The Automotive Industry - Essay Example

Introduction The automotive industry began in the early part of the 20th century with the United s being the pioneers in mass production of automobiles. The Germans were the actual inventors of the engine automobile prior to turn of the century which changed the lives of humans forever since it allowed people to transport themselves long distances in an independent manner. The industry did not take off globally until the culmination of WWII. At that time BMW a company that now is considered one of the leaders in the luxury car niche market began to make its presence in the industry. The company battle some tough times in its early days, but eventually it found a way to become a global icon by utilizing a branding strategy with the slogan “The perfect vehicle.” By the end of the 20th century the automobile industry as a whole reached its maturity stage and competition was intense. As the 21st came up us BMW had survived and was doing quite well in terms of profitability, but the overall market share of the company was low. This report analyses the firm BMW group and its situation and possibilities in the 21st century. Some of the analyses provided in this report include SWOT analysis, Porter Five Forces and identification of problem and potential solutions. SWOT Analysis Strengths BMW has built a reputation of quality and excellence for over 90 years. The German based firm after the 2nd half of the 20th century concentrated creating vehicles for the luxury car market. The capitalized on this niche marketplace and build a reputation that allowed them to earn above average profits. A BMW is car that is visualized by the car owners as a premium car than even though is in the luxury category it is an item that can be afforded by the middle to upper middle class drivers. The company was able to become successful with a product line of a few models, thus they could keep better control of quality. The company concentrated in a niche segment of the automobile industry which allowed the firm to keep its volume low. In low volumes the firm was able to keep a tight control of the entire supply chain including having the majority of their dealerships wholly owned. Due to their strategy the firm offered better warranties offerings than the industry in terms of years and mileage considerations. The advantages the company enjoys are based on the implementation of brand value market which means they are applying a long range competitive strategy (Kotler, 2002) Weaknesses As the 20th century came upon us the auto industry reached the maturity stage. BMW realized that as small player their profitable operation was susceptible to hostile takeover. The company built an incredible brand value which was great but if the company changed their strategy in order to increase their volume the most is that they cannot keep up their standards of excellence. In order to get into higher volumes the company might be able to keep its prestige. At that time the company would lose the incredible retention that kept BMW owners coming back to the firm for their next car purchases. The company’s biggest strength ironically is the firm’s biggest weakness. BMW has also not show that they can adequately adapt their business strategy in order to penetrate other market segments. The Rover utility vehicle debacle is the best example of the company inability to adapt their operation particularly in the marketing aspect of handling multiple vehicles. Research shows based on the American company expenses that can take up to $2900 worth of marketing expenses per vehicle sold in order to reach the large masses effectively. BMW does not have those types of resources since they have always been a small firm that specializes in a unique niche within the auto industry. Opportunities BMW has an incredible brand equity that can only be match by their closest competitor Mercedes. The firm in the early 21st had a strategic plan in place to expand their production. This is a viable plan that can reap the firm incredible benefits. The company has alliances in place to take advantage of the United States skilled labor for expansion purposes as well as other alliances to exploit the Chinese cheap labor costs in order to reduce costs. As far as utilizing China as a part of their supply chain there are protocols in place that would guarantee that the firm import the materials needed for the vehicles without the need to purchase any inferior raw materials from Chinese suppliers. The company has a legitimate realistic chance to become the world top luxury car manufacturer as well as entering into lower segments of the market such as car worth between $25,000 and $40,000. Threats One of the biggest threats of the ownership group of BMW is the fact that due to their small size the possibility of being taken over by a bigger firm is a high possibility. Due to this imminent threat the company wants to expand and become a bigger force within the marketplace. The company specializes in luxury cars. The firm is always under the threat that any car company can design a luxury car model or models that way better than theirs at a better price. BMW does not enjoy the economy of scale capabilities that the American Big 3 or the Japanese firms have. If BMW starts its expansion project to triple their volume sales within a ten year span the firm has the internal threat of their cheaper model cannibalizing the sales