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BMW: A Strategy built on Premium Brands

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Case Study on BMW for Strategic Management MBA Unit at the University of Western Australia

Case Study on BMW for Strategic Management MBA Unit at the University of Western Australia

Published by Tilde University Press, 2012

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    BMW:  A Strategy built on Premium Brands BMW: A Strategy built on Premium Brands Document Transcript

    • BMW: Redefining Premium Brand IdentityBMW: Redefining Premium Brand IdentityMGMT 8700 Strategic ManagementMBA Trimester 2, 2011Patrick Gallagher 20805458Sion Karta 20182345Mark Lim 10468237Wei Zhe Poh 20605321Jackie Tran 20597931Janifer Yap 20841177
    • BMW: Redefining Premium Brand IdentityTable of ContentsList of Tables and Figures............................................................................................................... 4BMW 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 ............................................................................................................... 14Strategy 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 ...................................................................................................................... 24Case 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 Page 2
    • BMW: Redefining Premium Brand Identity 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................................................................................................................................. 40Exhibits ......................................................................................................................................... 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 .................................................................................... 51References ......................................................................................Error! Bookmark not defined. Page 3
    • BMW: Redefining Premium Brand IdentityList of Tables and FiguresTable 1 Brief summary of BMW’s brand movements from 2001 to 2006 p. 12Figure 1 BMW’s strategic realignment p. 15Table 2 Events and initiatives of the four-pillar strategy from 2008 to 2010. p. 16Figure 2 BMW’s four-pillar strategy p. 17Figure 3 Drivers of BMW’s growth strategy p. 18Table 3 Four main types of accidents BMW identified and solutions provided p. 21Table 4 BMW Global Brand Valuation p. 24Figure 4 Porter’s Generic Strategies p. 27Figure 5 BMW Sustainable Competitive Advantage Profile p. 29Table 5 BMW VIRO Framework p. 31Figure 6 BMW Value Chain p. 32Figure 7 BMW Business Model and SCA p. 34Table 6 Kotter’s 8-Steps Framework p. 36Table 7 BMW 7S Model p. 37Figure 8 Interrelationship between BMW’s 7S p. 38 Page 4
    • BMW: Redefining Premium Brand Identity BMW Case StudyIntroductionThe BMW Group is considered one of the most successful companies in the world, primarilymanufacturing automobiles under its three brands – BMW, MINI and Rolls-Royce. BMWcontinues to be a world class performer in luxury automobiles, with growth across all regionsaccounting 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’shistory. With 24 production facilities in 13 countries and a global sales network spanning morethan 140 countries, BMW was well positioned as the worldwide automobile markets continue toimprove 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 astrategy of ecological and social sustainability throughout the value chain, comprehensiveproduct responsibility and a clear commitment to resource conservation. A strategy of promotinghigh-performing engines, high-recognition branding and high-profile racing has also beenadopted in the early stages of BMW’s life, which is still evident in the company’s culture to thisday.With the premium brand strategy focus as the cornerstone of its long-term sustainability, BMWhad to ensure that its business model, choices and change fit its strategy. As the companycontinued 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? Page 5
    • BMW: Redefining Premium Brand IdentityCompany HistoryThe Bayerische Motoren Werke (BMW) Group was established in 1916 as an aero-enginemanufacturing company, before post-World War I restrictions imposed on German aircraftconstruction 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, BMWcontinued 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 lineexpanded, 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 tobankruptcy in the 1950s and was faced with several takeover bids. As a result, Herbert Quandt, apowerful 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 itscapabilities for producing high-performance saloon cars. Using BMW’s sophisticated technicalskills, a new segment in the car market emerged and this has since been BMW’s model tosuccess.BMW continued to launch new models and received accolades in the automobile industry in thedecades the followed. Through Quandt, BMW had established itself as a company with globalimportance. BMW continued to develop its brand and in 1975, it introduced the ‘UltimateDriving 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. Page 6
    • BMW: Redefining Premium Brand IdentityBrand 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 marketstarted to emerge. In 1993, BMW appointed manufacturing chief, Dr Bernd Pischetsrieder, asChairman of the Board. Pischetsrieder brought with him a new vision for the company’s futureof expanding BMW’s market share by widening its product base to become a full rangemanufacturer, from small cars to SUV vehicles. This strategy required an acquisition of anotherbrand and in January 1994, BMW bought the Rover Group (Rover) for £1.7 billion whichincluded the MINI and the Land Rover brands. The deal included a 20% buyout stake ofHonda’s share of Rover. Honda’s buyout enabled BMW to better control its design and thefuture of its brand image. BMW aimed to revive the Rover brand image and move it to thepremium 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 billionthrough capital investment and restructuring. Furthermore, he estimated the BMW-Roveracquisition would take six years before it could generate profit. The estimated cost for Rover’sturnaround and Pichetsrieder’s vision marked the beginning of the company’s compoundedproblems, 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’shands-off approach to Rover’s existing management, led to the decline in workforce productivitywell below the industry average. Whilst BMW sales were up 20,000 units worldwide and Roversales were up 16,000 units in 1995, net income declined. The under utilisation of the outdatedLongbridge plant further compounded the problems at BMW. Due to an agreement madebetween the British government to keep the plant operational and avoid any lay-offs, the plantcontinued to exclusively produce Rover models, although the plant could be better utilised byproducing some BMW models. Page 7
