spanning more
than 140 countries, BMW was well positioned as the worldwide automobile markets continue to
improve post-GFC, particularly with a 32.4% increase in the Chinese automobile market in 2010
– confirming its position as the largest car market in the world.

BMW’s success is attributed to its long-term thinking and responsible action, establishing a
strategy of ecological and social sustainability throughout the value chain, comprehensive
product responsibility and a clear commitment to resource conservation. A strategy of promoting
high-performing engines, high-recognition branding and high-profile racing has also been
adopted in the early stages of BMW’s life, which is still evident in the company’s culture to this
day.

With the premium brand strategy focus as the cornerstone of its long-term sustainability, BMW
had to ensure that its business model, choices and change fit its strategy. As the company
continued in the future, it faced the following strategic issues:

 What has BMW changed in its strategies over the years to remain the market leader in the
premium automobile segment?
 How important were Milberg and Panke in the change process and implementation of a new
corporate culture?
 Will Strategy Number One, as the new business model, be able to sustain BMW’s
competitive advantage into the future?

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Company History
The Bayerische Motoren Werke (BMW) Group was established in 1916 as an aero-engine
manufacturing company, before post-World War I restrictions imposed on German aircraft
construction led the company to diversify to what are now its two principal productions –
automobile and motorcycles. Despite the easing of the government restrictions in 1923, BMW
continued to focus on the automobile and motorcycle market, launching their first motorcycle
(BMW R32) and automobile (Dixi) models in 1923 and 1928 respectively. As its product line
expanded, the BMW brand started to gain recognition for engineering excellence across Europe.

Due to the declining motorcycle market in the aftermath of the war, BMW came close to
bankruptcy in the 1950s and was faced with several takeover bids. As a result, Herbert Quandt, a
powerful industrial financier, risked much of his wealth and acquired a 47% share of BMW.
Quandt saved BMW by initiating a restructure which allowed the company to exploit its
capabilities for producing high-performance saloon cars. Using BMW’s sophisticated technical
skills, a new segment in the car market emerged and this has since been BMW’s model to
success.

BMW continued to launch new models and received accolades in the automobile industry in the
decades the followed. Through Quandt, BMW had established itself as a company with global
importance. BMW continued to develop its brand and in 1975, it introduced the ‘Ultimate
Driving Machine’ slogan, which still represents BMW until today. By 1989, BMW had a turn-
over of 20 million Deutsche Marks and broke production records by making half a million cars.
It was also the first European carmaker to recognise the opportunities in Asia.

Exhibit 1 outlines some of the key events made by BMW between 1916 and 1990.

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Brand Expansion – The Failure of the Rover Acquisition (1994–
1998)

“BMW is discovering, as many others have, that taking a volume brand up market is not
the easiest task to accomplish.” – Goldman Sachs report, December 1998.

In the early 1990s, competition from the Americans and the Japanese in the quality car market
started to emerge. In 1993, BMW appointed manufacturing chief, Dr Bernd Pischetsrieder, as
Chairman of the Board. Pischetsrieder brought with him a new vision for the company’s future
of expanding BMW’s market share by widening its product base to become a full range
manufacturer, from small cars to SUV vehicles. This strategy required an acquisition of another
brand and in January 1994, BMW bought the Rover Group (Rover) for £1.7 billion which
included the MINI and the Land Rover brands. The deal included a 20% buyout stake of
Honda’s share of Rover. Honda’s buyout enabled BMW to better control its design and the
future of its brand image. BMW aimed to revive the Rover brand image and move it to the
premium end of the mass market, which was in alignment with BMW’s core business.

Pischetsrieder estimated Rover’s turnaround would cost the company approximately £5 billion
through capital investment and restructuring. Furthermore, he estimated the BMW-Rover
acquisition would take six years before it could generate profit. The estimated cost for Rover’s
turnaround and Pichetsrieder’s vision marked the beginning of the company’s compounded
problems, associated with positioning both the BMW and Rover brand in the premium market.

The lack of leadership and real change in Rover’s management culture, caused by Pichetsrieder’s
hands-off approach to Rover’s existing management, led to the decline in workforce productivity
well below the industry average. Whilst BMW sales were up 20,000 units worldwide and Rover
sales were up 16,000 units in 1995, net income declined. The under utilisation of the outdated
Longbridge plant further compounded the problems at BMW. Due to an agreement made
between the British government to keep the plant operational and avoid any lay-offs, the plant
continued to exclusively produce Rover models, although the plant could be better utilised by
producing some BMW models.

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In 1996, BMW’s product development chief, Dr Wolfgang Reitzle, was appointed Chairman of
Rover despite his earlier opposition of the acquisition. He had strongly advocated closing or
disposing of Rover as soon as the deal was consummated in 1994. Reitzle and his new team
revealed the core operational problems at Rover in the Mckinsey & Co. report as outlined in
Exhibit 2.

The rise of the British pound in 1997 increased BMW’s production cost, further adding pressure
to its declining profits due to the decrease in sales. The rise of the pound also meant revenue
from vehicles sold abroad was significantly reduced. In 1998, Rover sales further declined with
the cheap imports of Volkswagens, Peugeots, Hondas and Nissans. The competitor dealerships
spread throughout the UK whilst Rover sales continued to suffer, because BMW could not
discount enough to offset the currency disadvantage. In the same year, BMW’s losses were
estimated to have reached £700 million and profit was expected to be generated in 2002 at the
earliest.

In 1998, Pischetsrieder purchased the Rolls-Royce brand from Vickers for £40 million and won
the rights to manufacture the vehicle under the Rolls Royce brand from 2003 onwards. Despite
BMW’s ongoing problems with Rover, the Rolls-Royce acquisition was celebrated as a success
to secure the high end market of the BMW portfolio. In October of the same year, BMW
requested aid funding from the British government or faced the possibility of shutting down its
Longbridge plant. Afraid of the worsening economic situations and rising unemployment, the
British government prepared £150 million in assistance aid for BMW.

The end of the line was in sight for Pischetsrieder. His strategy to revive the Rover brand has
compounded the problems BMW faced and losses of up to £700 million in 1998 were the tipping
point for Quandt. Using his power as a majority shareholder, Quandt replaced Pischetsrieder
with Joachim Milberg as BMW’s new CEO in February 1998.

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The Turnover (1998–2006)

Milberg’s Premium Strategy Brand
Prior to joining BMW, Milberg was an engineering professor at Munich’s technical university
and a manufacturing and productions expert. Through his career, he developed connections with
several automakers and parts suppliers in Europe and North America. In 1993, Milberg was
appointed BMW’s head of production and in February 1999, Milberg succeeded the outgoing
Pischetsrieder as BMW’s CEO.

A new management team came onboard after Milberg’s succession, including Helmut Panke as
Chief Financial Officer and Hagen Luderiz as Strategy Chief. The team was primarily assigned
to assist Milberg in turning BMW around. A year later, three significant members of BMW’s
management board resigned due to the differences of opinions about the strategy proposed by
Milberg and Panke.

“No trumpets. No fuss. Let’s just get this company refocused on the core business of
building BMW and now MINIs and do what we do best.” – Richard Gaul, BMW’s
communications chief describing Milberg’s leadership style.

In 2000, BMW sold Rover at a loss of €3.2 billion however it was able to recoup €2.9 billion by
selling the Land Rover brand to Ford. BMW kept the MINI brand as part of its strategy to enter
the compact car market. The disposal of Rover and the appointment of Milberg as the new CEO
signalled a new era for BMW.

