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Capstone Paper The Ultimate Driving Machine: A BMW Minivan? by The Soccer Moms John Brandes, Lisa Eskey, Ben Hidalgo, Michelle Ronco, Richard Upton & Fernando Villegas IDIS 619: Strategic Analysis Professor Tammy L. Madsen 2 June 2005 Table of Contents Wall Street Journal Article..............................................................................................................v Executive Summary.......................................................................................................................vi Introduction..................................................................................................................................... 1 External Analysis ........................................................................................................................... 3 Industry Definition...................................................................................................................... 3 Six Forces Analysis ................................................................................................................... 3 Level 1 Analysis ..................................................................................................................... 3 Level 2 Analysis ..................................................................................................................... 3 Level 3 Analysis ..................................................................................................................... 8 Macro Environmental Forces Analysis, Economic Trends, & Ethical Concerns.................. 9 Global...................................................................................................................................... 9 Social .................................................................................................................................... 10 Technological....................................................................................................................... 10 Governmental/Political ........................................................................................................ 11 Ethical ................................................................................................................................... 11 Economic .............................................................................................................................. 11 Demographic ........................................................................................................................ 12 Competitor Analysis................................................................................................................. 13 BMW’s Competitors............................................................................................................. 13 BMW’s Primary Competitors .............................................................................................. 14 Business Level & Corporate Level Strategies................................................................... 15 Achieving Strategic Positions ............................................................................................. 16 Willingness to Pay Framework ........................................................................................... 21 Comparative Financial Analysis ......................................................................................... 22 Summary.............................................................................................................................. 25 Intra-Industry Analysis ............................................................................................................. 26 Luxury................................................................................................................................... 26 Quality................................................................................................................................... 26 Value ..................................................................................................................................... 27 Mobility Barriers, Threats, & Opportunities ....................................................................... 27 Strategic Positioning............................................................................................................ 29 Failure Analysis........................................................................................................................ 29 Threats & Opportunities Analysis ........................................................................................... 30 Summary of External Analysis ............................................................................................... 31 Internal Analysis .......................................................................................................................... 31 Company Mission & Business Definition ............................................................................... 31 Management Style................................................................................................................... 33 Organization Structure, Controls, & Values .......................................................................... 34 Organizational Structure ..................................................................................................... 34 Controls for Employee Behavior & Performance.............................................................. 34 Organizational Values ......................................................................................................... 35 Strategic Position Definition.................................................................................................... 36 Corporate Level ................................................................................................................... 36 ii Business Level Strategy ..................................................................................................... 39 Resources & Capabilities .................................................................................................... 40 Technology Strategy ........................................................................................................... 47 Financial Analysis .................................................................................................................... 49 Profitability............................................................................................................................ 49 Growth Rates ....................................................................................................................... 50 Solvency & Liquidity ............................................................................................................ 50 Other Relevant Facts .......................................................................................................... 51 Net Present Value Analysis ................................................................................................ 51 Scenario Analysis ................................................................................................................ 52 Summary.............................................................................................................................. 53 Analysis of Effectiveness of the Strategy .................................................................................. 54 Recommendations ....................................................................................................................... 