International Business - Bayerishche Motoren Werke AG - Essay Example

RUNNING HEAD: International Business - Strategy for Company International Business -- Strategy for Company of of Professor 27 July 2011 Contents 1. Background Globalization is a phenomenon that can be observed from the economic environments characterized by countries needing to trade with each other its each and the companies from these countries goes beyond their borders for expansion or growth purposes in accordance with their long-term objectives. An example of a company that has been operating beyond and the borders Germany as its base is Bayerishche Motoren Werke AG (BMW) whose strategies for long-term will be analysed in this paper using appropriate models. BMW is well-known automobile manufacturer based in Germany and which focuses on the automobile motorcycle worldwide markets. Operating under three main segments -- Automobiles, Motorcycles, and Financial Services, the company well-known three brands -- BMW, MINI and Rolls-Royce, goes with the popularity of company. Its BMW automobile range encompasses the 1 Series, Series 3, the 5 Series, and 7 Series, the sports utility vehicles, X3, X5, and X6 and M models, such as M3, M5, and M6. It makes available to customer cars under MINI brand and motorcycles under the BMW brand. The Rolls-Royce brands include three luxury cars, Phantom, Coupe and Ghost. With continued production assembly, services and sales subsidiaries made throughout the world, (Reuters, 2010a), BWM is undeniably a global company that can be affected by globalization. One of best proofs of a company’s attainment of its long-term health is the behaviour of its stock price in the stock market as the same could indicate achievement of wealth maximization objective (Bernstein, 1993; Brigham and Houston, 2002). This paper seeks to examine how the BMW may have benefited from the actual and potential impacts of globalization on the company by analysing the possible strategies that the company has employed. This will also evaluate the possible strategies of going forward which the company might use to response to the impacts of globalization that would be identified. The paper will discuss first the different models to understand the company’s strategies. The models include the PEST, Five-Forces and SWOT and determine whether the same are applied by BMW in its choice of strategies. The paper will end-up evaluating the present strategies used by the company and recommend what should be done by company in relation with models describe. The analysis will include using available information for BMW from its 2010 Annual Report and its websites. This paper has chosen BMW as this researcher finds interesting to see how car manufacturers could really compete globally. It should be fascinating indeed to know how a company with known brands would compete on in the light of the reality of globalization. BMW appears to have the qualities and how the company behaved from the point of view of globalization should be interesting to find out. 2. The models for to be used for analysis -- PESTLE, 5 Forces and SWOT 2.1 PEST Pest is a known model for microenvironment scanning the aim used by companies adopting strategic management strategies as they become interested in identifying the broad forces and basic changes the business environment in its broadest terms. As broadly a based assessment, the same model can be used to view uncertain environment with some sense of a lens for a company to at least have some way to respond with workable strategies at the present. PEST is therefore designed to understand the environment for basic strategy analysis (Crossan et al, 2005). Given this framework relationship of the business strategy and its environment become not just reaction by the former but one with actually trying to influence the future with how a company plays as an organization in a given industry which is influenced by different external forces . Management then can monitor many events that occur on the perimeter of the business environment and quarantine or segregate those that have a potential impact on the business (Pearce &Robinson, 2004). PEST refers to political, economic, social, and technological forces that also affect the industry (Crossan, et al, 2005). They could be combined with those of Porter’s Five forces (Porter, 1980) as they also could affect the playing field of each industry in terms of the latter’s attractiveness or profitability. They could be considered larger in scale over that of Porter’s five forces, as the latter would talk more directly on the effect on industry profitability (Crossan,et al, 2005). PEST could therefore be viewed in terms of generating also threats and opportunities in the industry for analysis. The political aspect may contemplate introduction or amendment of laws that could be detrimental or favourable to the industry for a given period of time. The economic aspect may refer to the changes in interest rates, inflation rates, unemployment rates and in the general economic conditions of each local market or region or the world (Arnold, 2008; Slavin and Slavin, 2008). Social forces may refer to demographics or changes in the tastes and preferences of customers (Kotler, 1994). Technological forces may also involve the changes brought by the continuous evolution in technology. Because they are larger in scale, than the five forces, PEST forces can be considered as the early signals on what could happen to an industry. Like the Porter’s five-forces which will be discussed next, PEST does have effect also on impact supply, competition and demand (Crossan,et al, 2005). The effect of PEST forces can be appreciated in every element of the value chain as in the case of demographics that may eventually point to a change level of demand for goods and services that may be served by the industry or an evolve portion of the industry. Corporations, as they look for long-term view of the future, need to consider PEST forces and develop their plans by building their strategies which could provide them the economics of scale or strengths that would provide the big opportunities for growth. In effect the actual and potential effects of globalization can be screened in discussing the different forces. 2.2 Porter’s Five-Forces Model The Five-force model is how Porter’s framed how to understand the environment. These five forces or the degree of competition in the industry market can either increase or decrease the profitability in industry. They are the threat of entry, bargaining power of buyers, bargaining power of suppliers, and intensity of rivalry the availability of product substitutes. There are several determinants or causes of each of the forces which can either make it an industry threat or opportunity (Porter, 1980). 