After the sale of Rover, Milberg set four strategic goals. Firstly, a new small BMW model, the 1
Series, was to be launched which would sit in between the 3 Series and the MINI by 2004.
Secondly, the development of BMW’s own brand market for SUV was to be enhanced given the
popularity of its X5 model in the US and the potential to expand its product range to fill in the
SUV market. Thirdly, BMW was to employ around 10,000 workers in three factories and
production of the new MINI was to be relocated from the Longbridge factory in Birmingham to a
modernised plant at Cowley in Oxford. Lastly, preparation was to be undertaken for the complete

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takeover of the Rolls-Royce brand and the development of a new factory and head office for
Rolls-Royce in Britain.

The goals introduced by Milberg were part of a new strategic plan to take the BMW brand back
to its roots, by concentrating only on the premium market segment. Milberg’s vision of the
premium brand strategy was characterised by:

 Concentrating only on the premium segments of the automobile market.
 Creating a demanding product and market offensive in the premium segments, ensuring
that the brand is represented in all relevant parts of the market.
 The appropriate expansion of the production and sales network.
 The agility of the overall company with quick reactions and innovations.
 Cooperation and networks using external resources through strategic partnerships rather
than mergers.
 A new style of leadership and guidance oriented.
 Profitable growth.

The sale of Rover and Milberg’s premium brand strategy brought about an increase in profits of
more than 400% in 2002 compared to 1999, despite the economic downturn in both Germany
and the US (refer to Exhibit 3). Milberg was credited for successfully extracting Rover from
BMW.

Helmut Panke, Milberg’s Successor
In 2002, Milberg announced he will step down as CEO and Panke, who was responsible for
BMW’s financial affairs since 1999, was to succeed him. Panke was the architect of BMW’s
rapid financial restructuring following the divestiture of Rover in 2000. Milberg saw Panke as
the ideal replacement due to his similar traits in leadership, but with a more natural and outward
leadership qualities.

Milberg’s decision to retire before his contract expired was mainly due to his health and dislike
of public attention. He felt his decision of an early resignation was a strategic decision for BMW
to allow the company to continue to grow, whilst building on one of the most successful period
in BMW’s history. As one BMW official said, “Now that BMW is in a very strong position, it is

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the best time to initiate this change. This way, we can avoid all the speculation about his
successor. This can put a lot of uncertainty on a company.”

Since 2002, Milberg had taken up a supervisory board position at BMW. Panke’s vision was to
build on Milberg’s premium brand strategy which was ‘always premium’. The addition of Rolls-
Royce and MINI to the BMW brand was part of the strategic positioning which complemented
the core BMW product line. The Rolls-Royce brand defined a unique stylish luxury in the large
passenger saloon market whilst the MINI was a brand that would be the undisputed premium
choice in the compact car market. Panke believed these three brands were the essence of brand
value and brand management at BMW.

Panke’s organisational leadership was described to be regal and ruthless yet very smart, which
was similar to that of Milberg. Panke was comfortable in his public role and often found himself
conducting public speeches. Like all previous CEOs of BMW who brought in their own
leadership style to the company, Panke believed in the four Ps in an effective organization:

1. The right people: passionate of the job
2. Premium positioning: from making cars to making profit
3. Process driven: not personality driven
4. Panke: leadership

As Panke said, “I would say: focus on understanding who you are, what you stand for. What are
the values you have in the organisation? What are the values you believe in for the products and
services that you sell and provide? BMW builds high-performance products because BMW is a
high-performance organization.” Panke did not want people to follow him but he wanted people
to follow his program and processes. The new corporate culture under the leadership of Milberg
and Panke had created a new era for BMW that further strengthened its core value as the
premium car brand in the market since the 1970s.

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Revitalizing the Brand: BMW, MINI & Rolls-Royce
BMW repositioned itself in the premium market segment based on Milberg’s premium brand
strategy. Product expansion and market offences were performed on all three brands to ensure
the brands were well represented, as shown in Table 1. The launch of the new 7 Series and Z4 in
2002 and 2003 respectively marked the start of a new era at BMW, which reflected how big and
broad the BMW brand could be – a change brought by the leadership of Milberg and Panke.

Building on the successful expansion of its brand portfolio by the addition of MINI and Rolls-
Royce since 2000, BMW’s management team decided to further strengthen the unique identity of
each brand. In January 2004, BMW appointed separate brand managers for each of the three
brands, whilst marketing functions were to be centralized under one leadership.

Table 4 Brief summary of BMW’s brand movements from 2001 to 2006.

Brand MINI BMW Rolls Royce

2001 The launch of the new The new BMW 7 Series was The development of the new
and rebranded MINI introduced at the Frankfurt manufacturing plant and head office at
Motor Show Goodwood in West Sussex
2002 Winner of the North The launch of the new BMW 7
American Car of the Series to the public
Year Award
2003 The launch of the new BMW Z4 The launch of the Rolls Royce Phantom
and 5 Series
2004 The launch of the new BMW 1
Series, 6 Series and the X3 SUV
2006 The world first hydrogen
powered car the BMW 7 Series

(Source: Driven: Inside BMW, the most admired car company in the world, 2004)

In November 2002, BMW opened the Brand Academy to promote brand orientation amongst its
staff on the brilliance and fascination of the three premium brands. The academy was unique and
the only one of its kind in the automobile industry. The Brand Academy aimed to educate
BMW’s staff and partners to better understand the different identities of the brands and identify
the features that distinguished these brands from their competitors. By 2005, over half of BMW’s
management team had passed through the academy.

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In May 2004, BMW entered the Chinese market through its joint venture with Brilliance China
Automotive Holdings Limited. The new Shenyang manufacturing plant was expected to produce
around 30,000 units of both the BMW 3 Series and 5 Series. The joint venture was a strategic
positioning for BMW to expand its distribution network and to meet China’s future demand.

As part of the long term success of the premium brand strategy, BMW continued to improve its
driving dynamics innovation and technology in a way that other companies were not considering.
The leading position of BMW amongst premium manufacturers in the area of technology and
innovation was recognised in 2006, when BMW was bestowed numerous international awards,
such as the Engine of the Year that it had won for two consecutive years. Research and
development continued to be an integral part of BMW’s operation, allocating an R&D expense
of €3.2 million in 2006, 3% higher than in the previous year. In September 2006, Dr Norbert
Reithofer, then member of the Board of Management responsible for production, succeeded
Panke as Chairman of the Board and CEO of BMW.

Building on the Success of the Premium Brand Strategy
“The market for premium vehicles will continue to grow over the medium to long term.
But in the future, premium will not just be defined in terms of horsepower, but much
more in terms of sustainability…yesterday’s formula for success will not work in the
future.” – Dr Norbert Reithofer, expecting BMW’s retail curve to level off substantially
once the second step of the product initiative come to an end in a few years.

The period from 1999 to 2006 saw BMW repositioned itself in the premium market by
restructuring the organisation following the failure of the Rover acquisition. BMW had since
developed three extremely strong and authentic premium brands – BMW, MINI and Rolls-Royce.
In the same time period, BMW became the world’s leading manufacturer of premium
automobiles in terms of retail, backed by the largest product and market initiative in its corporate
history and recognised as Germany’s most attractive employer.

Faced with an ever-changing environment and with its product life cycle coming to an end (refer
to Exhibit 4), BMW recognised the need for a new strategic initiative required to maintain its
leadership in the premium market segment. BMW started focusing towards the concept of

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sustainable mobility and recognised hydrogen as the fuel source of the future. In November 2006,
BMW unveiled the BMW Hydrogen 7 in Berlin – the world’s first hydrogen-driven luxury sedan
– which was practically emission-free and considered suitable for everyday use. The release of
the Hydrogen 7 signalled a milestone for BMW as a technology and innovation leader in the
automobile industry. By 2006, BMW had gained a clear lead over its competitors in reducing
carbon dioxide emissions through its EfficientDynamics initiative. Furthermore, BMW had been
ranked first by the Dow Jones Sustainability Index within the automotive industry for three
consecutive years.