56 Marketing Short- & Long-Term Recommendations .............................................................. 56 Manufacturing Short- & Long-Term Recommendations ...................................................... 57 Design Short- & Long-Term Recommendations & Implementation .................................... 59 Short-Term: Incorporate Consumer Preferences into Design......................................... 59 Long-Term: Continue New Market Expansion with SUT ................................................. 62 Conclusion.................................................................................................................................... 64 Bibliography.................................................................................................................................. 65 iii Appendices................................................................................................................................... 78 Appendix 1: Personal Communication with Sarah Lovegrove ............................................ 78 Appendix 2: BMW History....................................................................................................... 79 Appendix 3: Company Strategy.............................................................................................. 79 Appendix 4: Six Forces Industry Analysis ............................................................................. 80 Levels 1 & 2.......................................................................................................................... 80 Level 3 .................................................................................................................................. 96 Appendix 5: Automobile Ownership Correlation with Per Capita GDP .............................. 97 Appendix 6: Currency Exchange Rates................................................................................. 98 Appendix 7: Target Market Statistics ..................................................................................... 98 Appendix 8: U.S. Market Share Data..................................................................................... 98 Appendix 9: Competitor Business Level Strategies ............................................................. 99 Appendix 10: Competitor Products & Product Markets ...................................................... 100 Appendix 11: Competitor Value & Cost Drivers.................................................................. 101 Appendix 12: Competitor Resources & Capabilities........................................................... 102 Appendix 13: Value-Price-Cost Analysis ............................................................................. 104 Value of Minivans .............................................................................................................. 104 Value of SUVs .................................................................................................................... 105 Price .................................................................................................................................... 106 Cost..................................................................................................................................... 107 Appendix 14: Profitability Ratio Analysis ............................................................................. 108 Appendix 15: Growth Rates Analysis .................................................................................. 109 Appendix 16: Solvency Analysis .......................................................................................... 110 Appendix 17: Liquidity Analysis ............................................................................................ 111 Appendix 18: Cash Flow Analysis ........................................................................................ 112 Appendix 19: Capital Expenditures & R&D Expenses ....................................................... 112 Appendix 20: Personal Communication with Sonja Pfeiffer .............................................. 113 Appendix 21: Personal Communications with Dr. Alessandro Zago ................................ 113 Appendix 22: Personal Communications with Kevin Flanagan ......................................... 114 Appendix 23: BMW Group Automobiles by Line ................................................................ 115 Appendix 24: Rumelt’s Category Scheme for Multi-Business Firms ................................ 115 Appendix 25: BCG Matrix for BMW Group & Automobile Brands..................................... 116 Appendix 26: BMW Business Level Strategies ................................................................... 117 Appendix 27: BMW’s Value Chain ....................................................................................... 117 Appendix 28: Activity System ............................................................................................... 118 Appendix 29: BMW Product Portfolio Analysis ................................................................... 119 Appendix 30: Lifecycle Analysis ........................................................................................... 119 Appendix 31: VRIO Analysis ................................................................................................ 120 Appendix 32: BMW Weighted Average Cost of Capital..................................................... 120 Appendix 33: BMW Net Present Value Analysis ................................................................ 121 Appendix 34: Demand Forecast........................................................................................... 121 Appendix 35: Scenario Analyses ......................................................................................... 122 Scenario 1: Minivan Priced at $65,000 ............................................................................ 122 Scenario 2: Minivan Priced at $60,000 ............................................................................ 122 Scenario 3: Minivan Priced at $55,000 ............................................................................ 123 Sensitivity Analyses ........................................................................................................... 124 Appendix 36: The Soccer Moms Team Photo .................................................................... 125 iv Wall Street Journal Article In the article “BMW Will Enter Market Segment for Minivans” by Neal Boudette (2005a), BMW’s strategy to enter the U.S. market for minivans is revealed. Below is the article in full: BMW AG has greenlighted plans to build a kind of minivan and expects to announce a decision in the coming months on what the vehicle will look like, the company's chief executive said yesterday. "We have decided that the BMW brand will enter the [market] segment" for spacious cars that can carry six or more passengers, Helmut Panke said in an interview at a reception on the eve of the Geneva auto show. "It's not a question of `if,' but of `what.' " By the middle of the year, BMW will "define the parameters" for the vehicle's size, engines and other technology, Mr. Panke said. BMW is scheduled to provide details about its plans at a news conference today. The car, which wouldn't enter the market for at least another year, is the latest in BMW's effort to broaden its product line into fast-growing market niches. Once strictly a maker of sporty sedans, BMW has branched into sports-utility vehicles, roadsters, compact cars and convertibles. The gamble has lifted overall sales