    • BMW: Redefining Premium Brand IdentityIn 1996, BMW’s product development chief, Dr Wolfgang Reitzle, was appointed Chairman ofRover despite his earlier opposition of the acquisition. He had strongly advocated closing ordisposing of Rover as soon as the deal was consummated in 1994. Reitzle and his new teamrevealed the core operational problems at Rover in the Mckinsey & Co. report as outlined inExhibit 2.The rise of the British pound in 1997 increased BMW’s production cost, further adding pressureto its declining profits due to the decrease in sales. The rise of the pound also meant revenuefrom vehicles sold abroad was significantly reduced. In 1998, Rover sales further declined withthe cheap imports of Volkswagens, Peugeots, Hondas and Nissans. The competitor dealershipsspread throughout the UK whilst Rover sales continued to suffer, because BMW could notdiscount enough to offset the currency disadvantage. In the same year, BMW’s losses wereestimated to have reached £700 million and profit was expected to be generated in 2002 at theearliest.In 1998, Pischetsrieder purchased the Rolls-Royce brand from Vickers for £40 million and wonthe rights to manufacture the vehicle under the Rolls Royce brand from 2003 onwards. DespiteBMW’s ongoing problems with Rover, the Rolls-Royce acquisition was celebrated as a successto secure the high end market of the BMW portfolio. In October of the same year, BMWrequested aid funding from the British government or faced the possibility of shutting down itsLongbridge plant. Afraid of the worsening economic situations and rising unemployment, theBritish 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 hascompounded the problems BMW faced and losses of up to £700 million in 1998 were the tippingpoint for Quandt. Using his power as a majority shareholder, Quandt replaced Pischetsriederwith Joachim Milberg as BMW’s new CEO in February 1998. Page 8
    • BMW: Redefining Premium Brand IdentityThe Turnover (1998–2006)Milberg’s Premium Strategy BrandPrior to joining BMW, Milberg was an engineering professor at Munich’s technical universityand a manufacturing and productions expert. Through his career, he developed connections withseveral automakers and parts suppliers in Europe and North America. In 1993, Milberg wasappointed BMW’s head of production and in February 1999, Milberg succeeded the outgoingPischetsrieder as BMW’s CEO.A new management team came onboard after Milberg’s succession, including Helmut Panke asChief Financial Officer and Hagen Luderiz as Strategy Chief. The team was primarily assignedto assist Milberg in turning BMW around. A year later, three significant members of BMW’smanagement board resigned due to the differences of opinions about the strategy proposed byMilberg 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 byselling the Land Rover brand to Ford. BMW kept the MINI brand as part of its strategy to enterthe compact car market. The disposal of Rover and the appointment of Milberg as the new CEOsignalled a new era for BMW.After the sale of Rover, Milberg set four strategic goals. Firstly, a new small BMW model, the 1Series, 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 thepopularity of its X5 model in the US and the potential to expand its product range to fill in theSUV market. Thirdly, BMW was to employ around 10,000 workers in three factories andproduction of the new MINI was to be relocated from the Longbridge factory in Birmingham to amodernised plant at Cowley in Oxford. Lastly, preparation was to be undertaken for the complete Page 9
    • BMW: Redefining Premium Brand Identitytakeover of the Rolls-Royce brand and the development of a new factory and head office forRolls-Royce in Britain.The goals introduced by Milberg were part of a new strategic plan to take the BMW brand backto its roots, by concentrating only on the premium market segment. Milberg’s vision of thepremium 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 ofmore than 400% in 2002 compared to 1999, despite the economic downturn in both Germanyand the US (refer to Exhibit 3). Milberg was credited for successfully extracting Rover fromBMW.Helmut Panke, Milberg’s SuccessorIn 2002, Milberg announced he will step down as CEO and Panke, who was responsible forBMW’s financial affairs since 1999, was to succeed him. Panke was the architect of BMW’srapid financial restructuring following the divestiture of Rover in 2000. Milberg saw Panke asthe ideal replacement due to his similar traits in leadership, but with a more natural and outwardleadership qualities.Milberg’s decision to retire before his contract expired was mainly due to his health and dislikeof public attention. He felt his decision of an early resignation was a strategic decision for BMWto allow the company to continue to grow, whilst building on one of the most successful periodin BMW’s history. As one BMW official said, “Now that BMW is in a very strong position, it is Page 10
    • BMW: Redefining Premium Brand Identitythe best time to initiate this change. This way, we can avoid all the speculation about hissuccessor. 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 tobuild 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 complementedthe core BMW product line. The Rolls-Royce brand defined a unique stylish luxury in the largepassenger saloon market whilst the MINI was a brand that would be the undisputed premiumchoice in the compact car market. Panke believed these three brands were the essence of brandvalue and brand management at BMW.Panke’s organisational leadership was described to be regal and ruthless yet very smart, whichwas similar to that of Milberg. Panke was comfortable in his public role and often found himselfconducting public speeches. Like all previous CEOs of BMW who brought in their ownleadership style to the company, Panke believed in the four Ps in an effective organization:1. The right people: passionate of the job2. Premium positioning: from making cars to making profit3. Process driven: not personality driven4. Panke: leadershipAs Panke said, “I would say: focus on understanding who you are, what you stand for. What arethe values you have in the organisation? What are the values you believe in for the products andservices that you sell and provide? BMW builds high-performance products because BMW is ahigh-performance organization.” Panke did not want people to follow him but he wanted peopleto follow his program and processes. The new corporate culture under the leadership of Milbergand Panke had created a new era for BMW that further strengthened its core value as thepremium car brand in the market since the 1970s. Page 11
    • BMW: Redefining Premium Brand IdentityRevitalizing the Brand: BMW, MINI & Rolls-RoyceBMW repositioned itself in the premium market segment based on Milberg’s premium brandstrategy. Product expansion and market offences were performed on all three brands to ensurethe brands were well represented, as shown in Table 1. The launch of the new 7 Series and Z4 in2002 and 2003 respectively marked the start of a new era at BMW, which reflected how big andbroad 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 ofeach brand. In January 2004, BMW appointed separate brand managers for each of the threebrands, 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 itsstaff on the brilliance and fascination of the three premium brands. The academy was unique andthe only one of its kind in the automobile industry. The Brand Academy aimed to educateBMW’s staff and partners to better understand the different identities of the brands and identifythe features that distinguished these brands from their competitors. By 2005, over half of BMW’smanagement team had passed through the academy. Page 12