Strategic Realignment
“Our new strategy will help us – and the dedication and motivation of all our employees
will guarantee our success… [it] is our path to the future. This strategy will allow us to
address the challenges we all face as a company and as part of society.” – Dr Norbert
Reithofer.

BMW’s organisational structure had remained relatively unchanged since 2000 and a need for a
strategic realignment became evident to align the organisational structure with its strategy. On 27
September 2007, Reithofer announced the implementation of a fundamental strategic
realignment called Strategy Number One, which stood for ‘New Opportunities, New Efficiency’.
The new strategy was viewed with a target-oriented approach and long-term focus hence it was
structured with a vision to the year 2020. Strategy Number One was intended to be the
framework for all of BMW’s future decisions and had clearly defined what the organisation
intended to do as well as not to do in the future. Through this strategy, BMW aimed to be the
leading provider of premium products and premium services for individual mobility. As
Reithofer said, “The premium business remains our strength – not the near-premium business,
nor the mass market segment”.

Reithofer emphasised the need for the entire organisation to be realigned in accordance to the
new strategy as shown in Figure 1. As a result, BMW appointed two new members to the Board
of Management responsible for the organisation’s structural change and two new divisions were
created to help the company focus on its defined objectives. The two new divisions were:

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 Purchasing and supplier network – responsible for optimising the process change from raw
material to finished products, with the top priority of lowering material costs while
improving the quality of the parts.
 Corporate and brand development network – responsible for corporate planning, brand
management and strategic implementation.

Besides the structural realignment and the board reorganisation, two committees were set up –
Strategy Implementation Committee (SIC) and Profitability Improvement Committee (PIC) – to
ensure the need for internal implementation. As Reithofer said, “Strategy implementation
requires a high-performance organisation capable of handling the complexity of our activities
and generating growth”. The SIC, personally headed by Reithofer, was responsible for the
strategy’s implementation and review progress whilst the PIC, headed by CFO Michael Ganal,
was responsible in ensuring all divisions and projects were in line with the strategy’s efficiency
targets.
Figure 6 BMW’s strategic realignment

(Source: BMW Group Investor Presentation, March 2010)

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Strategy Number One

Strategy Number One focused on the four pillars of growth, future, access to technologies and
customers and profitability, as depicted in Figure 2. Table 2 provides the different events and
initiatives of the four pillars from 2008 to 2010. The strategy’s systematic implementation since
2007 put the organisation in a better position than its competitors in the onset of the GFC. As
Reithofer said, “This strategy was introduced well before the financial and economic crisis and it
laid the foundation for the upturn we are currently experiencing”.

Table 5 Events and initiatives of the four-pillar strategy from 2008 to 2010.

Four Pillars 2008 2009 2010
Growth Service that spans a Developing a growth market From the first BMW 5 Series to
vehicle’s lifetime an impressive global family
Shaping the Project i: Reinventing Creating individual mobility of A high-tech material for
Future urban mobility the future tomorrow’s mobility
Access to Integrate safety Preparing for the future by Intelligent communication for
Technology and thinking ahead individual mobility
Customers
Profitability Clean Production Winning new customers through Stable performance in an age of
technological leadership global market fluctuations

(Source: BMW Annual Reports 2008-2010)

Ultimately, Strategy Number One put profitability and quality earnings as a paramount
importance. Whilst BMW recognised their strong position in the market, the company believed
it could only increase its value by changing its strategy. The rationale behind Strategy Number
One include the organisation’s disproportionally low profitability development, the threat of its
competitive position relative to the automobile industry, and the need to improve profitability
and capital efficiency of the entire company.

As the strategy’s full potential could only be viewed in the medium to long-term, BMW set a
short-term target for 2012 (refer to Exhibit 5), by which the company aimed to have achieved
significant improvements in profitability and capital efficiency. Some of the targets BMW aimed
to achieve by 2012 are sales of 1.8 million units of automobile vehicles, 50% increase in
motorcycle retail units and a return on capital of 26%, which will result in an 8-10% EBIT-based
return on sales in the automotive segment.

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Through its ambitious targets, BMW aimed to be the leading company in all segments by 2020,
achieving sales in terms of its strategic objectives with completely new vehicle concepts and
individual mobility.

Figure 7 BMW’s four-pillar strategy

(Source: BMW Annual Report 2007)

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The Four Pillars of Strategy Number One

1. Growth
BMW adopted the view of ‘customer service = growth driver’ as the underlying principle to
grow its market. In 2008, the company had accumulated more than 14 million BMW
automobiles on the road, which it recognised as 14 million potential service customers. For this
reason, BMW launched global initiatives to systematically exploit the huge sales potential of the
service and parts business, enabling the organisation to reach out to an entirely new group of
customers. As a result, customer focus became the heart of all of BMW’s sales and marketing
activities.

Greater customer orientation was especially important for customer support, which was one of
the focal points of BMW’s strategic efforts. In the organisation’s view, the quality of service was
one of the major criteria customers took into account when purchasing a new vehicle. BMW
therefore perceived growth in the market was possible when it provided ‘service that spanned a
vehicle’s lifetime’. Figure 3 illustrates the two drivers of BMW’s growth – product and service.

Figure 8 Drivers of BMW’s growth strategy


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BMW focused on developing its growth market by continuously pursuing targeted regional
expansion strategy particularly in parts of Asia (refer to Exhibit 6). In early 2009, the
organisation brought the concept of ‘premium’ to India, referred to as the ‘awakening elephant’.
With a gross national product growing by an average of 7% a year, the Indian middle class was
larger than the entire population of Germany. The Indians’ desire for superior mobility was
attributed to the changes in their lifestyle preference, triggered by the average income increasing
at a rate of 14% per annum. The enormous momentum led BMW to double its Indian sales to 1.8
million within four years. BMW is currently the market leader in India’s steadily growing
premium segment and continues to have a strong presence in the country. Its New Delhi
headquarter included sales and international purchasing offices, and its national parts centre
located in Mumbai had been assembling both the 3 Series and 5 Series since 2007.

BMW’s continuing expansion on its global procurement activities for future vehicle projects
resulted in the company’s outperformance within the emerging markets in 2010. The premium
market segment is expected to increase to 8.2 million units per annum by 2020 which would be
fuelled by the growth in the emerging markets (refer to Exhibits 7 and 8). In order to meet the
demands of the emerging markets, BMW continued to expand its distribution network to the
BRIC markets, with a total of 100 new dealerships opened in 2010. BMW’s worldwide
distribution network consisted of around 3,100 BMW, 1,300 MINI and 80 Rolls-Royce
dealerships. Through BMW’s customer oriented approach, it continued to open new markets by
‘winning people’s hearts’.

2. Shaping the Future
BMW’s future primarily focused on the individual mobility of both private and professional life.
By acknowledging that nothing can continue as it used to be due to the dramatic changes in the
global environment, such as global warming and depletion of fossil fuel resources, BMW
initiated a challenge to help guarantee the future individual mobility. BMW considered the
changing global environment as an opportunity for growth and used individual mobility as its
driver for developing contemporary solutions. BMW believed the development of contemporary
solution was a race and the company that came up with the best solution developed a sustainable
competitive advantage. To achieve this vision, BMW aimed to constantly develop new and
entirely different concepts.