2.3 SWOT and Internal Analysis SWOT stands for strengths and weaknesses, opportunities and threats. The first two or the strengths and weakness are internal to the organization while the other two – opportunities and threats are external to the organization. It is asserted that the SWOT analysis has been a favourite or usual model used by managers because of its being simple to and could easily connected with the essence of sound strategy formulation. Strength and weaknesses should be understood as closer to the heart and minds of managers since they refer to what the company has in implementing strategies. Does the company have what it takes to do or implement strategy or it is incapacitated or made incapable by its weakness? The qualifiers of the organization must be the result of an accurate and effective analysis. They must therefore be identified specifically since it is around them that the sound strategies can it be enacted. The resource-based view is one way of identifying these strengths and weaknesses. Financial analysis as a tool will be used to review the resources available to the company. Is the company profitable to be able to maintain its short term and long-term goals? It is liquid? Does it have the funds to pay its currently maturing obligations? Is the company possessing good financial leverage in order to fight temporary financial tsunamis that may came its way like the 2007 to 2009 financial crisis (Meigs, Meigs & Meigs, 1995; Helfert, 2001). Another way to derive strengths is by looking at the company’s core competencies or competitive advantages in relation to competitors. 3. Analysis and Discussion applying the described business tools The analysis first should be easy if the model is clear and I can identify that SWOT of the company in relation to PEST and Porter’s-five force model. In relation to goals and objectives of the company, its strategies must be able to make use of its company’s strengths while trying to correct or avoid its weakness. At the same time such strategies must be to express the statement into industry opportunities and threat. 3.1 Competitive Environmental Analysis This part applies Porter’s Five-Forces Model (Porter 1980) in relation to PEST to determine the industry opportunities and threats. Opportunities are favourable conditions that could increase profitability of the players in the industry while threats are those that could lessen the said profitability for the same players. 3.1.1 Difficulty of entry from new entrants (low) There is low threat from new entrants in the automotive industry as the latter is capital intensive and thus economies of scale are a bar to entry. Companies could not easily come into the industry, which makes it favourable to present industry players because less competition generally means better profitability. Although the industry may be expected to grow, the growth could easily not be eaten up by entry of new players thus causing profitability to be shared by existing players including BMW. 3.1.2 Bargaining power of suppliers (low) Bargaining power of suppliers may be considered low because auto manufacturers buy from them in large volume which is considered important to these suppliers. There could be many sellers or potential providers’ spare parts but the volume purchase by car-makers makes it less favourable to said suppliers (Crossan, et al, 2005). This is therefore an opportunity for industry players in car making. 3.1.3 Bargaining power of buyers (high) Bargaining power of buyers is believed to be because there are many corporate customers who could be having low switching cost as they could have their needs served by other manufacturers as there are a good number of industry players. Almost every consumer of BMW may have a wide array of choices from market. This is a threat to the industry as it could leave buyers shifting from one player to another or developing their own. 3.1.4 Threat from substitute products (high) Threat from substitute is high because the numbers of apparent substitutes may be many. The choice of having cars under the premium categories becomes a less preferred choice if the economy is not well. This could be seen in the experience of BWW where it has to suffer with lower revenues in 2008 and 2009 as a result of the financial crisis that affected many countries in the world (BMW, 2011). 3.1.5 Intensity of competition or Rivalry among Existing Firms (high) There is a strong rivalry of among existing firms as evidenced by their not being affected by the 2008 and 2009 financial crisis which caused them to compete heavily on prices and not on differentiation value on how to satisfy their clients who wanted more flexibility because of decrease purchased power. This is therefore a threat for players as they compete less for the market and lower prices. This force could increase cost that could drive to reduce their profitability. 3.2 Internal Analysis - Financial Analysis and Unique characteristics Financial analysis is constructed by comparing the overall financial situations of BMW based on their financial statements as retrieved from their Annual Report for years ended December, 2010 and 2009 with industry data (BMW, 2011, Reuters, 2011c). As to profitability BMW appears to more profitable compared with industry average. While BMW had average 3% profit margin for 2010 and 2009, the industry had only 1%. The difference becomes clearer in terms of return on assets and return on equity, were BMW has at least than two times more than that of the industry. Thus, the profitability rates of the company are indeed encouraging. See Appendix B. Return on equity (ROE) of BMW would also show things about the how the company has performed better in 2010 compared to previous year from 1% ROE to 14% in 2010. As to liquidity, which measures the capacity of a company to meet its currently maturing obligations using the current ratio and the quick asset ratio (Brigham and Houston, 2002; Bernstein, 1993), BMW can be still liquid. The quick ratios of BMW are 0.78 and 0.82 for the years 2010 and 2009 respectively while the current asset ratios for same years are the same respectively at 1.08. This must be because; all currents assets are also quick assets of BMW. See Appendix B. As against competitor, BMW reported an average current ratio of 1.09 which is higher than 0.32 of the industry. See Appendix B. This indicates that BMW is more liquid or is faster in generating cash from its operations than average competitors and has better ability of paying its short-term obligations although below industry average of 0.32. As to solvency , BMW also showed a less superior position in terms of debt to equity ratio an average of 3.92, which is riskier than industry at 0.32. The higher debt equity ratio may indicate that the company is maximizing its capital structure (Gitman, and McDaniel; Shim and Siegel, 2008). This