and profits, but also has caused some unease among its hard-core fans. For some, a type of minivan would be a further strike against tradition. Mr. Panke declined to say what shape the new vehicle might take, but acknowledged it could be described as a "crossover," a term the auto industry uses for vehicles that usually have three rows of seats but are sleeker and more carlike than boxy minivans. "In the U.S. there is a movement away from the traditional minivan shape and toward crossovers that have the higher, command seating of an SUV but have a more car-like silhouette," Mr. Panke said. He acknowledged a concept like that is one "alternative" BMW has considered. A second possibility looks more like the compact minivans that have been selling in increasing numbers in Europe. These vehicles are shorter than American minivans and usually have a third row of folding seats that offer little leg room. "We have these two fundamentally different alternatives," Mr. Panke said. He declined to say if the car would be built in its U.S. plant in Spartanburg, S.C. BMW has begun overhauling the plant so that two different vehicles, the Z4 roadster and X5 SUV, can be built on a single production line. That will leave ample space to install new production equipment to produce a third model. v Executive Summary As stated in the capstone paper proposal, BMW Group has announced it will introduce an extension of its product line with a minivan. Design details are expected to follow in the coming months, and the final product is expected to launch within the next two years (Brandes et al., 2005). To continue, “Over the past year, BMW has been making numerous strategic moves to broaden its product offerings, and the opportunity for growth by entering this fast-growing market-niche provides yet another possibility to boost sales and profits. Yet, there is also the risk that BMW will dilute its brand value by going against tradition and the Company’s most devoted fans, as well as the possibility that BMW will not be able to effectively penetrate the market to achieve its goals” (Brandes et al., 2005). This analysis uses various frameworks to examine various external and internal factors. Global forces, such as currency exchange rate volatility, national trade agreements, and alternative fuel trends, all can have an impact on BMW’s success. It was found that the Company is prudently addressing a number of these forces by taking such steps as investing in new hydrogen fuel technology and by operating an assembly plant in the United States. The U.S. automobile industry was determined to be neutral with regard to attractiveness. When BMW introduces its new product, it will face intense rivalry from many large competitors, as numerous SUV and minivan models clutter the market with a range of features and price points. The financial analysis shows that BMW compares equally or favorably to its competitors across a range of metrics, with Toyota being the only clear financially- superior competitor. BMW is well known for its technological and design edge for high-performance automobiles. With a balancing act of offering the right pricing and positioning, BMW should market the new offering in a way that appeals to consumers who might not otherwise buy BMW, while being careful not to tarnish the Company’s premium brand image. BMW should leverage its excess capacity in its U.S. plant, and secure options to make use of contract manufacturers to provide flexible capacity. The design of the new product should reinforce the brand image of BMW. In the long term, it is suggested that producing a sport utility truck would once again, broaden the product line, offering another premium option for every stage of a consumer’s life. This group is confident BMW will succeed, and recommend a buy and hold strategy for its stock. vi Introduction Bavarian Motor Works Corporation is the English translation of the German company Bayerische Motoren Werke Aktiengesellschaft (BusinessWeek, 2004a; BMW, 2005e, p.200). BMW AG refers to the headquarters operations in Munich, while BMW Group encompasses the BMW AG and all subsidiaries (Lovegrove, S., personal communication, May 26, 2005). Please see Appendix 1 for text of email communication. The appellations BMW AG, BMW Group, and BMW are often used interchangeably to refer to the Company (Rosemary [last name withheld], personal communication, May 25, 2005). BMW was founded in Munich, Germany in 1916. Now, almost 90 years later, BMW is recognized as one of the most powerful brands in the world, and its international network of plants spans seven countries across five continents (BMW, 2005a). For a timeline of the Company history, please see Appendix 2. Helmut Panke, who joined BMW in 1982 as a scientist, currently runs the Company. He was promoted to CEO in 1995 and added chairman of the board to his title in 2002 (BMW, 2004a). In short, the essence of BMW Group’s strategy is one of growing to be the best at its core strengths within the “premium sector of the international automobile market” (BMW, 2004b). See Appendix 3 for details of the strategy. The Company’s current success is detailed by market strategist and author Laura Ries in a recent blog: [BMW is] a brand focused on a single market: premium-priced cars. A brand that owns a word in mind: driving. A brand that has the best automotive advertising slogan ever written: “The Ultimate Driving Machine.” And a brand that has been highly profitable (Ries, 2005). A company with this much success can do one of two things: protect the brand by remaining focused and disciplined, with dedicated service to its “hard-core customers”, or expand the brand with product and market extension introductions to a broader set of consumers. Many see this debate as a black-and-white issue between long-term and short-term growth; protecting the brand is key to future success, whereas selling products that are only to result in immediate profits may undermine, weaken, or even destroy the power of the brand. BMW has been facing this issue for the past few years. To illustrate, the Company redesigned some of its core products—including the 3 Series, which was re-launched this spring—and has introduced multiple new models over the past year. BMW Group is attempting to provide “The Ultimate Driving Machine” to a wider audience around the world. In fact, Panke commented, “Our product portfolio and our international presence are more comprehensive than ever before. 1 We will resolutely continue to utilize further market potential available to us in the future” (Ries, 2005). The Company will continue the debate with the announcement of a recent strategic move, as detailed in the Wall Street Journal article that inspired this analysis. More than 20 years ago, the introduction of the minivan revolutionized transportation, combining the best features of cars, vans, and trucks in an appealing package that hauled families across America. The original was dubbed the “Magic Wagon” when Chrysler introduced the first one in 1983, and more than ten million Chrysler, Dodge, and Plymouth minivans have been sold ever since (Pesola, 2003). BMW enthusiasts are already worried that the Company’s aggressive expansion has damaged the brand, in terms of quality and attention to detail. For example, some have commented that creating the X3 took away from resources that could have been used to improve products such as the 3 Series models and iDrive, a personal navigation system (Diken, 2004). Now, with the Company’s announcement that a type of minivan is in the works, reactions have varied from enthusiasm to disgust. Comments by the general public on blogs provide examples of the degrees of sentiment: • • • • • No minivan on earth could ever be called “The Ultimate Driving Machine“; what an oxymoron! (Ries, 2005) BMWs are fun, fast cars. Are they blowing that brand? (Ries, 2005) I would love to see a minivan by BMW; they might reinvent the class. (Ries, 2005) BMW is making minivans now! What has the world come to? (Thomas, 2005) If I HAD to drive a minivan, I’d rather drive a BMW than an Odyssey, Town & Country, etc. (Diken, 2004) One user of Autotblog.com brought up a good point: What is BMW anyway? His contribution to the conversation was that it’s “Something—no matter the package—that offers driving pleasure” (Thomas, 2005). BMW’s website does toggle between two mantras: “The Ultimate Driving Machine” and “Sheer Driving Pleasure.” This transition to a new slogan seems fitting, as the original line implies one machine, whereas the Company now produces several lines of vehicles, prompting the question of which one of those products is THE ultimate one. So, is the minivan market ready for a BMW-specific solution? The following analysis details our response. 