    • BMW: Redefining Premium Brand IdentityIn May 2004, BMW entered the Chinese market through its joint venture with Brilliance ChinaAutomotive Holdings Limited. The new Shenyang manufacturing plant was expected to producearound 30,000 units of both the BMW 3 Series and 5 Series. The joint venture was a strategicpositioning 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 itsdriving 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 andinnovation 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 anddevelopment continued to be an integral part of BMW’s operation, allocating an R&D expenseof €3.2 million in 2006, 3% higher than in the previous year. In September 2006, Dr NorbertReithofer, then member of the Board of Management responsible for production, succeededPanke 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 byrestructuring the organisation following the failure of the Rover acquisition. BMW had sincedeveloped 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 premiumautomobiles in terms of retail, backed by the largest product and market initiative in its corporatehistory and recognised as Germany’s most attractive employer.Faced with an ever-changing environment and with its product life cycle coming to an end (referto Exhibit 4), BMW recognised the need for a new strategic initiative required to maintain itsleadership in the premium market segment. BMW started focusing towards the concept of Page 13
    • BMW: Redefining Premium Brand Identitysustainable 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 ofthe Hydrogen 7 signalled a milestone for BMW as a technology and innovation leader in theautomobile industry. By 2006, BMW had gained a clear lead over its competitors in reducingcarbon dioxide emissions through its EfficientDynamics initiative. Furthermore, BMW had beenranked first by the Dow Jones Sustainability Index within the automotive industry for threeconsecutive 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 astrategic realignment became evident to align the organisational structure with its strategy. On 27September 2007, Reithofer announced the implementation of a fundamental strategicrealignment 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 wasstructured with a vision to the year 2020. Strategy Number One was intended to be theframework for all of BMW’s future decisions and had clearly defined what the organisationintended to do as well as not to do in the future. Through this strategy, BMW aimed to be theleading provider of premium products and premium services for individual mobility. AsReithofer 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 thenew strategy as shown in Figure 1. As a result, BMW appointed two new members to the Boardof Management responsible for the organisation’s structural change and two new divisions werecreated to help the company focus on its defined objectives. The two new divisions were: Page 14
    • BMW: Redefining Premium Brand Identity 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) – toensure the need for internal implementation. As Reithofer said, “Strategy implementationrequires a high-performance organisation capable of handling the complexity of our activitiesand generating growth”. The SIC, personally headed by Reithofer, was responsible for thestrategy’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 efficiencytargets. Figure 6 BMW’s strategic realignment (Source: BMW Group Investor Presentation, March 2010) Page 15
    • BMW: Redefining Premium Brand IdentityStrategy Number OneStrategy Number One focused on the four pillars of growth, future, access to technologies andcustomers and profitability, as depicted in Figure 2. Table 2 provides the different events andinitiatives of the four pillars from 2008 to 2010. The strategy’s systematic implementation since2007 put the organisation in a better position than its competitors in the onset of the GFC. AsReithofer said, “This strategy was introduced well before the financial and economic crisis and itlaid 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 2010Growth Service that spans a Developing a growth market From the first BMW 5 Series to vehicle’s lifetime an impressive global familyShaping the Project i: Reinventing Creating individual mobility of A high-tech material forFuture urban mobility the future tomorrow’s mobilityAccess to Integrate safety Preparing for the future by Intelligent communication forTechnology and thinking ahead individual mobilityCustomersProfitability 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 paramountimportance. Whilst BMW recognised their strong position in the market, the company believedit could only increase its value by changing its strategy. The rationale behind Strategy NumberOne include the organisation’s disproportionally low profitability development, the threat of itscompetitive position relative to the automobile industry, and the need to improve profitabilityand capital efficiency of the entire company.As the strategy’s full potential could only be viewed in the medium to long-term, BMW set ashort-term target for 2012 (refer to Exhibit 5), by which the company aimed to have achievedsignificant improvements in profitability and capital efficiency. Some of the targets BMW aimedto achieve by 2012 are sales of 1.8 million units of automobile vehicles, 50% increase inmotorcycle retail units and a return on capital of 26%, which will result in an 8-10% EBIT-basedreturn on sales in the automotive segment. Page 16
    • BMW: Redefining Premium Brand IdentityThrough 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 andindividual mobility. Figure 7 BMW’s four-pillar strategy (Source: BMW Annual Report 2007) Page 17
    • BMW: Redefining Premium Brand IdentityThe Four Pillars of Strategy Number One1. GrowthBMW adopted the view of ‘customer service = growth driver’ as the underlying principle togrow its market. In 2008, the company had accumulated more than 14 million BMWautomobiles on the road, which it recognised as 14 million potential service customers. For thisreason, BMW launched global initiatives to systematically exploit the huge sales potential of theservice and parts business, enabling the organisation to reach out to an entirely new group ofcustomers. As a result, customer focus became the heart of all of BMW’s sales and marketingactivities.Greater customer orientation was especially important for customer support, which was one ofthe focal points of BMW’s strategic efforts. In the organisation’s view, the quality of service wasone of the major criteria customers took into account when purchasing a new vehicle. BMWtherefore perceived growth in the market was possible when it provided ‘service that spanned avehicle’s lifetime’. Figure 3 illustrates the two drivers of BMW’s growth – product and service. Figure 8 Drivers of BMW’s growth strategy (Source: BMW Annual Report 2007) Page 18
    • BMW: Redefining Premium Brand IdentityBMW focused on developing its growth market by continuously pursuing targeted regionalexpansion strategy particularly in parts of Asia (refer to Exhibit 6). In early 2009, theorganisation 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 waslarger than the entire population of Germany. The Indians’ desire for superior mobility wasattributed to the changes in their lifestyle preference, triggered by the average income increasingat a rate of 14% per annum. The enormous momentum led BMW to double its Indian sales to 1.8million within four years. BMW is currently the market leader in India’s steadily growingpremium segment and continues to have a strong presence in the country. Its New Delhiheadquarter included sales and international purchasing offices, and its national parts centrelocated 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 projectsresulted in the company’s outperformance within the emerging markets in 2010. The premiummarket segment is expected to increase to 8.2 million units per annum by 2020 which would befuelled by the growth in the emerging markets (refer to Exhibits 7 and 8). In order to meet thedemands of the emerging markets, BMW continued to expand its distribution network to theBRIC markets, with a total of 100 new dealerships opened in 2010. BMW’s worldwidedistribution network consisted of around 3,100 BMW, 1,300 MINI and 80 Rolls-Roycedealerships. Through BMW’s customer oriented approach, it continued to open new markets by‘winning people’s hearts’.2. Shaping the FutureBMW’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 theglobal environment, such as global warming and depletion of fossil fuel resources, BMWinitiated a challenge to help guarantee the future individual mobility. BMW considered thechanging global environment as an opportunity for growth and used individual mobility as itsdriver for developing contemporary solutions. BMW believed the development of contemporarysolution was a race and the company that came up with the best solution developed a sustainablecompetitive advantage. To achieve this vision, BMW aimed to constantly develop new andentirely different concepts. Page 19
