BMW Case Study
Introduction
BMW is one of the best-managed brands in Europe, if not the whole world. Its consistent work over the last many years has led to a very strong position in the automobile industry, a clear message as well as a distinct identity. All encapsulated in ‘the ultimate driving machine’. The only challenge for the brand seems to be to keep it all on track and continue to develop (2003). In 1959 BMW was on the edge of bankruptcy. However, the company recovered to become one of the world’s most profitable automobile manufacturers.
Background of the Automobile Industry
Though the car industry worldwide is replete with so-called national champions, it is probably the most globalized industry in the world with the three triad groups of the USA, Japan and Western Europe accounting for almost 90 per cent of total output. Additionally, it employs around 4 million direct workers with a further 10 million involved in material and component manufacture. When those involved in the selling and maintenance of vehicles are included, the total figure swells to around 20 million (1998).
Apart from merger, almost all the automobile industry producers in Europe sought to improve their position in world markets by improving relations with their suppliers and bringing about radical improvements in supply chain management. The tradition in dealing with component suppliers virtually throughout Western Europe was extremely adversarial and based on short-term contracts which was in sharp contrast with Japanese practice. Successive reports indicated that the automotive components industry was the weak link in the European car industry. Initially, car makers simply tried to force component suppliers to cut costs and so place the responsibility for cost reduction and rising quality on to the suppliers.
However, a report prepared by the Boston Consulting Group on behalf of the European Commission in 1996 highlighted Europe’s problems. The report pointed out that there was an alarming competitive gap with Japan and that unless drastic action was taken, this gap would continue to widen. The European components industry employed 942,000 people in 1992 with annual output worth £22 billion. It recommended that if Japanese productivity levels – 2.5 times greater than Europeans – were to be achieved, then 40,000 jobs or 54 per cent of the workforce would have to go. But even this swingeing cut of itself would not guarantee reaching Japanese productivity levels. Such a change demanded radical policies and a strong move towards the Japanese system of tiers with the number of direct suppliers falling by two-thirds by 1997. The report recognised that the greatest challenge to improve productivity lay in the second tier suppliers consisting primarily of small and medium-sized enterprises “where awareness of need to improve competitiveness is least advanced”. It noted that individual car makers had already taken action to cut the number of direct suppliers from 1,280 on average in 1988, to 900 in 1994, and to an average of 400 by 1997.
Central to this across Europe was the role of Germany which accounted for 47 per cent of the independent components industry and for 53 per cent of the sector’s value added. France accounted for 19 per cent of output, the UK for 12 per cent, Italy for 11 per cent and Spain for 7 per cent. Crucial to success was concentration of ownership. Indeed, the process of consolidation was driven by “the lack of competitiveness of many suppliers in an extremely fragmented industry” and by changes in vehicle makers’ policies towards:
- more outsourcing with more design work being transferred to suppliers;
- the sourcing of components to come from single rather than multiple suppliers;
- the purchasing of whole systems rather than individual components;
- the formation of strategic business alliances.
Context
(1985) states that “competitive advantage grows fundamentally out of the value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.
Competitive advantage can be created in the choice process by helping buyers resolve their dilemma: How do I choose among the available alternatives? The answer to that question is learned, category by category, buyer by buyer, depending on the strategies brands pursue. Consider a simple case, one in which all brands deliver value on the same goals, brands are perceived as similar, and comparisons between brands are easy (e.g., videocassette recorders). Introducing differentiation in markets such as these can lead to a change in decision strategies by consumers. By innovating, for instance, consumers may have to re-evaluate their choice strategies that ignore everything but price. Eliminating the equivalence on everything but price can prompt buyers to rethink how they choose and, as a result, what they choose (2001).
There are two basic types of competitive advantage. These are cost leadership and differentiation.” A cost advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost. While differentiation advantage exist when the firm deliver benefits that exceed those of the competing products.
As a leading global brand, Germany’s BMW is in possession of some of the best management talent in the industry and is sure to be all too aware of exactly what is at stake. Whilst minor drawbacks may be unavoidable, most observers believe that we are highly unlikely to witness a large-scale quality crisis. And externally the signs seem good – the quality award presented to BMW in the year 200 by the well-known JD Power survey group will have done spirits – and customer confidence – no harm at all (2004).
BMW is putting a lot at stake with its new strategy and the quality issue most definitely sits high up the agenda. The implications for launching new products flawed through over extension could turn out to be devastating for the German giant. But BMW is by no means the first luxury carmaker to venture into these waters. Since being bought out by Ford, Jaguar has undergone a similar mass transformation in which it broke the mold by launching the X-Type mid-sized saloon, thus making a Jaguar more affordable than ever before. But in doing so Jaguar was taking a quality gamble – and as predicted in some quarters there were indeed some early quality drawbacks that frayed a few nerves at Jaguar management. Is the trend perhaps repeating itself? Business Week highlights cases of recent quality frustrations for BMW owners in the US, including confusion related to the innovative “I-Drive” instrumentation system – which controls audio, climate, navigation and other functions – and engine glitches with 3 Series saloons. Interestingly, one owner is quoted as believing that BMW’s new strategy may well be asking too much of the car brand he “grew up admiring” (2004).
Endorsement is, of course, simply the most explicit case of the most usual mechanism for developing a reputation in a new market quickly: staking a reputation which has been acquired in another market. BMWs’ reputation in cars reinforces its reputation in motor bikes, and vice versa. BMW also endorses a range of ‘Active line’ sportswear. There is small reason to believe that the capabilities which distinguish BMW cars are applicable to the manufacture of sportswear. But since the revenue from the sale of sportswear is very small relative to the revenue from the sale of BMW cars, it would clearly be foolish for BMW to attach its name to poor-quality sportswear.