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In 2008, BMW rolled out its ‘Project i’ and its mission was nothing less than to completely
rethink mobility for people who lived in the world’s metropolitan areas – reinventing urban
mobility. The project included a comprehensive vision to develop cars for the future which
included everything from vehicle concepts to production structures through to branding and
service strategies. The ‘i’ in the project name stood for intelligent, innovative and international.

The MINI E was the first electric car which incorporated crucial elements of Project i, such as
fuel-saving technologies, global warming, and individual mobility. BMW believed the MINI E
was a viable solution to electric mobility, which was made into reality in 2008. From field trials
performed in 2009, BMW proved that electronic mobility has the potential to become a new and
viable form of transportation (refer to Exhibit 9).

Confident that electronic mobility would be the new form of transportation in the future, BMW
began to concentrate its resources on the materials for its future vehicles. To ensure sustainable
mobility, vehicles would be made out of carbon-fibre reinforced plastic (CFRP). This material
allowed vehicles to be much lighter without compromising safety as CFRP is more robust than
steel but less than half its weight. CFRP was resistant but highly malleable, versatile and
relatively easy to work with. A lighter vehicle used less energy hence sustaining the concept of
electronic mobility much longer. Through the use of CFRP, BMW was able to adopt a new
radical approach, explored unique design concepts and realised a new kind of car building, all of
which were important in creating a contemporary solution.

3. Access to Technologies and Customers
BMW’s needs to access technologies and customers required the organisation to consider
customer benefits in all its decisions. To achieve sustainable competitive advantages, BMW
realised the importance of collaborations and networks established within the automobile
industry as well as differentiation through brand-specific strengths. It was crucial for BMW to
derive key technologies by maintaining the right balance between in-house production, supplier
management and collaborations. Furthermore, cooperation was important as the relationship
between the dealers and fleet service providers played a crucial role in the customers’ buying
process.

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In 2008, the strategy for its customers was to focus on integrated safety. BMW was the first
automobile manufacturer worldwide to offer side head airbag as a standard feature on some if its
models back in 1997. In line with this, BMW developed a new concept of safety, with attention
to active safety, smart prevention and saving lives. Table 3 lists the four main types of accidents
BMW identified and the solutions it offered.

Table 6 Four main types of accidents BMW identified and solutions provided

Accidents Solutions
Driving accidents BMW introduced the active cruise control system and the lane
departure warning to help the driver manoeuvre safely. Intervention
systems such as integral active steering and the Dynamic Drive activate
the stabilizer system in dangerous situations. The group had also been
Accidents in longitudinal traffic working on developing technology in intelligent communication
between vehicles which could, for instance, allow a car to alert traffic
behind it to patches of black ice.
Crossing accidents BMW’s engineers concluded that more than half of all fatal pedestrian
accidents took place at dusk or during the night in poor visibility. In
response to this challenge, BMW safety experts developed a uniquely
intelligent infrared system to warn the driver of pedestrians or animals
Accidents involving pedestrians on the road in the dark. The technology, called the Night Vision, used
an infrared camera to transmit moving video images of the
surroundings.


In 2009, BMW shifted its strategy to EfficientDynamics which entailed winning new customers
by acquiring more customer input. BMW’s aim was for more driving pleasure and lower
emissions through future technologies of efficient and high-performance mobility by reducing
fuel consumption and carbon dioxide emissions. In response, the BMW and MINI brands
outperformed all other competitors in the premium segment and this unique position was earned
through EfficientDynamics technologies across the entire fleet, with more than 1.8 million BMW
and MINI vehicles on the road. Furthermore, BMW engineers and designers from different
disciplines gathered to develop the Vision EfficientDynamics concept car (refer to Exhibit 10).
This example of cutting-edge technology was simply the logical continuation of the BMW
EfficientDynamics to create a sustainable future.

BMW provided intelligent communication for individual mobility in what was called the BMW
ConnectedDrive in 2010 and it had been considered the pacemaker for the automobile industry in
this field for many years. Through ConnectedDrive, BMW offered intelligent driver assistance
systems, such as extended emergency call function, Night Vision with pedestrian recognition, e-

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mail and Internet access and had expanded to link drivers, passengers, their vehicles and the
world around them even more closely. BMW had once again set the standard for intelligent
networking between the driver, the vehicle and the world around them. After becoming the first
carmaker which enabled the Internet, iPod and iPhone integration in its vehicles, BMW is now
creating another innovative highlight with its visionary Concept BMW Application Store.
Similarly, it would be possible in the future to download regular software updates to run engines
even more fuel-efficiently, for instance. ConnectedDrive was a fully comprehensive approach
designed to maximise the benefits of seamlessly connecting the driver, the vehicle and the world
around them.

4. Profitability
Strategy Number One was to consistently align BMW to achieve profitability, earnings quality
and increase value over the long term, which were the decisive factors in everything that BMW
did. It was vital for BMW to make investing an attractive option and generate positive results as
investors expected a premium return from investing in a premium manufacturer. Therefore,
BMW concentrated on those business areas promising a return on investment that matched the
premium aspirations and continued to leverage its cooperative ventures in order to improve its
profitability.

One of the key themes learned from EfficientDynamics was ‘more output from less input’. This
lesson was applied to the entire organisation and as far as costs and profitability were concerned,
less input involved re-evaluating all cost structures and achieving an increase in efficiency of at
least five percent a year. BMW intended to achieve economies of scale by establishing
collaborations in the areas of components, drive systems and modules. In 2007, BMW formed a
joint venture with PSA Peugeot Citroen to supply engines for the second-generation MINIs. It
had always been one of BMW’s key strengths to make best use of project-based cooperation and
cost efficient networks. The US had been the most important individual automobile market for
years and BMW largely depended on the development of currency exchange rates, mainly
between the US dollar and the Euro.

In 2008, profitability for BMW also meant the reduction in costs and saving of resources leading
to clean products. BMW systematically improved its resource efficiency throughout its global

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production network. The innovations implemented as part of the EfficientDynamics program
combined lower carbon dioxide emissions with optimised driving dynamics throughout the
model range. BMW had also established a systematic approach across its entire worldwide
production network (refer to Exhibit 11) which controlled resource consumption and emissions.
This systematic approach was the global benchmark for all plant managers at BMW to manage
its resources at anytime. As a result, BMW managed to lower its emission consumption by more
than €36 million in 2008. As Herbert Höltschl, BMW’s corporate officer for sustainability and
environmental protection said, “It is often possible to make extensive improvements just by
completely rethinking established processes. Sometimes you even have to invest less to save
more: we profit from doing less.”

The impact of the GFC in 2008 resulted in BMW’s shift to efficient capital investing in the
following year. As Reithofer said, “In an exceptional situation like this, there are two options:
hope for the economic crisis to pass, or respond quickly and deliberately – which is what the
BMW Group did”. As a result, BMW came through 2008 in relatively good shape and made a
successful start to a difficult 2009. Fixed costs were substantially trimmed across all divisions,
several plants temporarily implemented short-time working and steps taken to secure sufficient
liquidity. BMW also benefited from having a corporate financial structure with an international
focus through financing companies in Singapore, New York and in Europe, on global capital
markets around the clock. The key to BMW’s success was its profitability in its core business
and financial services business. This gave the company an advantage over its competitors due to
its different risk profile and its capacity to finance from its own resources.

In 2010, the theme behind profitability was stable performance in an age of global market
fluctuations which consisted of having a global balance. BMW aimed to find a good balance
between Europe, Asia and the Americans in business and sales activities to support long-term
positioning in an effort to become more flexible to market fluctuations by investing in the growth
markets. In order to make the value creation process as independent as possible from market and
exchange rate cycles, BMW relied on natural hedging. BMW identified Shenyang in China,
Oxford in the UK and Spartanburg in the US as natural hedging sites. The three sites would
match its expected sales revenue to its cost structure to provide protection against exchange rate
fluctuations (refer to Exhibit 12).