2 External Analysis Industry Definition BMW competes in the auto manufacturing industry, however, this analysis will concentrate on the introduction of BMW’s proposed product in the United States, as well as its impact upon established competitors, focusing only on auto manufacturers that distribute SUVs and minivans in the U.S. market that seat more than six passengers” (Brandes et al., 2005). Automobile manufacturers are referring to SUVs, minivans, and similar offerings with varying terminology. A brief thesaurus includes crossover utility vehicle (CUV), multi-purpose vehicle (MPV), and sports activity vehicle (SAV). Six Forces Analysis Level 1 Analysis A Level 1 analysis was performed for each of the six forces and is detailed in Appendix 4. Level 2 Analysis Threat of Rivalry To analyze Rivalry, the SUV and minivan markets were separated from the general automobile market. Segmenting this market is important because rivalry in the market subsets—especially when considering exit barriers and participant size—are different from the market in general. Rivalry in the luxury SUV and minivan markets is high. With more than 19 compact SUVs, 24 mid-size SUVs, 16 full-size SUVs, 26 luxury SUVs, and 16 different brands of minivans to choose from, product differentiation and demand conditions become the most important factors concerning rivalry (CarsDirect.com, 2005). As consumer preferences vary, with regard to the many different amenities, styles, power, and prices of cars, automakers’ ability to differentiate products in this market is favorable. High exit barriers are unfavorable to the industry, due to excessive up- front costs in plants, machinery, labor, and distribution channels, making an automaker’s exit from this industry unlikely. Although automakers can produce a variety of products, they typ ically stay in the car, truck, and motorcycle arenas. Cost conditions in the industry have also proved unfavorable. The price of producing automobiles has been steadily increasing both domestically and abroad, making the competition for cutting costs fierce. Rising labor 3 wages, more intricate production demands, and elaborate distribution networks have made production efficiency a key industry concern. Demand conditions in the automotive industry depend on the type of product. The luxury market grew four times as fast as total auto sales in 2004, although it is not expected to grow as much this year (Green, 2005). For example, although new car sales decreased in 2003-04, sales of small-sized SUVs have increased. However, “sales of full- size SUVs in the United States for the first four months of 2005 dropped 19 percent compared to the sales during the same period in 2004” (Millikin, 2005). Sales of minivans have not increased; in fact, after sales peaked in 1999 when they were 7.7 percent of total cars sold domestically, sales have declined (Stoddard, 2004). In 2003 sales of minivans in the U.S. were at their lowest in nine years at 6.6 percent (Stoddard, 2004). What is disconcerting to automakers is that macroeconomic conditions have a great impact on auto sales. Rising gas prices and increasing new vehicle taxes have dissuaded some consumers from purchasing a new vehicle, especially SUVs, which traditionally have inferior fuel economies. Another concern for automakers is that the cash-back incentives and low- interest financing options offered to consumers did not increase demand as much as automakers expected. These will be detailed further in the Marco-Environmental Analysis that begins on page 9. The manner in which the automobile industry is structured has positive and negative impacts on automakers, depending on which segment of the market is entered. The minivan market, for example, is dominated by a small number of firms, namely DaimlerChrysler and Ford. Alternatively, SUV producers have much more equal market share spread through the small, mid-size, and large markets. The fact that the auto industry in general is rather oligopolistic, however, is not favorable. Larger automakers, such as GM, Ford, and DaimlerChrysler, often have prominent influence and power, given the number of products they produce in many different markets. Although an automaker might have weak market share with one product, this is often offset by its power in another market. Additionally, automakers can enter new product markets if they choose. Therefore, Rivalry as a competitive force has a moderately unfavorable impact on industry attractiveness. 4 Threat of Entry Regarding Threat of Entry in the automobile industry, five different types of potential entrants were evaluated: • • New Automobile Manufacturers: These potential entrants include companies created from scratch and existing companies entering the automobile business for the first time, starting with an SUV or minivan product. Automobile Manufacturers that Do Not Make SUVs or Minivans and Do Not Sell Any Automobiles in the U.S. Market: Our research did not find any major auto manufacturers that fit into this category; however, a company might fit into this category in the future. Automobile Manufacturers that Make SUVs or Minivans and Do Not Sell Any Automobiles in the U.S. Market: Foreign companies, such as Aro of Romania (Skrzycki, 2005), Maruti Udyog (Bryant, n.d.) and Tata (MacAveal, n.d.) of India, Chery of China (Edmunds.com, Inc., 2005), and PSA (Kelly, 2005; Peugeot, n.d.) of France, manufacture SUVs or minivans, but do not have distribution channels to currently sell these products in the United States. Automobile Manufacturers that Sell in the U.S. Market but Do Not Make Minivans or SUVs: This is another category for which our research found no major auto manufacturers that fit. Automobile Manufacturers that Sell in the U.S. Market and Make SUVs or Minivans, but Do Not Sell SUVs or Minivans in the U.S. Market: An example of a foreign company in this category is Fiat S.p.A (Fiat S.p.A., n.d.a). The company makes SUVs and minivans under the Alfa Romeo and Fiat brand names, but does not offer them for sale domestically (Fiat S.p.A., n.d.b; Fiat S.p.A., n.d.c). • • • Capital requirements are favorable, and are joined by moderately favorable factors of economies of scale, level of product differentiation, and cost advantages independent of scale. Therefore, Threat of Entry as a competitive force has a moderately favorable impact on industry attractiveness. Buyer Power Regarding Buyer Power in the automobile industry, four general types of buyers were evaluated: • • • Individual End Consumers: Individuals are the largest buyer group, with nearly all sales coming from new car dealerships. New Car Dealerships: Dealerships serve as the primary channel for sales to individual end consumers. Rental Car Agencies: Agencies are very concentrated and purchase in large quantities. 