of its more expensive models which are way more profitable. Porter 5 forces The Porter Five Forces framework was developed by Michael Porter in the 1980’s The purpose of the analytic tool with consists of threat of entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers and intensity of rivalry is to evaluate the competitiveness of a particular marketplace (Marketingteacher, 2009). The application of the five forces in paper are based on the automobile industry in the early part of the 21st century with specific emphasis on BMW. Threat of Entrants The threat of new entrants within the luxury car market niche for BMW is relatively low. The firm has built a powerful brand value. It takes decades to create an operation that could equal BMW’s expertise in this segment. Industry experts realize that the luxury cars of other companies do not directly compete with BMW vehicles. BMW buyers are not only looking for awesome features in their cars they also car about the prestige of owning a BMW machine. Another threat for BMW and other luxury carmakers is new concept cars such as the Moller Sky Car which is an automobile able to fly in the air at speed of up to 350 mpg (Moller, 2009). Threat of Substitutes The threat of substitutes for BMW is medium. All car companies have a line of luxury vehicles. If any of these companies is able to market their luxury cars properly in order to create the perception that their models are competing directly with BMW then the threat of substitutes increases. Also if the company undergoes their expansion plans and begins to sell cheaper vehicles then the threat of substitutes becomes higher. Another threat of substitutes for BMW is that culture begin to shift away from the utilization of automobiles and start more mass transportation system similar to what occurred in nation such as Japan. Bargaining Power of Buyers BMW currently operates in the niche marketplace of luxury vehicles. The buyers of the cars have low bargaining power because they realize prior to entering a BMW dealer that the cars they are seeking to buy are expensive. The company has built a strong reputation as far a quality, service, and performance in their line product line. The company controls most of their dealerships, thus they negotiate directly buyer without the intervention of an intermediary. Under the current scenario their buyers have low bargaining power. If the company increases its production and releases cheaper models then these models would be competing against other vehicles in the marketplace. At that time market forces would shift a portion of their buyer bargaining power towards the customers. The power of the buyers increases as well if the banking industry can provide more loans at reasonable rates which would mean that there would be more potential buyers with access to the type of money need buy a BWM machine. Bargaining Power of Suppliers BMW is a company that has kept great control of its supply chain. They control all sides of the chain from raw material purchases to end user sales locations. The company can utilize their supplier power to their advantage if an expansion plan is approved. They already showed great negotiating power by setting up potential deals in the US and China for alternative production facilities. The company has always purchased quality materials. They have built long term relationship with suppliers which help any firm achieve flexibility in their supplier relationships. Even if the company increased its purchases by twice or triple their volume they could get better prices of premium materials than other firms due to their excellent supplier power within the luxury parts marketplace. The supplier power of the firm is medium-high. If the firm pursued an aggressive expansion plan the supplier variable is on their side. Intensity of Rivalry BWM has an intense rivalry with their major and practically only competitor which is Mercedes Benz. The current proposal of the company of incorporating an organic growth model is based on beating our Mercedes and achieved a market share greater than them. The company perceives their global market structure as an oligopoly in which BMW and Mercedes are the only participants. They have the potential to beat out Mercedes as far as volume because Mercedes has historically concentrated on the higher edge of the luxury market which are automobile in the $75,000 or more range. There are other competitors the company can consider such as Fiat, but in reality it is a two horse race in which BMW wants to be the winner. Problems BMW is a company with over 90 years of experience in the automobile marketplace. Despite their experience the firm has never been able to diversify into other segments of the automobile industry. In order to make their organic growth model plans a reality the firm has to move into other segments of the market in which they have limited experience. The business is operation in an industry that has reached the maturity stage. If we move forward to 2009 the industry is actually in the final phase of its life cycle which is the declining stage. The company is accustomed to above normal profits; an expansion strategy would reduce their profit margins and suddenly create competition against them that did not exist when they concentrated only the luxury car niche marketplace. The company has created amazing brand equity in their niche based on quality and performance. If the firm moved