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Future Challenges
In the first quarter of 2011, BMW continued to roll out its strategies with good performances and
growth highlighted across all regions and sales records were evident across the three brands.
BMW’s projection of young and attractive range of models combined with the strong growth
worldwide helped to push first-quarter sales up 21.3%. BMW continues to implement new
product initiative across their product line offerings throughout 2011.

BMW’s global brand reached a peak brand value of $28.02 billion in 2008 however it decreased
to a minimum value of $21.8 billion as a result of the GFC, which impacted the entire
automobile industry. The brand however rebounded as it maintained its position as the second
most valuable automobile brand and increased its brand value 3% to $22.43 billion in 2011 while
brand momentum increased to a rating of 8 which showed positive signs of the BMW brand
moving towards the future as shown in Table 4 and Exhibit 13.

Table 4 BMW Global Brand Valuation

BMW 2006 2007 2008 2009 2010 2011
Brand Value ($m) 23,820 25,751 28,015 23,948 21,816 22,425
% Change n/a 8% 9% -15% -9% 3%
Global Rank 17 14 17 18 25 30
Continental Europe Rank 2 2 2 3 2 5
Automobile Rank 2 2 2 2 1 2
Brand Contribution (5 scale) 4 4 4 4 5 5
Brand Momentum (10 scale) 4.5 6 7 9 6 8

(Source: BrandZ Top 100 Global Brand Reports 2006-2011)

The global brand valuation demonstrates BMW as the second best known brand in the world,
just behind Toyota who is in the mass market automobile segment. In the US, BMW is currently
the premium market leader in the automobile industry with Mercedes coming a close second
place (refer to Exhibit 14).

As BMW continues to redefine its premium brand identity as a leader in the premium automobile
segment, the company faces several challenges to retain its market position as competition in the
international market from new and existing competitors intensify. What has BMW changed in its
strategies over the years to remain the market leader in the premium automobile segment?
Furthermore, how important were Milberg and Panke in the change process and implementation

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of a new corporate culture? BMW made a major decision with Strategy Number One in order to
stay ahead of competition and achieve long-term sustainability. The biggest question moving
forward from 2011 is, “Will Strategy Number One, as the new business model, be able to sustain
BMW’s competitive advantage into the future?”

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Case Study Analysis

Introduction
BMW have maintained its reputation as the global market leader in the premium automobile
segment. The team’s logical choice to conduct its strategic analysis on BMW is due to the
company’s long, innovative and interesting history coupled with continues momentum of their
brand in the global landscape. The case study reviews the key events, activities and strategies of
BMW, starting with the failed Rover acquisition, to the company’s turnaround in 2000 and to the
implementation of Strategy Number One which became BMW’s guiding path for the future. The
three strategic management themes of strategic choice, building a business model and strategic
change will be applied to examine the case study. The success of BMW as the global leader in
automobile market leader requires a meticulous examination of the strategic choices and strategic
changes made whilst also considering the impacts of a new business model for long-term
sustainability.

Strategic Choice
Choosing a business strategy requires a focus in terms of an organisation’s objectives. Once
these objectives have been determined, an organisation can move onto developing sustainable
competitive advantages fitting those objectives. Therefore, it is important to consider the theory
of business which is how organisations perceive their business environment both internally and
externally. This involves analysing key assumptions of the environment, the specific mission of
the organisation and the core competencies of the organisation (Drucker 2006). BMW has been
able prepare for the future by putting an emphasis towards understanding the global luxury
automobile market and current market trends whilst retaining a key focus on the customer,
innovation and their brand. BMW has been able to portray a premium quality brand image and
the introduction of new models and new safety features annually has been a result of
understanding the environment and economic conditions and listening to their customers.

Strategic choice refers to method of selecting one option for implementation by surveying the
available options. If there are no decisions to be made, there can be minimal value in thinking
about strategy at all. On the other hand, there will always be, in practice, limits on the range of
possible choices (MacMillan and Tampoe 2000). Good strategic choices have to be challenging

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enough to keep ahead of competitors but they also have to be attainable. Strategic choices that
keep alternatives open depends their success on uncertain events happening. The corporate
history and strategies of BMW over the past 20 years have demonstrated many significant
strategic choices to remain competitive and future planning to remain sustainable in the premium
automobile market. Milberg was responsible for BMW’s planning and implemented many of its
strategic choices. Most recently, the tradition and vision has been continued by Reithofer with
the objective of selling 1.8 million vehicles by 2012.

Michael Porter (1985) explains that the goal of strategy is to develop sustainable competitive
advantages which are difficult for rivals to imitate and are constantly evolving in order to stay
ahead of the game. These include generic industry strategies of either pursuing low cost or
differentiation targeting a broad or narrow market as shown in Figure 4. The company that
carries out the strategy best will make the most profits (Kotler 2009).

Figure 9 Porter’s Generic Strategies

(Source: Porter 1985, modified by author)

Cost Leadership
Porter’s generic strategy of cost leadership focuses on achieving sustainable leadership where the
organisation sets out to become the lowest cost provider of goods and services and wins a large

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market share. This strategy focuses on targeting the broad or mass market of many industry
segments leading to a cost advantage, depending on the structure of the industry. BMW has
never been focused on a cost leadership strategy due to its history of a premium provider of
products and services in the premium automobile market, which is reflected in the company’s
three premium brands – BMW, Mini and Rolls-Royce. This is further reflected in the high
market prices of its vehicles. Labour costs in Germany and the US, together with research and
development costs reached €3 billion in 2010.

Differentiation
In a differentiation strategy, an organisation concentrates on achieving uniqueness and superior
performance in important customer benefit areas and segments which is widely valued by the
buyers and the market resulting in a premium price. An organisation that can achieve and sustain
differentiation will be an above-average performer in its industry if its price premium exceeds
the extra cost incurred in being unique from its competitors. BMW has a business strategy of
focusing on creating sustainable competitive advantages through innovation, technology,
customer focus and its brand by producing premium vehicles exclusive to the luxury market.
BMW has accomplished this through the implementation of new programs such as
EfficientDynamics, Individual Mobility and Project i.

Stuck in the Middle

An organisation that engages in each of the generic strategies of cost leadership, differentiation
and focus, but fail to achieve any of them is ‘stuck in the middle’ and possesses no competitive
advantage. This is often explained by a trade-off between low cost and differentiation because
accomplishing different types of competitive advantages requires conflicting actions. However
an organisation that is ‘stuck in the middle’ is usually unwilling to make a choice about how to
compete thus resulting in poor financial performance. BMW’s acquisition of Rover in 1994 is a
classic example of conflicting strategies as it tried to implement a broad differentiation strategy
in the mass market whilst trying to maintain a differentiation focus strategy in the premium
market (illustrated in Figure 4). As a result of these conflicting strategies, the organisational
cultures and leadership styles in the UK and Germany clashed, which eventually led to the
disastrous result of Rover’s disposal at a loss of €3.2 billion in 2000. An organisation must

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choose the type of competitive advantage and generic strategy to be implemented for the long-
run and BMW decided the differentiation focus strategy of the Mini, BMW and Rolls-Royce
brands was the way to the future (illustrated in Figure 4). This led the company to concentrate on
the premium market with its luxury automobiles in the small, mid-size and large segments.

