CLASSIC CASE STUDIES
The BMW Group is a prominent European maker of prestige automobiles. Its operations also include motorcycles, software products and financial services: this case deals only with the group’s automobiles. By 2004 it produced and sold over one million vehicles under three brands: BMW, by far the largest; MINI, a relaunch of the British icon small automobile from the 1960s; and the Rolls Royce, of which they relaunched the ‘Phantom’ model in 2003. Following the failure to grow market share and the range of models by acquiring the British group Rover, the Group in the early 2000s adopted an aggressive strategy of organic growth. The result was the launch of a large number of models across the price and class ranges, and a robust policy of market development. ● ● ●
THE AUTOMOBILE INDUSTRY IN THE MID 2000S
The first automobiles were produced in the late 19th century but the automobile industry became a significant employer and an economic force only after the Second World War, when national economies began to be rebuilt. With the end of the war, the industrial production and manpower that had fuelled the war effort were deployed to rebuild infrastructures and provide people with the consumer goods that were not available during the war. Automobile production was initially prominent in the US, but soon Europe, later Asia, especially Japan, became equally important forces. By the latter part of the 20th century, the automobile industry was global, mature and heavily consolidated: most of the world automobile production was concentrated in five companies – General Motors, Ford, Daimler-Chrysler, Toyota and Volkswagen (see Exhibit 1). A number of environmental circumstances affected the industry in the first few years of the 21st century. The global economy experienced a sharp downturn in 2001, which lasted well into 2003 when some signs of acceleration were experienced, especially in the US economy. Equity prices had fallen until late in 2003: this, coupled with geopolitical tensions and concerns about oil supplies, added to the uncertainty about the economic and political environments. In this climate, sales in most automobile markets around the world declined, with the exception of the UK, some Scandinavian countries and China, which grew well above average. The decline in the automobile market in US was particularly severe. From the mid 1990s automobile producers strove to improve engineering and quality of vehicles as a route to competitive advantage or, in many cases, to catch up with competitors, but ten years later there
This case was prepared by Valeriano Lencioni, Middlesex University Business School. It is intended as a basis for class discussion and not as an illustration of either good or bad management practice. © V. Lencioni, 2004. Not to be reproduced or quoted without permission.
Exploring Corporate Strategy by Johnson, Scholes & Whittington
Exhibit 1 The automobile industry
BMW and the five major companies in 2003 Company General Motors Ford DaimlerChrysler Toyota Volkswagen BMW group No of vehicles (m) 8.5 6.7 3.85 6.25 5.02 1.12 C (bn) 157.19 116.47 144.65 125.30 87.15 41.52
was very little to differentiate automobiles produced by many of the major companies. Therefore, in the first few years of the 21st century, players in the automobile industry as a whole stepped up price competition. A hefty overcapacity of around 30 per cent in the overall industry meant that ‘a lot of metal chased little money’, making low prices or incentives – mostly in the form of free insurance, zero per cent interest on hire purchase – the prevalent means to displace market share from competitors. However managers were fully aware that competing on price was not beneficial to anyone in the medium term, as it depressed the profitability of the whole industry: customers’ expectations would become a very...