    • BMW: Redefining Premium Brand IdentityIn 2008, BMW rolled out its ‘Project i’ and its mission was nothing less than to completelyrethink mobility for people who lived in the world’s metropolitan areas – reinventing urbanmobility. The project included a comprehensive vision to develop cars for the future whichincluded everything from vehicle concepts to production structures through to branding andservice 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 asfuel-saving technologies, global warming, and individual mobility. BMW believed the MINI Ewas a viable solution to electric mobility, which was made into reality in 2008. From field trialsperformed in 2009, BMW proved that electronic mobility has the potential to become a new andviable form of transportation (refer to Exhibit 9).Confident that electronic mobility would be the new form of transportation in the future, BMWbegan to concentrate its resources on the materials for its future vehicles. To ensure sustainablemobility, vehicles would be made out of carbon-fibre reinforced plastic (CFRP). This materialallowed vehicles to be much lighter without compromising safety as CFRP is more robust thansteel but less than half its weight. CFRP was resistant but highly malleable, versatile andrelatively easy to work with. A lighter vehicle used less energy hence sustaining the concept ofelectronic mobility much longer. Through the use of CFRP, BMW was able to adopt a newradical approach, explored unique design concepts and realised a new kind of car building, all ofwhich were important in creating a contemporary solution.3. Access to Technologies and CustomersBMW’s needs to access technologies and customers required the organisation to considercustomer benefits in all its decisions. To achieve sustainable competitive advantages, BMWrealised the importance of collaborations and networks established within the automobileindustry as well as differentiation through brand-specific strengths. It was crucial for BMW toderive key technologies by maintaining the right balance between in-house production, suppliermanagement and collaborations. Furthermore, cooperation was important as the relationshipbetween the dealers and fleet service providers played a crucial role in the customers’ buyingprocess. Page 20
    • BMW: Redefining Premium Brand IdentityIn 2008, the strategy for its customers was to focus on integrated safety. BMW was the firstautomobile manufacturer worldwide to offer side head airbag as a standard feature on some if itsmodels back in 1997. In line with this, BMW developed a new concept of safety, with attentionto active safety, smart prevention and saving lives. Table 3 lists the four main types of accidentsBMW identified and the solutions it offered.Table 6 Four main types of accidents BMW identified and solutions providedAccidents SolutionsDriving 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 beenAccidents 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 animalsAccidents 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.(Source: BMW Annual Report 2008)In 2009, BMW shifted its strategy to EfficientDynamics which entailed winning new customersby acquiring more customer input. BMW’s aim was for more driving pleasure and loweremissions through future technologies of efficient and high-performance mobility by reducingfuel consumption and carbon dioxide emissions. In response, the BMW and MINI brandsoutperformed all other competitors in the premium segment and this unique position was earnedthrough EfficientDynamics technologies across the entire fleet, with more than 1.8 million BMWand MINI vehicles on the road. Furthermore, BMW engineers and designers from differentdisciplines 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 BMWEfficientDynamics to create a sustainable future.BMW provided intelligent communication for individual mobility in what was called the BMWConnectedDrive in 2010 and it had been considered the pacemaker for the automobile industry inthis field for many years. Through ConnectedDrive, BMW offered intelligent driver assistancesystems, such as extended emergency call function, Night Vision with pedestrian recognition, e- Page 21
    • BMW: Redefining Premium Brand Identitymail and Internet access and had expanded to link drivers, passengers, their vehicles and theworld around them even more closely. BMW had once again set the standard for intelligentnetworking between the driver, the vehicle and the world around them. After becoming the firstcarmaker which enabled the Internet, iPod and iPhone integration in its vehicles, BMW is nowcreating 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 engineseven more fuel-efficiently, for instance. ConnectedDrive was a fully comprehensive approachdesigned to maximise the benefits of seamlessly connecting the driver, the vehicle and the worldaround them.4. ProfitabilityStrategy Number One was to consistently align BMW to achieve profitability, earnings qualityand increase value over the long term, which were the decisive factors in everything that BMWdid. It was vital for BMW to make investing an attractive option and generate positive results asinvestors expected a premium return from investing in a premium manufacturer. Therefore,BMW concentrated on those business areas promising a return on investment that matched thepremium aspirations and continued to leverage its cooperative ventures in order to improve itsprofitability.One of the key themes learned from EfficientDynamics was ‘more output from less input’. Thislesson 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 atleast five percent a year. BMW intended to achieve economies of scale by establishingcollaborations in the areas of components, drive systems and modules. In 2007, BMW formed ajoint venture with PSA Peugeot Citroen to supply engines for the second-generation MINIs. Ithad always been one of BMW’s key strengths to make best use of project-based cooperation andcost efficient networks. The US had been the most important individual automobile market foryears and BMW largely depended on the development of currency exchange rates, mainlybetween the US dollar and the Euro.In 2008, profitability for BMW also meant the reduction in costs and saving of resources leadingto clean products. BMW systematically improved its resource efficiency throughout its global Page 22