5 • Fleet Leasing Companies: Corporations lease autos for their employees. These buyers typically involve a third-party leasing agent that handles all servicing, negotiations with manufacturers, registration, and insurance. All buyers are severely price sensitive, except for a few affluent individuals. Differentiation to rental car agencies and fleet leasing corporations is primarily based on price, once basic requirements are met. Individual consumers are not only price-sensitive, but very specific with regard to product design, brand, and performance. Buyers earn low profits as individuals, save less than 1 percent of income (Bureau of Economic Analysis, 2005), and spend 19.1 percent per year on autos (Bureau of Labor Statistics, 2004). Dealerships have experienced decreasing gross margins, from more than 10 percent in 1979 to a current level below 6 percent (Bruynesteyn, 2005, p. 33). Additionally, publicly-traded car rental agencies show poor returns on sales (Levecke, 2004). Autos have a strategic importance to each buyer. For individuals, they are a necessary means of transportation outside of major cities. For all other buyers, autos are critical assets for business. They are a large cost for all buyers with an average large SUV having a Manufacturer’s Suggested Retail Price (MSRP) of more than $42,000, and $35,000 for a loaded Chrysler (The Auto Channel, 2004; CarsDirect.com, 2005). Buyer power is low, primarily due to the lack of concentration between the two most important groups: individual consumers and dealerships. These buyers are strategically important to automakers, as there are no other potential buyer groups available. Market growth has slowed for SUVs but still remains solid with the introduction of hybrid models; sales are expected to grow as these autos are made more practical and stylish. Overall, good market growth, high switching costs, and product differentiation among individual buyers are the overriding factors. Therefore, Buyer Power as a competitive force has a moderately favorable impact on industry attractiveness. Supplier Power Regarding Supplier Power in the automobile industry, eight general types of suppliers were evaluated: • • Labor: Includes unionized and non-unionized human capital. Steel: 47 percent of the raw material cost of a typical automobile is from steel (Bruynesteyn, 2005, p. 26), making this category a primary supplier. 6 • • • • • • Commodity Components: Includes tires, batteries, fabric, fluids/chemicals, and paint, as well as other raw materials, such as iron ore, copper, brass, zinc, rubber, and glass. A recent Association of International Automobile Manufacturers study found that “international automakers spent $66.7 billion on purchases in 2003 from U.S. suppliers of all types, including $49.1 billion in auto parts” (Stoltz, 2005). Model-Specific Components: Includes hood ornaments, paint, fabric colors, body design, etc. Electronics: A growing supplier, as electronics currently comprises 25 percent of a car’s costs, but is expected to rise to 40 percent by 2010 (IHS, Inc., 2004). Powertrain: Includes engine and transmission. Although options are increasing (such as diesel, gasoline, electric, hydrogen fuel cell, and hybrid), these components are usually produced in- house by the automobile manufacturers. Contract Manufacturers: Many companies are outsourcing manufacturing to reduce costs. These companies concentrate on “specialty models that sell in small quantities” (Siekman, 2005). Magna Steyr is the largest player, and its Graz, Austria plant produced almost 227,000 vehicles in 2004, with more than half that volume accounted for by BMW’s X3 (Ward’s Auto World, 2005). Manufacturing Tools: From hand and power tools, to toolboxes and shop equipment, to automated machines, tools are a large part of the manufacturing process. Although the suppliers’ products and services are differentiated, and manufacturers need these to produce automobiles, other factors offset them. The lack of substitutes, the fragmented nature of the suppliers, and the inability of these groups to vertically integrate forward favor the automobile manufacturers to a great degree and reduce supplier power. Therefore, Supplier Power as a competitive force has a neutral impact on industry attractiveness. Substitutes Regarding Substitutes in the automobile industry, three segments were analyzed: vehicles in general, the SUV market, and the minivan market. There are no viable substitutes for vehicles in general. It would be impractical to assume that a consumer requiring a high-occupancy vehicle would easily be able to utilize public transportation or any other means. The switching costs are also quite high; not only are the financial costs associated with buying and selling a vehicle significant, there are also inconvenience factors associated with shopping for a vehicle, selecting a dealership, and negotiating a final price. This holds true for vehicles in general, as well as the SUV and minivan segments. These factors are all favorable to the industry. 7 However the price performance of substitutes is fairly high, and there are a number of alternatives available. Buyers do have a relatively high propensity to substitute when they are in the market for a new vehicle. This is not favorable for the industry. However the switching costs do prohibit customers from substituting often. Therefore, Substitutes as a competitive force has a moderately favorable impact on industry attractiveness. Complements Regarding Complements in the automobile industry, five general types of complements were evaluated: gasoline refiners and distributors, banks and other lending institutions, liability insurance companies, after market accessories suppliers, and maintenance companies. Even though relative concentration, switching costs, and asymmetric integration threats are favorable for the industry, the unfavorable nature of the ease of bundling and the differences in pull- through demand neutralize their favorable effects. Moreover, the rate of growth of the value pie is neutral. The SUV/minivan industry itself is neutral, and, in aggregate, the complementing industries do not add much overall value. Specifically, while the gasoline refiners and distributors industry, with the depleting of fossil fuels, and the insurance industry, with its regulatory nature, take away from the pie, the other industries are neutral. The role of Complements is an important factor in the buying decision of automobiles. Demand for new automobiles is greatly impacted by the level of interest rates; a higher rate lowers demand for new cars, as most purchases are made with borrowed money (Porreto, 2004). The price of gasoline is another determinant of automobile demand. Higher oil prices translate to higher prices at the gas pump; this in turn lowers demand for gasoline burning vehicles in general. However, demand for large SUVs, sometimes referred to as gas- guzzlers, is more elastic, thereby decreasing demand more than the industry in general (Green, 2005). Therefore, Complements as a competitive force has a neutral impact on industry attractiveness. Level 3 Analysis The Level 1 and 2 analyses lead to the conclusion that the U.S. automobile manufacturing industry for SUVs and minivans is neutral. Please refer to the end of Appendix 4 for a table summary. The Level 2 analysis indicates that Rivalry is moderately unfavorable, while Threat of Entry, Buyer Power, and