Focus
Organisations implement a focus strategy by selecting a segment or group of segments in a
narrow competitive scope within an industry and tailoring its strategy to serve them exclusively.
The differentiation focus is where a company seeks differentiation in its target segment and
attempts to exploit the special needs of buyers in certain segments. BMW saw an opportunity in
the niche small automobile market, which led to its strategic choice of holding onto the Mini
brand in the failed Rover acquisition. Figure 5 illustrates BMW’s SCA profile which clearly
supports its differentiation focus strategy. The result of the SCA questionnaire is shown in
Exhibit 15.

Figure 10 BMW Sustainable Competitive Advantage Profile

Sustainable Competitive Advantage Profile
Differentiation
20
15
10
5
0
-5
Narrow Target -10 Broad Target

Low Cost
(Source: Based on Stockport 2010)

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Building a Business Model
Creating a business model provides a basis for building sustainable competitive advantages
(SCA) as the idea is to identify core and sub-activities that link to critical success factors within a
business or industry and boost synergy (Stockport 2011). As a result, the business model
typically consists of four interacting, interdependent elements of value proposition, resources,
processes and profit formula. These elements as a whole help create, delivery value and capture
profit for the organisation (Christensen and Johnson 2009).

BMW’s new strategic re-alignment, Strategy Number One, introduced a new business model
focused on growth, customers and technologies, profitability and the future to assist the
organisation on future decisions and long-term sustainability. The core business activities that
supplemented BMW’s business model focused on the value proposition which drive resources
and processes which lead to a more profitable and sustainable business.

Value Proposition
The value proposition refers to the whole cluster of benefits an organisation promises to deliver
to customers whom will gain by doing their jobs more effectively and efficiently. This is
accomplished by providing the customer a solution to problems within the functional, emotional,
and social dimensions (Christensen and Johnson 2009). BMW’s value propositions consist of
offering individual mobility, safety, improved fuel efficiency and carbon dioxide emissions and a
premium brand quality and experience. These value propositions are aligned with BMW’s
differentiation focus strategy and by allocating the necessary resources, the building of SCAs can
be accomplished.

Resources
Resources typically include facilities, products, suppliers, distribution channels, technology,
people and the brand. These elements are assessed based on their value, rarity, cost of imitation
and the ability to be exploited by the organisation in what is referred to as the VIRO framework.
As a result, those resources that pass the VIRO test contribute to the activities that build an
organisation’s sustainable competitive advantage (Barney 1996). BMW’s resources as applied
through the VIRO framework are classified into three categories of competitive parity (CP),

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temporary competitive advantage (TCA) and sustainable competitive advantage (SCA) as
illustrated in Table 5.

Table 5 BMW VIRO Framework

Costly to imitate
Resource name

Exploited by
organisation

Competitive

Description
implication
Value

Rare

BMW's reputational brand was well established
for their premium quality, ergonomic design,
packed with futuristic technology and long term
Brand Yes Yes Yes Yes SCA profit and sustainability mind set.
BMW has unique, valued and highly integrated
technology platforms including the Connected i-
drive, E-stop, accident control, dynamic drive, in-
car WWW connection, service and order
placement call centre. These technologies
allowed BMW to significantly differentiate
against their counterparts and at the same time
Technology Yes Yes Yes Yes SCA created high valued service to their end users.
Long term technology and supply partnership
network allowed BMW to quickly obtain,
developed new technology and reduced the cost
of in-house research and development. This
arrangement allowed BMW to keep
manufacturing cost to a reasonable level whilst
Supply striving for premium quality and differentiated
partnership Yes No No Yes CP technology.
The growth and expansion into the Indian and
Chinese market allowed BMW to leverage their
Emerging brand reputation and quickly captured the value
market Yes No No Yes CP of expanding market share.
Close relationship with customers and the well
integrated customer service system allowed
Customer BMW to collect and develop a detailed
knowledge Yes Yes No Yes TCP understanding of customers’ needs and wants.
BMW had access to efficient capital market,
internal funding and hedged financing structure.
This arrangement allowed optimised international
manufacturing business and protected the
company against currency exchange fluctuation,
Financing reduced the cost of capital funding and increased
capacity Yes No Yes Yes TCP the flexibility of investment.
BMW’s training academy allowed them to
Training directly access to talent pool, reduced their
academy Yes No Yes Yes TCP recruitment and internal training cost.
(Source: Based on Barney 2002)

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Processes
Processes are the ways that an organisation uses its resources to generate value. These stem from
the many discrete activities a firm performs in designing, producing, marketing, delivering and
supporting its products and service (Porter 1985). For instance, BMW has implemented a
corporate finance structure with an international focus to reduce its exposure to local and foreign
capital market fluctuation. As explained through the value chain, BMW’s processes are
illustrated in Figure 6.

Figure 6 BMW Value Chain

(Source: Based on Porter 1985)

One of the major processes from the brand of BMW through core business activities have
assisted in acquiring funding from the open capital financial markets using its low risk profile.
As a result of a shift to maintain a global balance, BMW has implemented a foreign currency
management process to minimise the impact of global exchange rate fluctuations particularly in
countries where production facilities are located. This is accomplished through increasing or
decreasing the amount of supply such as raw materials and the location of local manufacturing in
order to provide a natural hedge against medium and long-term fluctuations in currency in the
global financial markets.

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Another process has been the development of technology and innovation across multiple section
of the BMW business. This has been assisted through strategic alliances formed with suppliers to
increase BMW’s purchasing and manufacturing competency. Furthermore, research and
development has been able to take advantage of the market research and analysis with regards to
customer behaviours and purchasing patterns to develop technology products and services. For
instance, ConnectedDrive and Dynamic Drive which offer intelligent driver assistance were the
result of such processes and systems in place.

Profit Formula
The final element, the profit formula, refers to the amount of sales volume turnover in addition to
the gross and net margin that makes an organisation profitable within the cost structure of its
resources. The scale of an organisation’s resources, level of investment and the frequency of
asset turnover to realise acceptable returns are an outcome of the profit formula (Christensen and
Johnson 2009). The profit formula for BMW is a reflection of the transformation of the
organisations’ resources and processes to achieve sustainable performance and leaner business
operations across the businesses and the three brands of BMW, Mini and Rolls-Royce. For
instance, EfficientDynamics with a focus on improved fuel efficiency, carbon dioxide emissions
and the use of lightweight material in carbon fibre are some resources that are contributing to the
profitability of the BMW business. Furthermore, BMW’s sustainable and stable performance in a
period of market fluctuations have been offset with a focus on maintaining global balance and
reinforcing the premium brand name and image as part of the profit formula.

Crafting a Business Model
The strength of a business model is like a story of a company which focuses on how the pieces of
the business fit together with its strategy and describes how the firm differentiates itself across
industries (Magretta 2002). To build a business model, a set of attributes should be well defined
and distinguished from one another. BMW implemented Strategy Number One with four main
attributes – profitability, customer, growth and future – which were interrelated on any
significant business event or activity.

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Four characteristics served as a guide (Scott 1981) to develop BMW’s business model as
illustrated in Figure 7:
 Intuitively sensible - captures the common sense of what a business model means by
grouping together businesses that seem similar in their business models, and separating
businesses that seem different which leads to a deeper level of understanding on how the
activities create value.
 Comprehensive - a systematic way of classifying all businesses, or any other subsets of the
company.
 Clearly defined - define systematic rules to determine the company business model in a way
that does not depend on highly subjective judgment. The rule of thumb is to classify the same
company in the same way, if given the same information.
 Conceptually elegant – it is subjective with the concept of simple and self-explanatory.