    • BMW: Redefining Premium Brand Identityproduction network. The innovations implemented as part of the EfficientDynamics programcombined lower carbon dioxide emissions with optimised driving dynamics throughout themodel range. BMW had also established a systematic approach across its entire worldwideproduction 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 manageits resources at anytime. As a result, BMW managed to lower its emission consumption by morethan €36 million in 2008. As Herbert Höltschl, BMW’s corporate officer for sustainability andenvironmental protection said, “It is often possible to make extensive improvements just bycompletely rethinking established processes. Sometimes you even have to invest less to savemore: we profit from doing less.”The impact of the GFC in 2008 resulted in BMW’s shift to efficient capital investing in thefollowing 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 theBMW Group did”. As a result, BMW came through 2008 in relatively good shape and made asuccessful 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 sufficientliquidity. BMW also benefited from having a corporate financial structure with an internationalfocus through financing companies in Singapore, New York and in Europe, on global capitalmarkets around the clock. The key to BMW’s success was its profitability in its core businessand financial services business. This gave the company an advantage over its competitors due toits 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 marketfluctuations which consisted of having a global balance. BMW aimed to find a good balancebetween Europe, Asia and the Americans in business and sales activities to support long-termpositioning in an effort to become more flexible to market fluctuations by investing in the growthmarkets. In order to make the value creation process as independent as possible from market andexchange 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 wouldmatch its expected sales revenue to its cost structure to provide protection against exchange ratefluctuations (refer to Exhibit 12). Page 23
    • BMW: Redefining Premium Brand IdentityFuture ChallengesIn the first quarter of 2011, BMW continued to roll out its strategies with good performances andgrowth 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 growthworldwide helped to push first-quarter sales up 21.3%. BMW continues to implement newproduct 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 decreasedto a minimum value of $21.8 billion as a result of the GFC, which impacted the entireautomobile industry. The brand however rebounded as it maintained its position as the secondmost valuable automobile brand and increased its brand value 3% to $22.43 billion in 2011 whilebrand momentum increased to a rating of 8 which showed positive signs of the BMW brandmoving towards the future as shown in Table 4 and Exhibit 13.Table 4 BMW Global Brand ValuationBMW 2006 2007 2008 2009 2010 2011Brand Value ($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 30Continental Europe Rank 2 2 2 3 2 5Automobile Rank 2 2 2 2 1 2Brand Contribution (5 scale) 4 4 4 4 5 5Brand 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 currentlythe premium market leader in the automobile industry with Mercedes coming a close secondplace (refer to Exhibit 14).As BMW continues to redefine its premium brand identity as a leader in the premium automobilesegment, the company faces several challenges to retain its market position as competition in theinternational market from new and existing competitors intensify. What has BMW changed in itsstrategies 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 Page 24
    • BMW: Redefining Premium Brand Identityof a new corporate culture? BMW made a major decision with Strategy Number One in order tostay ahead of competition and achieve long-term sustainability. The biggest question movingforward from 2011 is, “Will Strategy Number One, as the new business model, be able to sustainBMW’s competitive advantage into the future?” Page 25
    • BMW: Redefining Premium Brand Identity Case Study AnalysisIntroductionBMW have maintained its reputation as the global market leader in the premium automobilesegment. The team’s logical choice to conduct its strategic analysis on BMW is due to thecompany’s long, innovative and interesting history coupled with continues momentum of theirbrand in the global landscape. The case study reviews the key events, activities and strategies ofBMW, starting with the failed Rover acquisition, to the company’s turnaround in 2000 and to theimplementation of Strategy Number One which became BMW’s guiding path for the future. Thethree strategic management themes of strategic choice, building a business model and strategicchange will be applied to examine the case study. The success of BMW as the global leader inautomobile market leader requires a meticulous examination of the strategic choices and strategicchanges made whilst also considering the impacts of a new business model for long-termsustainability.Strategic ChoiceChoosing a business strategy requires a focus in terms of an organisation’s objectives. Oncethese objectives have been determined, an organisation can move onto developing sustainablecompetitive advantages fitting those objectives. Therefore, it is important to consider the theoryof business which is how organisations perceive their business environment both internally andexternally. This involves analysing key assumptions of the environment, the specific mission ofthe organisation and the core competencies of the organisation (Drucker 2006). BMW has beenable prepare for the future by putting an emphasis towards understanding the global luxuryautomobile 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 andthe introduction of new models and new safety features annually has been a result ofunderstanding the environment and economic conditions and listening to their customers.Strategic choice refers to method of selecting one option for implementation by surveying theavailable options. If there are no decisions to be made, there can be minimal value in thinkingabout strategy at all. On the other hand, there will always be, in practice, limits on the range ofpossible choices (MacMillan and Tampoe 2000). Good strategic choices have to be challenging Page 26
    • BMW: Redefining Premium Brand Identityenough to keep ahead of competitors but they also have to be attainable. Strategic choices thatkeep alternatives open depends their success on uncertain events happening. The corporatehistory and strategies of BMW over the past 20 years have demonstrated many significantstrategic choices to remain competitive and future planning to remain sustainable in the premiumautomobile market. Milberg was responsible for BMW’s planning and implemented many of itsstrategic choices. Most recently, the tradition and vision has been continued by Reithofer withthe objective of selling 1.8 million vehicles by 2012.Michael Porter (1985) explains that the goal of strategy is to develop sustainable competitiveadvantages which are difficult for rivals to imitate and are constantly evolving in order to stayahead of the game. These include generic industry strategies of either pursuing low cost ordifferentiation targeting a broad or narrow market as shown in Figure 4. The company thatcarries out the strategy best will make the most profits (Kotler 2009).Figure 9 Porter’s Generic Strategies(Source: Porter 1985, modified by author)Cost LeadershipPorter’s generic strategy of cost leadership focuses on achieving sustainable leadership where theorganisation sets out to become the lowest cost provider of goods and services and wins a large Page 27