means that its competitors have less debt obligations in relation to capital investment from owners (Weygandt, et al, 2009). Market leader – In addition to financial analysis, identifying unique features of the company not possessed by ordinary competitors my provide a competitive advantage to out the later, Using the above approach, BMW can be considered to have strength of being market leader in an premium portion of the automotive industry. The company is considered to be the best under this category (BMW, 2011). The company is owner of three strongest premium brands in the industry. BMW having the well-known of BWM, MINI and Rolls-Royce as indications of strongest premium brand may prove to be beneficial to the company’s plans that it need not build more time or invest more resources to build a name associated with quality in terms of car and motorcycle in the world (BWM, 2011). The company’s good access to capital market. From its solid financial position and financing strategy, which is described as diversified, it had acquired longstanding long and short-term ratings by S & P and Moody’s thus allowing the company to have good access to capital (BMW, 2011). 3.3 SWOT SUMMARY This part in effect summarizes the discussions made in the external and internal analysis using the general environment, Porter’s five-force model, PEST, and financial analysis and the unique characteristics of the company. 3.3.1 Strengths and Weakness These are conditions or characteristics of the company, which could be tapped by the company in its design of its strategies. The following are the company’s strengths. Generally Liquid - The Company is generally liquid with current ratios of above 1.0 for the last two years and even better than competitor is. The company’s capacity strength to weather short-term insolvency could be further used to improve profitability. Profitable Operation. This means that company’s average profitability is evidently higher than some of its average competitors. The other strengths include its being market leader in premium brands and having good access to capital markets. The company was found to have weak points, which it should make stronger or avoid in its design of its strategies so that it could accomplish its objectives. Highly-Leveraged Financial Position – Its debt to equity ratio is higher than its competitor in the industry average in 2010. This makes it riskier than competitors. 3.3.2 Industry Opportunities and Threats These are derived from Porter’s five forces and the greater macro-environment from PEST that may cause decline in the profitability of the company. Industry opportunities include the low bargaining power of suppliers due to large volume made by car makers favours the latter. Another is the difficulty of entry by new entrants which requiring much bigger capital could actually discourage more to come in easily to the industry. Industry threats include the high bargaining power of buyers. This could aggravate the company’s low profitability as customers would need to cut their expenditures due economic pressures cause by present recession in the US. Another is the high rivalry of competitors. As found earlier, this forces existing player to for profits as evidenced by the competition in terms of prices. The third one is high availability of product substitutes which could decrease the chance to earn more profit as the different economies go for higher productivity and customers normally shift to non-premium cars if there is problem in the economy. 4. Conclusion BMW was found to have evidence of its stocks and operation. Appendix A clearly showed the increasing stock price of the company which was supported by good profitability and acceptable liquidity in Appendix B. It appears to have applied the correct strategies in taking advantage of industry opportunities, protecting the company from industry threats, making use of company’s strengths and avoiding or strengthening company’s weaknesses. It has diversified its operations to reduced its and it has maintain a solid financial position that allowed it to have good access to capital market. Having done so, it has maximized stockholder’s while trying to avoid its seemingly high financial leverage. Its having maintained leadership in certain brands has indeed protected the company from industry threats. It has also continuously invested in research and development to sustain its differentiation strategy by responding to changing taste and preferences of its customers. It must therefore continue said strategies on continue research and development. As one service a premium part of the market, differentiation is unavoidable. By so doing, it would avoid the industry threat of strong rivalry among existing players in the industry since this would strengthen its branding strategy and at the same time that it may develops new products needed by the market to create an advantage over competitors. By continuously focusing R&D, BMW may maintain market leadership for its premium brand products. Such is way to make its product unique and different other industry buyers may be neutralized or at least be warned of the high risks of spending resources that will not produce the expected rewards for more profitability. The same can be expected to build customers brand loyalty and without the need to compete basically on price, will make use effectively of its resources being generated from operations. This could further strengthen eventually is capital structure because of expected higher profitability while taking advantage the strategic growth drivers favourable to the company. Establishing strategic alliance with related industry players can be added to expand as the doing so can more or less lessen strong rivalry of existing players in the BMW industry as form of collaborative strategy. Neutralizing the industry threat of high bargaining power of buyers can be achieved as result. The same strategies will take protect its self from the threat of high availability of products substitutes will make use of its good liquidity and profitability. Having a good match of good performance in its operation and stock price provide a solid proof of a well-managed organization as that of BMW. Having good access to capital credit manifest its lower cost of capital than competitors and this would have a direct effect on the share price of the company as this could be a demonstration of optimizing its capital structure. Appendices Appendix A- Graph of Stock Price of BWM – Five Years; Source (Reuters, 2011b). Appendix B – Summary of Financial Data and Ratios as against the industry; Source (BMW, 2011; Reuters,2010c).  References: Arnold, R. (2008). Economics. Cengage Learning Bernstein (1993). Financial Statement Analysis, Sydney: IRWIN BMW (2011). 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