Figure 7 BMW Business Model and SCA

(Source: Based on Scott 1981)

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Strategic Change
Business transformation is a change management strategy aiming to align people, process and
technology initiatives of a company more closely with its business strategy and vision. As
organisational environments exert pressure for change, organisations must adjust to survive and
prosper. Due to the rapidly changing work environment, economy and society, all companies are
being challenged to remain competitive in an environment. This implied to BMW, that buying
Rover was part of their strategy to remain competitive. However, this moved backfired and
caused the company into a recession and incurred high financial losses as a result of the
acquisition. With the accumulating debt burden and the failure to invigorate the Rover brand,
BMW realised that there was a sense of urgency to turnaround the company. In 1999 to 2000,
BMW replaced Pischetsrieder with Milberg and subsequently sold Rover which marked the
beginning of a new era in BMW.

Kotter (1996) suggests leadership behaviour evidently influences the outcomes of organisational
change efforts. The change process was driven by BMW chairmen Milberg and Panke, where
both leaders’ vision was to position BMW as the premium brand in the automobile market. As a
visionary leader that was able to see the future of the company and inspire others by sharing their
vision, both leaders have driven the change in BMW. As a result, BMW became the premium
market leader in the automobile industry within six years after selling Rover. Milberg now sits in
the BMW Supervisory Board and continues to select new leaders which are aligned to BMW’s
vision.

BMW has gone through a series of phases and time in order to be successful in the change.
Kotter (1996) have listed eight steps of transformation and change process, where bypassing
steps will create the illusion of speed that will not produce a satisfying result. Table 6 illustrates
the Kotter’s framework in relation to the BMW case study.

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Table 6 Kotter’s 8-Steps Framework

Kotter’s 8 Steps Application to BMW
1. Establishing a  BMW expected to lose £700 million in 1998 and will only begin to see profit in 2002.
sense urgency  Reitzle and his new team revealed the core operational problems at Rover in the
Mckinsey & Co. report (refer to Exhibit 2).
 The accumulating burden at Rover was the tipping point for BMW which realised that
there wass an urgency to sell Rover and realign BMW back to its core business.
2. Forming a  The hiring of Joachim Milberg in Feb 1998 as chairman of BMW.
guiding  New management team including Helmut Panke as CFO, Hagen Luderiz as Strategy
coalition Chief, assigned to assist Milberg in turning BMW around.
3. Developing  Milberg and Panke’s vision for BMW was to become the premium brand in the market
visions and by concentrating only on the premium segments of the automobile market.
strategies  Created a demanding product and market offensive in the premium segments, ensuring
that the brand was represented in all relevant parts of the market.
 BMW, MINI and Rolls-Royce formed the BMW brand portfolio.
4. Communicating  Milberg and Panke through the use of press releases and annual report communicated
the visions and BMW’s vision and strategies.
strategies
5. Empowering  Milberg and Panke’s corporate culture and leadership created a new BMW era that
employees further strengthened its core value as the premium brand in the market since the 1970s.
 Rover was the biggest obstacle for BMW.
 Three significant members of BMW’s management board resigned due to the
differences of opinions about the strategy proposed by Milberg and Panke.
 Panke 4 P’s for an effective organisation.
6. Generating  Keeping the MINI brand as part of its brand portfolio to enter the compact car market.
short-term wins  The acquisition of Rolls-Royce in 1998 that enabled BMW to secure the high end
market of the BMW portfolio.
 Milberg’s appointment could also be seen as generating a short term win.
 BMW saw a 400% increase in profit in 2002 even though the economy was down.
 The launch of the new 7 Series and Z4 in 2002 and 2003 respectively marked the start
of a new era at BMW, which reflected how big and broad the BMW brand could be.
 BMW was awarded numerous international awards, such as the global Engine of the
Year for two consecutive years.
7. Consolidating  The Brand Academy established in 2002 promoted brand orientation amongst its staff
change on the brilliance and fascination of the three premium brands. Brand Academy today is
called Training Academy.
 In January 2004, BMW appointed three separate brand managers for each of their
brand and marketing functions was centralised under one leadership.
 Entered the Chinese market in May 2004 through a joint venture was a strategic
positioning for BMW to expand its distribution network and to meet China’s future
demand.
8. Anchoring the  Although the implemented change was successful, complacency had to be prevented
change as change was an ongoing process. Strategy Number One was introduced by Reithofer
to continue to improve and bring BMW forward.
 The development of Strategy Number One was based on their previous success as a
premium brand and continued to sustain BMW’s leadership in the premium product.
 Strategy Number One had a long-term vision up to 2020 which represented the
company’s dynamic changes to keep up with the changing environment.
(Source: Based on Kotter 1996)

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McKinsey’s 7S Model

McKinsey’s 7S model is used to highlight the different areas impacting the internal strategic
options and decisions. This model was used to analyse the strategic implementation based on the
interrelationship between the seven key factors that contributed to BMW’s organisational
effectiveness (refer to Table 7 and Figure 8).

Table 7 BMW 7S Model

Elements Application to BMW
Structure  BMW’s structure consisted of a board of management and the three premium
brand (SBUs) under BMW’s brand portfolio: BMW, Mini, Rolls-Royce.
 A decentralised structure where headquarter is in Munich but branches placed all
over the world were responsible of their own activities.
Strategy  Strategy Number One was BMW’s core strategy and had a short term goal in
2012 and a long-term goal in 2020. It was divided into the four pillars. Strategy
Number One not only involved increasing profitability and reducing costs but
also focused on its customers and technology.
Systems  As a premium brand, BMW had the technical system advantage in the
organisation. This enabled BMW to produce high quality automobiles that lived
up to the expectations of customers’ demands and standards.
Style  BMW had a style of leading in a regal and ruthless yet very smart way. This was
proven through the leadership of Milberg and Panke. The appointment of
Reithofer as BMW Chairman in 2007 saw a similar leadership style to Milberg
and Panke.
Staff  Part of Strategy Number One’s goal was for BMW’s employees to be the major
priority and the most valuable assets for the company. This was evident because
the combination of skills possessed by employees enabled BMW to retain and
hire the best possible employee.
Skill  Apart from the existing skill sets possessed by the employees in the
organisation, BMW’s Training Academy aimed to further develop and cultivate
new skills.
Shared Values  BMW’s shared values revolved around being the premium market leader in the
world which included: high quality standards, customer focus, continuous
improvements and sustainability. These values became the corporate culture and
were shared amongst all employees within the organisation.
(Source: Based on Waterman, Peter & Phillips 1980)

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Figure 8 Interrelationship between BMW’s 7S

(Source: Based on Waterman, Peter & Phillips 1980)

Recommendations
The analysis of BMW according to the three strategic management themes of strategic choice,
business model and strategy change have explained how the organisation has maintained its
position as the market leader in the premium automobile segment. However, in order to maintain
long-term sustainability to 2020, the following recommendations have been proposed:

Brand Identity
BMW needs to continue focusing on its differentiation focus strategy in the premium segment to
maintain its prestige brand identity and momentum through engaging and communicating with
consumers. BMW can do so by investing in market research and understanding consumer
preferences and behaviours, which will factor into the new types of models, products and
services offered. Furthermore, the education of consumers on the benefits of sustainable vehicles

Page 38


should explain important factors such as cost savings, fuel efficiency and safety. The integration
of these events should help improve BMW’s brand equity value.

Structure
BMW should continue to build and develop its business model through new types of partnerships
and collaborations which are crucial to the ever changing automobile industry. This could
include industry collaboration on electricity network, cyber security and communications which
share technology and innovations for producing small engines based on low emission
technologies. Another strategy is to increase interaction with governments and regulators where
collaboration on projects such as electric vehicles, which requires high capital investments to
build and maintain the infrastructure, can be offset with governments’ subsidies and incentives.