The company is, however, pushing it a bit. If it were to endorse, say, garden furniture, it is not clear that its reputation would genuinely be at stake. If the garden furniture is disappointing, why should this lead me to think worse of BMW cars? The likely consequence is that the BMW marque is less likely to be effective in selling garden furniture, and indeed the attempt to do so may actually impinge negatively on the BMW reputation as a whole, by suggesting that the owner is careless of its value (1995).
While BMW at a quick glance does not seem to be customizing its brand, the reality is different. The tag line ‘the ultimate driving machine’ represents the overall brand proposition. This is a car for people who like driving. BMW is the car for people who think that the car in itself matters most. It is about machines, not people. The emotions sit in the metal, the engine, the driving (2003).
While companies such as Ford and VW are vigorously pursuing platform rationalization as a means of cutting both development and purchasing costs, BMW stand against this approach on the grounds of maintaining their brand integrity. Wolfgang Ziebart, BMW’s head of R&D, is highly skeptical about the adoption of common vehicle platforms. ‘What we do not do is offer cars with the same concept under different brands, merely modifying the body and the interior. It would have been easier to place the Rover 75 on the platform of the BMW 3 or 5-series, instead of developing an entirely independent car. But then the character of that car would have been too similar to that of our own models, and customers would have asked what makes a BMW 3 or 5-series so special?’. BMW stand firm in their belief that independent platforms are critical to their brand integrity, however component commonization can be applied where customer expectations are not compromised. An example of this is the sharing of common electrical architectures between vehicles where increasingly up to 20%, or more, of the costs of the vehicle can be incurred (2001).
It must be said that while these approaches towards the provision of product variety in the market may be viewed as being diametrically opposed, BMW pursued these strategies successfully to the benefit of their respective brands. However, BMW protected themselves from shifts in demand through the operation of fixed allocation schemes within their dealer networks thereby operating on a build-to-stock-basis with long order lead-times.
BMW are committed to developing a more responsive sales and production system and the Rover 75 is the first vehicle within the Group designed with the capability to deliver a shortest possible order cycle of ten working days. The origins of the Rover 75 lie in the debate over the trade-off between variety, operational effectiveness and responsiveness to customer demands, a debate shaped by Honda’s influence and one challenged by BMW’s insistence for high levels of profitable variety (2001).
From a thorough, in particular in-house, evaluation of the values associated with the brand, four fundamental values seem to be conveyed by BMW as a brand: advanced technology, performance, quality and exclusiveness. Naturally, these values evolve in their mode of formulation. Thus the performance associated with the engine output and acceleration is from now on expressed in more responsible terms, in accordance with the spirit of the 1990s. Acceleration for example is presented more as a safety factor (2003). The targeting strategy consists in partitioning the brand’s customers in an even more discrete way, so as to communicate with each one of them through adapted channels. The guiding principle adopted here is that BMW cars are not produced in series and because of this fact could not address the general public. Raising the centre of gravity of the brand consists in having used top-range models in order to increase the average perception of the brand by its customers. In practice, the implementation of this principle resulted in a disproportionate assignment of the budgets of communication to the top-of-the-range models. Thus series 7 and 8 absorbed, in 1990, about half of the budget whereas it contributed to only 8 per cent of the turnover. Finally, the final principle: that of the definition of a coherent style of communication for BMW, through the creation of a BMW universe in coherence with its marked fundamental values (2003).
BMW is strongly associated with performance. That unique association has been created over 30 years through consistent product development and advertising. The very first advertisements for BMW in North America labeled BMW as “The Ultimate Driving Machine.” That description remains true to the products and the entire experience of driving a BMW. It thus provides a powerful basis for being distinctive in a market where important differences between brands are quickly disappearing (2001). A unique association is competitively valuable. By being linked so strongly with performance, BMW enjoys an advantage by implicitly defining competitors as lacking the very strength BMW enjoys.
Recommendations
Based on the research that was done, the BMW group can benefit further from some recommendations. For the BMW supply chain to adjust to higher and lower rates of demand, supply chain participants must have advance warning of the expected execution rates and changes in those rates. In rate-based planning and execution, this is the purpose of the forecast. The forecast is not used for releasing orders in anticipation of demand, except for parts with long lead-times. The forecast is used to prepare suppliers for changes in demand rates ( 2002).
For example, if the demand rate is expected to increase in the future, suppliers must be warned in advance. The suppliers then will be prepared to accommodate the increased velocity of kanban replenishment signals (or trips) when the demand does increase. In this way, planning should significantly reduce the level of surprises at or near the build date. Minimizing surprises and disruptions, in turn, reduces the likelihood of misallocated capacity on the part of BMW and its suppliers.
The ethical implications for this recommendation includes corporate challenges for BMW like adoption of standards, debates on the need to monitor and audit compliance on the suppliers, and ethical ways by which supplier activities can be integrated with the broader supplier management objectives of BMW. On the other hand, this recommendation can also strengthen the relationships of BMW with suppliers and licensees.
Conclusion
The customer-focused internal supply and demand integration used by BMW s provides customers with what they want as the result of improved supply activities. There is integration of the BMW value chain through information sharing, decision making, and collaborative planning. The leveraging of suppliers jointly creates solutions and opportunities for BMW.
Credit:ivythesis.typepad.com
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