Substitutes are moderately favorable. Supplier Power and 8 Complements have a neutral affect. Rivalry is considered the most crucial force affecting industry profitability, with Threat of Entry being the second most vital force. As discussed previously, product differentiation and demand conditions, cost conditions, and industry structure give rise to intense rivalry conditions. This is offset by the capital requirements, economies of scale, level of product differentiation, and cost advantages independent of scale that comprise Threat of Entry. Together, these fo rces are equally balanced by Buyer and Supplier Power, as well as Substitutes and Complements. Macro Environmental Forces Analysis, Economic Trends, & Ethical Concerns Global The major global factors that affect the automobile industry are trade tariffs between trading partners, global economic conditions, and global social trends. The cost of doing business across the globe increases when tariffs are imposed on imports by trading partners. These costs are passed on to the end consumer when possible or are absorbed by the firms. In either case, the level of business in the industry is affected by these trade restrictions. When the costs are transferred to the consumer, demand falls because substitutes are preferred. When the firms absorb the costs, supply is curtailed because lower profits are unattractive. The continuation of free trade agreements between trading partners, such as North American Free Trade Agreement nations and the European Union, will help mitigate cross-country trading costs. Global econo mic conditions affect the overall demand for automobiles. Automobile ownership is highly correlated with per capita Gross Domestic Product. Please see Appendix 5 for supporting data. As world real GDP is expected to grow at around 4 percent for the next five years (IMF, 2003, p. 275), automobile demand should grow as well. Inflation and interest rate fluctuations affect currency exchange rates, which increase cost uncertainties for firms transacting in the global economy. Forecasted stability in these key economic metrics should help currency exchange rates stabilize the volatility experienced in recent years. Appendix 6 details a currency exchange rate volatility chart fo r selected currencies. Inflation is expected to be around 2 percent (IMF, 2003, p. 212) per year for major advanced economies, as defined by the International Monetary Fund, and world longterm interest rates are expected to be around 3.2 percent for the next five years (IMF, 2003, p. 275). 9 Social The continued depletion of fossil fuels and the increasing concern of global warming are factors that could potentially have negative effects on demand for automobiles. In fact, the automobile industry has been under scrutiny for not developing more environment- friendly alternative fuels. For example, in the United States over the past 10 years, oil efficiency was not a major concern for consumers because the economy was robust, as the longest bull market in U.S. history created many millionaires. However, a recent economic recession and rising oil prices are changing attitudes toward fuel efficiency. Consumers now feel less comfortable with the economy and are becoming more worried about costs. In the 1980s and ’90s, the yuppie generation was “motivated almost exclusively by professional success” (Boudette, 2005b) and driving a luxury car like a BMW was a mark of such attainment, as its hood emblem became a “world-wide symbol of achievement” (Boudette, 2005b). This attitude has since changed, as was found in a study by The Sigma, a German research firm (Boudette, 2005b). As attitudes changed toward other lifestyles, such as family time and outdoor recreational activities, the vehicles bought became roomier than sedans and more stylish than minivans. Although the minivan market remained strong, the SUV market became lucrative for manufacturers, as owning an SUV became a symbol of modern society. Consumers’ buying habits are shifting once again, as a result of higher oil prices, as well as a result of SUV styles becoming stale. Now, the crossover concept is invading the auto industry. Consumers are looking for vehicles that are still roomy, that ride smoother than truck-based SUVs of the past, and that have higher fuel efficiencies. This change in attitude bodes well for BMW as it enters the minivan market. Technological Throughout its history, the auto industry has benefited from technological advancements, from Henry Ford’s adoption of the assembly line concept (Mateja, 2003) to the more recent phenomenon of real-time, online collaboration between manufactures and suppliers for inventory control (Gould, 2003). Moreover, technology is used from the manufacturing process, with specialized robots in the assembly lines (Holland, 2001), to the sales activity, as consumers have the ability to custom order their vehicles online (The Economist Newspapers Ltd., 2004). Technology has made the buying process at dealerships much simpler, with onthe-spot online credit checks and automated contract creation (Banks, 2003). 10 The advancements in electronic communications in recent years should help auto manufacturers take advantage of marketing strategies not feasible in the past, such as personalized advertisements based on past shopping and driving behaviors. Governmental/Political There are multiple levels of government involvement in the auto industry, most of which increase the cost of manufacturing and selling vehicles. Auto manufacturers must abide by federal and state regulations. As examples, there are laws regarding occupational safety, minimum wage, and minimum working age for U.S. manufacturers, while selling automobiles domestically also requires meeting fuel economy, safety, and environmental pollution standards. Ethical The industry faces some direct ethical problems and many indirect ones. Directly, one could make the argument that auto manufacturers should spend resources in designing cleanfuel burning vehicles to alleviate some of the health problems that are due to smog from the manufacturing and use of automobiles. Moreover, an argument could be made that affordable vehicles should be made for people that need transportation but cannot afford to buy a vehicle in the current market. Indirectly, auto manufacturers could be blamed for human rights abuses by global oil companies, as they are major consumers of oil-based byproducts. Secondly, the unethical behavior employed by some of the industry’s distribution partners can be indirectly linked to associated manufacturers. Economic As with many other industries, favorable economic conditions are essential for the auto industry to do well. Historically, earnings for the auto industry are positively correlated to economic growth, as measured by GDP. The U.S. economy is expected to grow, year-overyear, between 3.5 and 4 percent in the next four calendar quarters, as Prudential Securities’ analysts assume 3.5 to 4 percent (Bruynesteyn, 2005, p.9) while a Bloomberg survey projects economic growth at around 3.6 percent (McKeaney, 2005). In the automobile industry, it is common to assume a 4 to 5 percent GDP growth will increase auto sales by 1 percent (Bruynesteyn, 2005, p. 9). Given this forecast, one can infer that vehicle unit sales should have some positive growth, albeit small. 