    • BMW: Redefining Premium Brand Identitymarket share. This strategy focuses on targeting the broad or mass market of many industrysegments leading to a cost advantage, depending on the structure of the industry. BMW hasnever been focused on a cost leadership strategy due to its history of a premium provider ofproducts and services in the premium automobile market, which is reflected in the company’sthree premium brands – BMW, Mini and Rolls-Royce. This is further reflected in the highmarket prices of its vehicles. Labour costs in Germany and the US, together with research anddevelopment costs reached €3 billion in 2010.DifferentiationIn a differentiation strategy, an organisation concentrates on achieving uniqueness and superiorperformance in important customer benefit areas and segments which is widely valued by thebuyers and the market resulting in a premium price. An organisation that can achieve and sustaindifferentiation will be an above-average performer in its industry if its price premium exceedsthe extra cost incurred in being unique from its competitors. BMW has a business strategy offocusing 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 asEfficientDynamics, Individual Mobility and Project i.Stuck in the MiddleAn organisation that engages in each of the generic strategies of cost leadership, differentiationand focus, but fail to achieve any of them is ‘stuck in the middle’ and possesses no competitiveadvantage. This is often explained by a trade-off between low cost and differentiation becauseaccomplishing different types of competitive advantages requires conflicting actions. Howeveran organisation that is ‘stuck in the middle’ is usually unwilling to make a choice about how tocompete thus resulting in poor financial performance. BMW’s acquisition of Rover in 1994 is aclassic example of conflicting strategies as it tried to implement a broad differentiation strategyin the mass market whilst trying to maintain a differentiation focus strategy in the premiummarket (illustrated in Figure 4). As a result of these conflicting strategies, the organisationalcultures and leadership styles in the UK and Germany clashed, which eventually led to thedisastrous result of Rover’s disposal at a loss of €3.2 billion in 2000. An organisation must Page 28
    • BMW: Redefining Premium Brand Identitychoose 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-Roycebrands was the way to the future (illustrated in Figure 4). This led the company to concentrate onthe premium market with its luxury automobiles in the small, mid-size and large segments.FocusOrganisations implement a focus strategy by selecting a segment or group of segments in anarrow 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 andattempts to exploit the special needs of buyers in certain segments. BMW saw an opportunity inthe niche small automobile market, which led to its strategic choice of holding onto the Minibrand in the failed Rover acquisition. Figure 5 illustrates BMW’s SCA profile which clearlysupports its differentiation focus strategy. The result of the SCA questionnaire is shown inExhibit 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) Page 29
    • BMW: Redefining Premium Brand IdentityBuilding a Business ModelCreating 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 abusiness or industry and boost synergy (Stockport 2011). As a result, the business modeltypically consists of four interacting, interdependent elements of value proposition, resources,processes and profit formula. These elements as a whole help create, delivery value and captureprofit for the organisation (Christensen and Johnson 2009).BMW’s new strategic re-alignment, Strategy Number One, introduced a new business modelfocused on growth, customers and technologies, profitability and the future to assist theorganisation on future decisions and long-term sustainability. The core business activities thatsupplemented BMW’s business model focused on the value proposition which drive resourcesand processes which lead to a more profitable and sustainable business.Value PropositionThe value proposition refers to the whole cluster of benefits an organisation promises to deliverto customers whom will gain by doing their jobs more effectively and efficiently. This isaccomplished by providing the customer a solution to problems within the functional, emotional,and social dimensions (Christensen and Johnson 2009). BMW’s value propositions consist ofoffering individual mobility, safety, improved fuel efficiency and carbon dioxide emissions and apremium brand quality and experience. These value propositions are aligned with BMW’sdifferentiation focus strategy and by allocating the necessary resources, the building of SCAs canbe accomplished.ResourcesResources typically include facilities, products, suppliers, distribution channels, technology,people and the brand. These elements are assessed based on their value, rarity, cost of imitationand 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 anorganisation’s sustainable competitive advantage (Barney 1996). BMW’s resources as appliedthrough the VIRO framework are classified into three categories of competitive parity (CP), Page 30
    • BMW: Redefining Premium Brand Identitytemporary competitive advantage (TCA) and sustainable competitive advantage (SCA) asillustrated in Table 5.Table 5 BMW VIRO Framework Costly to imitate Resource name Exploited by organisation Competitive Description implication Value Rare BMWs reputational brand was well established for their premium quality, ergonomic design, packed with futuristic technology and long termBrand 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 timeTechnology 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 whilstSupply striving for premium quality and differentiatedpartnership Yes No No Yes CP technology. The growth and expansion into the Indian and Chinese market allowed BMW to leverage theirEmerging brand reputation and quickly captured the valuemarket Yes No No Yes CP of expanding market share. Close relationship with customers and the well integrated customer service system allowedCustomer BMW to collect and develop a detailedknowledge 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 increasedcapacity Yes No Yes Yes TCP the flexibility of investment. BMW’s training academy allowed them toTraining directly access to talent pool, reduced theiracademy Yes No Yes Yes TCP recruitment and internal training cost.(Source: Based on Barney 2002) Page 31
    • BMW: Redefining Premium Brand IdentityProcessesProcesses are the ways that an organisation uses its resources to generate value. These stem fromthe many discrete activities a firm performs in designing, producing, marketing, delivering andsupporting its products and service (Porter 1985). For instance, BMW has implemented acorporate finance structure with an international focus to reduce its exposure to local and foreigncapital market fluctuation. As explained through the value chain, BMW’s processes areillustrated 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 haveassisted 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 currencymanagement process to minimise the impact of global exchange rate fluctuations particularly incountries where production facilities are located. This is accomplished through increasing ordecreasing the amount of supply such as raw materials and the location of local manufacturing inorder to provide a natural hedge against medium and long-term fluctuations in currency in theglobal financial markets. Page 32