to lower segments of the market the company could dilute their brand value. The firm is thinking of incorporating China into its supply chain. This move might seem like a very good cost saving alternatives, but the public image repercussion of this plan could be disastrous. China is perceived by the global population as the place where they can acquire cheap merchandise which by de facto is unreliable and of low quality standards. For a BMW a company that has survived based on engineering and quality excellence the inclusion of such vendors in its supply chain is not aligned with its mission statement. Alternative solutions A1 BMW could create a business plan with an organic growth model at their assumption of 40% growth and put its business up for grabs. There would be a lot of bidders interested in acquiring the company due to its proprietary rights, technology, and goodwill. This option would create a bidding war which potentially could allow the stockholders of the firm to obtain a price of 50% or more above market value for the equity of the firm. In monetary terms this option this option is good alternative in the short term and would ensure a great return for the shareholders which are the stakeholder group that should primarily be considered in such a decision. Due to the history and legacy of this German firm that has survived the good and bad times for nearly a century it is unlikely that the ownership group would be interested in such an option. In the long term BMW might be keeping control of its operation and ownership. A2 In order to achieve its expansion plan BMW could enter into a strategic alliance with a major player in the automobile industry such as Ford or Honda. This alternative would allow the company to take advantage of the mass production expertise of such companies as well as obtain financing and mass marketing that otherwise would be hard for them to obtain on their own. The downside of the alternative includes the reception of the customers to such a move which would dilute their brand value. Also there is the possibility of foul play from the partner which could potentially steal trait secrets from BMW and utilize them in the future for their own purposes. A3 BMW can continue its organic growth model plans on its own. The company’s brand equity is so strong that the worldwide population of car buyers would be act positively towards more quality BMW models in the marketplace. In order to pursue this plan BMW has to accept its limitation and lack of expertise and hire an outside consultant to them realize such a plan. Also the firm has to significantly increase its marketing budget. The option has the highest short term risk, but it also has the biggest potential return in the medium and long term. Optimal solution The best alternative for BMW based on their mission and long term vision is alternative number 3. The company has the capabilities to realize their organic growth plan on their own. Companies in other industries with much less experience such as Starbucks and Subway have successfully implemented organic growth models. BMW has the advantage that they already have strong brand equity on their side and they have expertise knowledge in production of quality vehicles that cannot be matched by anyone, not even Mercedes Benz. The long term repercussion of pursuing their long term plans can reap benefits unmatched by any of the other alternatives. The firm needs to seek outside assistance to pursue this plan, otherwise the chances of failure increase. Also the 40% projected growth might be unrealistic; a 20-25% growth would be a better target. If the company achieves greater growth it would better for them since it would raise the value of the company. In the stock market investors buy based on expectations. If the company claims it can achieve 40% growth and it does not achieve that metric the price of their stock would go down regardless of the growth achieved. BMW has the potential to become a more diversified firm that offers more models that offer greater value for the global marketplace. Recommendations / Conclusion The BMW Group is a market leader in the luxury car niche marketplace. The firm has a global presence and high reputation for quality, performance, and reliability. Their slogan of the “ultimate driving machine” is justified because their autos are spectacular. Despite these attributes the company has reached stage due to industry changes that they need to achieve higher market share in order to compete under the new market realities. The firm does not have the experience at mass producing vehicles, but due to their knowledge and human capital the company can achieve any goal if they seek proper assistance. The optimal solution for this company is to contract a consulting firm to help them out with the production specification and marketing consideration in order to introduce several new car models that would the company to increase its revenue as well as its market share. The future of BMW is bright as long as they keep their quality standards above the competition. References Moller.com (2009). Retrieved March 28, 2009 from http://www.moller.com/ Answers.com (2009). Voluntary Export Restraint. Retrieved February 13, 2009 from http://www.answers.com/topic/voluntary-export-restraints Marketing Teacher (2009). Five forces Analysis. Retrieved March 29, 2009 from http://www.marketingteacher.com/Lessons/lesson_fivefoces. Read More