11 One factor looming over current and possibly future economic conditions is the pervasive interest rate hikes by the Federal Reserve. In general, economic activity increases when interest rates are low. However, because of the prolonged and eventually overheated economic expansion of the 1990s, the Federal Reserve has had to increase rates to cool the economy to keep inflation at sensible levels. Interest rate hikes are dangerous because it is difficult to predict how high to raise rates before economic growth is hampered. However, keeping interest rates low, as stated before, can spark inflation, and high inflation is not healthy for real economic growth. The availability of fuel at a reasonable price is an important factor for the industry. Therefore, the price of oil, in concert with other economic and social variables, plays an important role in the type of vehicles consumers demand. Due to the high oil prices of recent history, in general, demand for high fuel consumption autos, such as large SUVs, is declining (Green, 2005). This situation then creates opportunities for substitutes. Finally, the price of raw materials used in the manufacturing of vehicles has been rising and is expected to continue to increase through the calendar year (Bruynesteyn, 2005, p. 26). Higher input costs may point to higher prices for consumers, if the manufacturers can pass on rising costs or lower profits for the industry. Demographic The target markets for BMW’s new product are households with adults 35-50 years old with child ren and households with adults 50-plus years old with no children that earn at least $200,000 annually per household. The size of the target market, by age, has expanded 23 percent from 1990 to 2000 (U.S. Census Bureau, n.d.), and is expected to grow another 14 percent in 2005. See Appendix 7 for calculations of estimates. This segment of the population is expected to enter its peak spending years around 2005, a time in which it tends to buy more expensive vehicles (Bruynesteyn, 2005, p. 9). Favorable trends for the industry include disposable income growth, which is increasing at around 6 percent annually, combined with low inflation rates. The Consumer Price Index has increased on average 2.6 percent annually over the last five years (Bloomberg online service). Although inflation has increased recently, the interest rate hikes should curtail the trend. Furthermore, even though interest rates are increasing, they are still low relative to what they 12 were five years ago. With money still considered relatively cheap, consumers should continue to borrow. Competitor Analysis BMW’s Competitors BMW has many competitors in the U.S. market. According to 2002 data detailed in Appendix 8, the top four OEMs account for 72 percent of passenger vehicles. These include various models from DaimlerChrysler (DCX), Toyota, General Motors (GM), and Ford. The top seven account for 86 percent and the top 20 include the remaining 14 percent. Segmenting the industry by manufacturer, the minivan market is dominated by DaimlerChrysler (DCX), with 39 percent of the market. The top four in this market are DaimlerChrysler, GM, Ford, and Honda, selling a range of models that aggregate 85 percent of the market. Toyo ta and Nissan add an additional 8 percent, and other manufacturers account for the remaining 7 percent. The SUV market is segmented into five subcategories: small, mid, large, prestige mid, and prestige large. The small segment is the most fragmented; DCX has 22 percent share, and Ford, Honda, and GM are in the mid-teens. However, the largest portion, 23 percent, is a combination of competitors outside the top six. In three of the remaining four subcategories, GM dominates, with 25 percent share in the mid, 49 percent in the large, and 61 percent in the prestige large. Ford is a close rival in the mid SUV segment, with its Explorer, and Toyota has taken 27 percent of the prestige mid, with its Lexus cross-utility vehicle, the RX330. The SUV market’s demand is more variable, due to greater product differentiation among models. Whereas there are many players in the small, mid, and prestige mid SUV segments, there are only three major players in the large SUV (GM, Ford, and Toyota) and only two in the prestige large (GM and Ford). Examining the luxury car market, Lexus (12 percent market share), BMW (11), and Mercedes-Benz (10) are the leaders with double-digit figures. Cadillac (9) and Lincoln (8) follow closely behind to give the top-five firms a collective market share of 50 percent. Smaller players accumulate to account for the remaining half of this market. 13 BMW’s Primary Competitors The primary competitors for BMW in the high-occupancy vehicle space are as follows: • • • • DaimlerChrysler Toyota General Motors Ford DCX is the number one emerging competitor. It is the market leader in the minivan segment, as indicated in the previous section. The company also ranks number three in the luxury segment, BMW’s primary market segment. This means that it has experience in designing and manufacturing high-occupancy vehicles, and it has the Mercedes brand to compete with BMW head on if it chooses to enter the high-occupancy vehicle market. Mercedes is also associated with luxury and performance, making DCX a strong competitor. Toyota is BMW’s number one existing competitor. It has the highest market share in the premium mid-size SUV market. Two out of the three products in the Lexus line- up currently offer seating for six or more passengers: the LX470 and GX470 (CarsDirect.com, 2005). While these vehicles are considered trucks, they are the closest substitute in the luxury highoccupancy vehicle market. The Lexus brand is strongly associated with luxury and is somewhat associated with performance, making Toyota a fairly strong competitor. GM and Ford are the other existing primary competitors for BMW. General Motors has experience in the minivan market, with the Chevy and GMC brands, and also has experience in the prestige (mid-size and large) SUV segment, with the Cadillac brand. Like DCX, GM could use the Cadillac brand and its experience designing high-occupancy vehicles to compete with BMW. Ford has similar experience in the minivan market, with the Ford, Mercury, and Mazda brands, and also has experience in the prestige SUV segments, with its Lincoln and Volvo brands. While some GM and Ford brands and product lines are associated with performance (Corvette and Mustang) and luxury (Cadillac, Lincoln, and to a lesser extent, Volvo), consumer perceptions of a particular product line and brand may affect their perception of other product lines by the same manufacturer. GM and Ford are existing competitors, but either could release new products that are more closely aligned with the BMW product. GM and Ford are also potentially emerging competitors. 14 Business Level & Corporate Level Strategies Please see Appendix 9 for competitor business level strategy matrices. DaimlerChrysler DaimlerChrysler’s business level strategy is stuck in the middle. The company has lowcost, mass market models with its Dodge and Chrysler lines for cost leadership positions and migrates toward focused low cost with the Smart cars as it moves into niche markets. Its focused differentiation lines include Jeep, Mercedes-Benz, and Maybach, each of which trend toward few market segments. DCX’s corporate level strategy is that of related linked; 70 percent of revenue comes from the vehicle segment of its business (DaimlerChrysler AG, 2005). The commercial vehicle division, Freightliner, operates as a semi- independent business unit, and shares limited resources from the parent company. The financial services division finances most of the vehicles sold by the passenger car division, making this a vertically integrated business segment. Toyota Toyota’s business level strategy is that of broad differentiation. Toyota brands are focused on cost leadership, and the Lexus models are perceived as unique, as they are moving from niche markets into the masses. Toyota’s third brand, the Scion, is both low cost and perceived by customers as unique, and is one of the few product lines specifically targeting a narrow market. Toyota’s corporate level strategy is that of single business. More than 95 percent of revenue comes from the sale of vehicles; the remainder is generated by financing operations (Toyota Motor Corporation, n.d.). General Motors General Motors has a solid foothold as a cost leader business level strategy, as Chevrolet, Pontiac, Buick, and GMC lines fall into this category. Saturn is also in this group, but is perceived as a bit more unique by consumers, thanks in part to its no- haggling sales force. GM does offer differentiated products, and Saab falls into the broad differentiation category. Cadillac is targeted to fewer segments and is therefore in focused differentiation, and Hummer is deep in this strategy as well, as its line plays to a very niche audience. 