    • BMW: Redefining Premium Brand IdentityAnother process has been the development of technology and innovation across multiple sectionof the BMW business. This has been assisted through strategic alliances formed with suppliers toincrease BMW’s purchasing and manufacturing competency. Furthermore, research anddevelopment has been able to take advantage of the market research and analysis with regards tocustomer behaviours and purchasing patterns to develop technology products and services. Forinstance, ConnectedDrive and Dynamic Drive which offer intelligent driver assistance were theresult of such processes and systems in place.Profit FormulaThe final element, the profit formula, refers to the amount of sales volume turnover in addition tothe gross and net margin that makes an organisation profitable within the cost structure of itsresources. The scale of an organisation’s resources, level of investment and the frequency ofasset turnover to realise acceptable returns are an outcome of the profit formula (Christensen andJohnson 2009). The profit formula for BMW is a reflection of the transformation of theorganisations’ resources and processes to achieve sustainable performance and leaner businessoperations across the businesses and the three brands of BMW, Mini and Rolls-Royce. Forinstance, EfficientDynamics with a focus on improved fuel efficiency, carbon dioxide emissionsand the use of lightweight material in carbon fibre are some resources that are contributing to theprofitability of the BMW business. Furthermore, BMW’s sustainable and stable performance in aperiod of market fluctuations have been offset with a focus on maintaining global balance andreinforcing the premium brand name and image as part of the profit formula.Crafting a Business ModelThe strength of a business model is like a story of a company which focuses on how the pieces ofthe business fit together with its strategy and describes how the firm differentiates itself acrossindustries (Magretta 2002). To build a business model, a set of attributes should be well definedand distinguished from one another. BMW implemented Strategy Number One with four mainattributes – profitability, customer, growth and future – which were interrelated on anysignificant business event or activity. Page 33
    • BMW: Redefining Premium Brand IdentityFour characteristics served as a guide (Scott 1981) to develop BMW’s business model asillustrated 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) Page 34
    • BMW: Redefining Premium Brand IdentityStrategic ChangeBusiness transformation is a change management strategy aiming to align people, process andtechnology initiatives of a company more closely with its business strategy and vision. Asorganisational environments exert pressure for change, organisations must adjust to survive andprosper. Due to the rapidly changing work environment, economy and society, all companies arebeing challenged to remain competitive in an environment. This implied to BMW, that buyingRover was part of their strategy to remain competitive. However, this moved backfired andcaused the company into a recession and incurred high financial losses as a result of theacquisition. 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 thebeginning of a new era in BMW.Kotter (1996) suggests leadership behaviour evidently influences the outcomes of organisationalchange efforts. The change process was driven by BMW chairmen Milberg and Panke, whereboth leaders’ vision was to position BMW as the premium brand in the automobile market. As avisionary leader that was able to see the future of the company and inspire others by sharing theirvision, both leaders have driven the change in BMW. As a result, BMW became the premiummarket leader in the automobile industry within six years after selling Rover. Milberg now sits inthe BMW Supervisory Board and continues to select new leaders which are aligned to BMW’svision.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 bypassingsteps will create the illusion of speed that will not produce a satisfying result. Table 6 illustratesthe Kotter’s framework in relation to the BMW case study. Page 35
    • BMW: Redefining Premium Brand IdentityTable 6 Kotter’s 8-Steps FrameworkKotter’s 8 Steps Application to BMW1. 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. strategies5. 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) Page 36
    • BMW: Redefining Premium Brand IdentityMcKinsey’s 7S ModelMcKinsey’s 7S model is used to highlight the different areas impacting the internal strategicoptions and decisions. This model was used to analyse the strategic implementation based on theinterrelationship between the seven key factors that contributed to BMW’s organisationaleffectiveness (refer to Table 7 and Figure 8).Table 7 BMW 7S ModelElements Application to BMWStructure  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) Page 37
    • BMW: Redefining Premium Brand IdentityFigure 8 Interrelationship between BMW’s 7S(Source: Based on Waterman, Peter & Phillips 1980)RecommendationsThe 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 itsposition as the market leader in the premium automobile segment. However, in order to maintainlong-term sustainability to 2020, the following recommendations have been proposed:Brand IdentityBMW needs to continue focusing on its differentiation focus strategy in the premium segment tomaintain its prestige brand identity and momentum through engaging and communicating withconsumers. BMW can do so by investing in market research and understanding consumerpreferences and behaviours, which will factor into the new types of models, products andservices offered. Furthermore, the education of consumers on the benefits of sustainable vehicles Page 38
    • BMW: Redefining Premium Brand Identityshould explain important factors such as cost savings, fuel efficiency and safety. The integrationof these events should help improve BMW’s brand equity value.StructureBMW should continue to build and develop its business model through new types of partnershipsand collaborations which are crucial to the ever changing automobile industry. This couldinclude industry collaboration on electricity network, cyber security and communications whichshare technology and innovations for producing small engines based on low emissiontechnologies. Another strategy is to increase interaction with governments and regulators wherecollaboration on projects such as electric vehicles, which requires high capital investments tobuild and maintain the infrastructure, can be offset with governments’ subsidies and incentives.InnovationIt is vital for BMW to continue its business model with innovation through rolling out newautomobile models and refreshing the vehicle life cycle. Product innovation can be accomplishedwith improvements in the efficiency of internal combustion engines, development of lowemission technologies and lightweight materials to reduce overall energy consumption. Anotherinnovation can be implementing programs that improve efficiency in production andmanufacturing that focus on cost savings and reducing environmental impacts through leanmanufacturing.Talent ManagementBMW should continue its focus on strategy change within its corporate culture. BMW’semployees are the most valuable asset for the company and workforce diversity is a key factorfor future success as the company aims for social diversity to ensure future competitiveness. Thiscan be accomplished with investment in training targeting right skills and mindsets of keymanagers and future leaders so that they can effectively manage the change toward a sustainableautomotive industry. Another strategy is to attract new highly educated talent to the companywhich is crucial for BMW to transfer knowledge and continuing innovating vehicles and newproduction methods. BMW could collaborate with top universities in Asia, Europe and the US onan engineering and innovation program built around mobility, electric vehicles and transportation. Page 39