Innovation
It is vital for BMW to continue its business model with innovation through rolling out new
automobile models and refreshing the vehicle life cycle. Product innovation can be accomplished
with improvements in the efficiency of internal combustion engines, development of low
emission technologies and lightweight materials to reduce overall energy consumption. Another
innovation can be implementing programs that improve efficiency in production and
manufacturing that focus on cost savings and reducing environmental impacts through lean
manufacturing.

Talent Management

BMW should continue its focus on strategy change within its corporate culture. BMW’s
employees are the most valuable asset for the company and workforce diversity is a key factor
for future success as the company aims for social diversity to ensure future competitiveness. This
can be accomplished with investment in training targeting right skills and mindsets of key
managers and future leaders so that they can effectively manage the change toward a sustainable
automotive industry. Another strategy is to attract new highly educated talent to the company
which is crucial for BMW to transfer knowledge and continuing innovating vehicles and new
production methods. BMW could collaborate with top universities in Asia, Europe and the US on
an engineering and innovation program built around mobility, electric vehicles and transportation.

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Conclusion
The BMW Group is one of the most successful automobile manufacturers in the world with the
three brands of BMW, MINI and Rolls-Royce and has continued to hold onto its market leader
position and brand identity in the premium segment. This case study and analysis showed that
BMW has had a very interesting history of strategy as displayed through the themes of strategic
choice, strategy change and building a business model. The failure of the organisation was in the
purchase of Rover to move into the mass market segment, however the organisation made a
pivotal change in leadership through Joachim Milberg and Helmut Panke to focus on premium
brand strategy, which had been one of the cornerstones of its success. In an effort to maintain its
position as market leader, the company foresaw signs that could impact their long-term
sustainability and introduced a new strategic re-alignment called Strategy Number One that
contained the four pillars of growth, customers, profitability and future. The focus on new
models with improved fuel efficiency and lightweight material, the importance of emerging
markets in India and China, the introduction of new technologies in accident control and safety
and the financial hedging to maintain a global balance of production facilities worldwide were all
strategies that have positioned BMW to remain market leader in the premium . The future is
bright for BMW, but the challenges will be if the organisation can remain competitive, maintain
its brand identity and accomplish its vision and objectives to 2020.

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Exhibits

Exhibit 1 – Key Dates in BMW’s History from 1916–1990
Decade Key Dates
1910s 1916: The company was founded as an aero-engine manufacturer in Munich.
1917: The Rapp Motor Company was renamed BMW.
1920s 1928: Bought the car factory in Eisenach/Thuringia and with it license to build a smaller car called the
Dixi.
1929: BMW’s first car, the Dixi, was produced.
1950s 1951: Produced its first post-war car, the 501. It went to production the following year but was a
financial failure.
1955: The R50 and R60 models were the new BMW motorcycle generation with full swinging arm
suspension. Production of small cars began with the Isetta.
1960s 1965: Ceased building aircraft engines from the next 25 years.
1966: Launched a new car series with the two-door version of the 1600, which later formed the basis of
the 3 Series.
1967: Purchased Hans Glas GmbH in Dingolfing.
1970s 1970: Second car factory was built in Dingolfing.
1972: The first 5 Series was launched and BMW Motorsport GmbH was founded. As assembly plant in
South Africa was built.
1973: First European subsidiary was opened in France and BMW was founded in North America.
1975: The first 3 Series was launched.
1977: The first 7 Series was launched and construction of the new motorcycle production facility in
Berlin started.
1979: Developed the first digital engine electronics, supplied the first armoured BMW and began R&D
on hydrogen engines. The M1 was launched.
1980s 1980: ABS went into production and the development of the Formula One engine began. BMW
motorcycles won the Paris to Dakar rally.
1981: BMW was the first European car importer to establish a subsidiary in Japan.
1983: The new Berlin motorcycle factory was opened and the K Series was launched. The company
incorporated diesel engines for cars in its range. In Geneva, BMW demanded lead-free petrol in
Europe.
1984: BMW Technik GmbH was founded. Computers and robots revolutionized work in planning and
production.
1985: The BMW Research and Engineering Centre was completed. The BMW 325 iX was the first
BMW four-wheel drive.
1986: BMW celebrated its centenary and celebrated its most successful year in the US with 96,800
registrations.
1987: Developed electronic diesel injection system, implemented on-board diagnostic, introduced the
electronic accelerator pedal and bought a second test centre in southern France.
1988: The Z1 roadster was launched. The K100 was the only motorcycle in the world to have ABS. A
BMW repair centre was opened in Moscow and an import centre in Japan.
1989: Produced half a million cars and had a turnover of DM 20.000 million. BMW bought the land
for a seventh production facility in Wackersdorf.
1990s 1990: BMW returned to its root in aircraft-engine manufacturing with the foundation of BMW Rolls
Royce GmbH.
(Source: Company Report of Bayerische Motoren Werke AG – BMW, Mint Global, 2010)

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Exhibit 2 – McKinsey & Co Report: Core Operational Problems at
Rover
1. Rover had shown a net profit in 1994 only by manipulating the balance sheet.
2. Absenteeism at Rover plants ran 6 percent, compared with an industry benchmark of 1 percent.
3. Downtime (time that the plant was not producing vehicles) at Longbridge was more than 15 percent, compared
with an industry benchmark of 5 percent.
4. Rework time (the time workers spend fixing assembly-line errors by hand) was four times the industry standard.
5. While Land Rover as a division earned $171 million in the year examined by McKinsey, Rover overall lost $22
million. The parts business declared a $52 million profit—a shame since the parts, which were bought by Rover,
not by dealers or parts stores, mainly went to satisfy warranty claims. Spare-parts manufacturing, often a
handsome profit centre for automakers, was outsourced by Rover, so it earned nothing from the replacement
parts purchased by mechanics and owners at parts stores. Given Rover’s quality problems, a spare-parts
business would have been lucrative.
6. All Rover vehicles were far below the industry quality average, as measured by J.D. Power and Associates.
7. Longbridge was a whopping 62 percent less productive than industry leaders’ factories.
8. Nearly one-third of Rover’s production remained in inventory as unsold vehicles—twice the desirable amount.
A car company carries unsold inventory as assets on its books, but Rover’s inventory was overvalued by
hundreds of millions of British pounds because of falling prices at the discount-driven dealerships.
9. Rover had given, sold, or leased at a loss to company employees and their families more than 31,000 vehicles,
compared with just 5,000 provided to BMW executives under less generous terms over the same period. And
Rover was hardly a global player in BMW’s league. Amazingly, 18 percent of Rover “sales” were to their own
employees and family members at a loss! Top executives were allowed to acquire up to five cars each under this
arrangement.
10. Owner loyalty (repurchase) for Land Rover and Mini was average in the United Kingdom, but below average in
every other market in the world; owner loyalty was almost nonexistent in Germany, Spain, and France.
11. BMW earned a return on sales of 8 percent, compared with an industry average of around 4 percent. Rover’s
return on sales was negative. The company had been operating on negative cash flow, consuming 200 million
British pounds per year in debt. Yet Rover’s own internal documents anticipated a robust 14.6 percent gain in
revenues from 1993 to 1995—coupled with a 17 percent cost increase. Yes, Rover actually planned for cost
increases to run faster than revenue growth, an imbalance not usually built into a company’s plans up front!
12. In all the years since the Mini was launched in 1959, the car had never been profitable. Despite amortizing the
cost of tooling and development over more than 30 years, Mini lost money every year. In the auto industry, this
is a remarkable feat of ineptitude. Most vehicles have earned back their investment by the third year of
production.

(Source: Driven: Inside BMW, the most admired car company in the world, 2004)

Page 42

BMW: A Strategy built on Premium Brands

BMW: A Strategy built on Premium Brands

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