    • BMW: Redefining Premium Brand IdentityConclusionThe BMW Group is one of the most successful automobile manufacturers in the world with thethree brands of BMW, MINI and Rolls-Royce and has continued to hold onto its market leaderposition and brand identity in the premium segment. This case study and analysis showed thatBMW has had a very interesting history of strategy as displayed through the themes of strategicchoice, strategy change and building a business model. The failure of the organisation was in thepurchase of Rover to move into the mass market segment, however the organisation made apivotal change in leadership through Joachim Milberg and Helmut Panke to focus on premiumbrand strategy, which had been one of the cornerstones of its success. In an effort to maintain itsposition as market leader, the company foresaw signs that could impact their long-termsustainability and introduced a new strategic re-alignment called Strategy Number One thatcontained the four pillars of growth, customers, profitability and future. The focus on newmodels with improved fuel efficiency and lightweight material, the importance of emergingmarkets in India and China, the introduction of new technologies in accident control and safetyand the financial hedging to maintain a global balance of production facilities worldwide were allstrategies that have positioned BMW to remain market leader in the premium . The future isbright for BMW, but the challenges will be if the organisation can remain competitive, maintainits brand identity and accomplish its vision and objectives to 2020. Page 40
    • BMW: Redefining Premium Brand IdentityExhibitsExhibit 1 – Key Dates in BMW’s History from 1916–1990Decade Key Dates1910s 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) Page 41
    • BMW: Redefining Premium Brand IdentityExhibit 2 – McKinsey & Co Report: Core Operational Problems atRover1. 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: Redefining Premium Brand IdentityExhibit 3 – BMW’s Key Financials at a Glance 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Sales volume (000)Automobiles total 1,187 751 822 825 1,057 1,104 1,208 1,327 1,373 1,500 1,435 1,286 1,461BMW 699 751 822 800 913 928 1,023 1,126 1,185 1,276 1,202 1,068 1,224Rover 303Land Rover 153MG 14MINI 16 24 144 176 184 200 188 222 232 216 234Rolls Royce (2003) 300 792 796 805 1,010 1,212 1,002 2,711Workforce at the end 118 114 93 96 101 104 105 105 106 107 100 96 95of year (000)Sales (in € ) 32,280 34,402 37,226 38,463 42,282 41,525 44,335 46,656 48,999 56,018 53,197 50,681 60,477Capital Expenditure 2,179 2,155 2,781 3,516 4,042 4,245 4,347 3,993 4,313 4,267 4,204 3,471 3,263Depreciation 1,859 2,042 2,435 2,159 2,143 2,370 2,672 3,025 3,272 3,683 3,670 3,600 3,682Cashflow 2,479 2,807 3,779 4,202 4,374 4,970 6,157 6,184 5,373 6,340 4,471 4,921 8,150Result from ordinary 1,061 1,111 2,032 3,242 3,297 3,205 3,583 3,287 4,124 3,873 351 413 4,836business activitiesNet income / loss 462 -2,487 1,209 1,866 2,020 1,947 2,242 2,239 2,874 3,134 330 210 3,234(Source: BMW Annual Reports 1998–2010)
    • BMW: Redefining Premium Brand IdentityExhibit 4 – BMW Product Life Cycle(Source: BMW Group Investor Presentation, March 2010)Exhibit 5 – Short-Term (2012) Targets of Strategy Number One(Source: BMW Group Investor Presentation, March 2010)
    • BMW: Redefining Premium Brand IdentityExhibit 6 – BMW Priority Growth Market(Source: BMW Group Investor Presentation, March 2010)Exhibit 7 – Premium Segment Growth in Emerging Markets(Source: BMW Group Investor Presentation, March 2010) Page 45
    • BMW: Redefining Premium Brand IdentityExhibit 8 – Growth of Worldwide Premium Segment(Source: BMW Group Investor Presentation, March 2010)Exhibit 9 – MINI E: The Biggest Electric Vehicle Field TestWorldwide(Source: BMW Group Investor Presentation, March 2010) Page 46
    • BMW: Redefining Premium Brand IdentityExhibit 10 – BMW EfficientDynamics(Source: BMW Group Investor Presentation, March 2010) Page 47
    • BMW: Redefining Premium Brand IdentityExhibit 11 – BMW Global Production Network (2009)(Source: BMW Group Investor Presentation, March 2010)Exhibit 12 – BMW Natural Hedging(Source: BMW Group Investor Presentation, March 2010) Page 48
    • BMW: Redefining Premium Brand IdentityExhibit 13 – BMW Global Brand Valuation BMW Brand Equity 2006-2011 $30,000 $28,015 Brand Equity ($million) $28,000 $25,751 $26,000 $23,948 $23,820 $24,000 $22,425 $21,816 $22,000 $20,000 2006 2007 2008 2009 2010 2011 Year BMW Brand Momentum and Contribution 2006- 2011 10 6 Brand Momentum (10 scale) Brand Contribution (5 scale) 9 5 8 4 7 3 Brand Momentum 6 2 Brand Contribution 5 1 4 0 2006 2007 2008 2009 2010 2011 Year(Source: BrandZ Top 100 Global Brand Reports 2006-2011) Page 49
    • BMW: Redefining Premium Brand IdentityExhibit 14 – Luxury Auto Market Share in the US(Source: www.goodcarbadcar.net) Page 50
    • BMW: Redefining Premium Brand IdentityExhibit 15 – BMW SCA Questionnaire Sustainable Competitive Advantage Strongly Neutral Strongly Agree Disagree We differentiate our product or service1 from those of our competitors................................................... 7 6 5 4 3 2 1 Our product or service has wide market2 appeal................................................... 7 6 5 4 3 2 1 As our customers are very price sensitive,3 we give considerable time and effort to improving efficiency...................................... 7 6 5 4 3 2 1 Our marketing research clearly identified a4 target group of buyers for our product or service............................................................ 7 6 5 4 3 2 15 We offer a unique product or service............ 7 6 5 4 3 2 1 The strategy we follow targets the total6 market rather than a particular segment within it......................................................... 7 6 5 4 3 2 17 We try to fully utilise our existing capacity and resources................................................ 7 6 5 4 3 2 18 Our marketing strategy is based around a clearly defined market segment.................... 7 6 5 4 3 2 1 Our customers are more concerned with9 product or service features and benefits than they are with price................................ 7 6 5 4 3 2 110 Our product or service appeals to a diverse range of customers........................................ 7 6 5 4 3 2 111 We are / aim to be the lowest cost producer or seller in our industry................................. 7 6 5 4 3 2 1 Our product or service has narrow market12 appeal............................................................ 7 6 5 4 3 2 1 Page 51
    • BMW: Redefining Premium Brand Identity We continually look for new and innovative13 ways to add distinctive features and benefits to our product or service................. 7 6 5 4 3 2 1 Our strategy is successful because we focus14 upon a wide and diverse range of customers..................................................... 7 6 5 4 3 2 115 We put considerable emphasis upon the control of operating costs............................. 7 6 5 4 3 2 116 Our product or service appeals to a narrow and clearly defined group of customers........ 7 6 5 4 3 2 117 We emphasis our distinctive product or service in our marketing communications.... 7 6 5 4 3 2 118 Our marketing communications appeal to the mass market............................................ 7 6 5 4 3 2 119 We carefully monitor our operations in order to keep costs under control................. 7 6 5 4 3 2 1 The market for our product or service has20 become more segmented and narrowly defined over time.......................................... 7 6 5 4 3 2 1 As our customers are not very price21 sensitive, we give little time and effort to improving efficiency...................................... 7 6 5 4 3 2 122 There are no clearly defined separated market segments for our product or service. 7 6 5 4 3 2 123 We undertake extensive efforts to secure the lowest cost sources of supply.................. 7 6 5 4 3 2 1 Our strategy is successful because we focus24 upon a narrow and clearly defined group of customers...................................................... 7 6 5 4 3 2 1 Page 52