15 GM’s corporate level strategy is that of dominant business. Approximately 83 percent of revenue is derived from the automotive and related businesses segments (General Motors Corporation, 2005a, p. 46). The remaining revenue is generated by GMAC, the corporation’s financing division. GMAC finances most of the vehicles sold by the automotive business units, making it a vertically- integrated business. Ford Ford’s business level strategy mirrors DCX, as both are stuck in the middle. Although five of the company’s eight brands are listed in the focused differentiation category, the remaining three are costs leaders and produce a majority of Ford’s overall total volume. Ford’s corporate level strategy is that of dominant business. Approximately 86 percent of revenue is derived from the sale of vehicles in the automotive business, while Ford Financial Services accounts for the remaining 14 percent (Ford Motor Company, 2005b, p.3). According to Ford, most vehicle sales are financed by Ford Financial Services, making it too, a vertically- integrated business. Achieving Strategic Positions BMW’s rivals —DaimlerChrysler, Toyota, GM, and Ford—have a variety of strengths. The most innovative rivals are the domestic brands; they seem most willing to launch differentiated products. Toyota is more conservative but is known for having the highest quality and the greatest manufacturing skill. GM and Ford have the most diverse product lines, as they are the only rivals in the group that have complete coverage of the passenger vehicle segments. DCX has near-complete coverage, but is missing a full-size SUV and a full-size van. Toyota has elected to focus on fewer segments, as it is the smallest of the four rivals and has the least amount of resources. In fact, Toyota spends the least on R&D as a percentage of revenue, while Ford spends the most of the four rivals (BMW spends more than Ford). Toyota and Ford appear to be the cost leaders; Ford has implemented effective cost-cutting measures, and Toyota runs a lean manufacturing operation. Toyota and DCX appear to have the greatest advantages for competition in the seven-plus passenger vehicle market. DCX has the greatest success in the current minivan market with the Town and Country minivan; Toyota has the greatest share of the luxury car market, and has two sevenplus passenger SUVs available today: the LX430 and the GX430. 16 Products Please see Appendix 10 for a complete listing of products and segments for all primary competitors. DaimlerChrysler Value DCX has a number of value drivers that help it achieve its strategic position. DaimlerChrysler values quality, especially for the high-end Mercedes brand. This is interesting because there have been some quality problems associated with the Mercedes line. However, the strength of the brand is strong enough to continue to attract customers. Brand is definitely a source of value for DCX. Along with quality, service is also a high priority, especially for the high-end brands. The DCX line is very well diversified and has products that cover most of the passenger vehicle segments (with the exception of the large SUV and full-size van segments). The company is willing to accept a larger amount of risk than the other competitors, as it has the longest warranty coverage of the four rivals. Appendix 11 details a full listing of value drivers. Cost DCX and the rest of the automakers share a number of cost drivers: scale economies, scope economies, and learning curves. All of the rivals have manufacturing operations large enough to achieve economies of scale, and all have product lines that share parts, processes, and equipment, giving them all economies of scope. All of the rivals have sufficient volume and longevity to have experienced learning curve benefits. DCX has an average level of organizational practice expertise and somewhat loose control over the supply base. Appendix 11 also details a full listing of cost drivers. Resources DCX has access to low-cost, high-quality manufacturing, through its joint vent ure with Beijing Automotive, and a large number of plants with a global reach. The organizational structure is a hybrid, allowing greater efficiency and response ability. DCX spends an average amount on R&D, about 4 percent of revenue. DCX has also diversified its holdings by taking a 33 percent stake in Mitsubishi. DCX is also a member of the Covisint supplier portal. Appendix 12 details a full list of resources. 17 Capabilities DCX has had success in its ability to predict market trends. The Chrysler 300 was very innovative, and DCX continues to own the minivan segment by offering customer specific requirements such as adjustable pedals, DVD video, and remote audio for the rear seating area (CarsDirect.com, 2005). Like the others, DaimlerChrysler utilizes a pooling concept by building cars on common frames. DCX is also immersed in technology: it is a member of USCAR, an organization focused on furthering technology in the domestic market. Appendix 12 also details a full listing of capabilities. Toyota Value Toyota is a company that is focused on quality; this delivers value to Toyota in every area of the business. Toyota views quality as a process vs. a metric to be measured. This means that, even though it does not offer the longest warranties in the business—in fact it averages the shortest warranty of the four rivals—it produces cars with low maintenance costs. Brand is also a value driver for Toyota; for the Toyota and Scion brands, reliability, quality, and value are the main focus; for Lexus brand, the main drivers are luxury, reliability, and quality. Toyota has the greatest geographical advantage of the rivals, as it requires its suppliers to locate within driving distance to the manufacturing plants. Please return to Appendix 11 for a complete list of value drivers. Cost As mentioned previously, these automakers share a number of cost drivers. However, Toyota differentiates itself through tight integration to the supply base and unparalleled organizational practices. Appendix 11 also details a full listing of cost drivers. Resources Toyota has low-cost, high-quality manufacturing as part of every-day operations, but it has also formed a joint venture with Guangzhou Automobile group to build engines, as well as with GM, when it opened the NUMMI plant in Fremont. Toyota has a number of manufacturing plants around the world, though not as many as the other rivals. Toyota is working to consolidate North American operations to improve efficiencies. A 50 percent 18 stake in Hino Motors and a 5 percent stake in Yamaha provide a diversified holding portfolio. Please refer back to Appendix 12 for a full listing of resources. Capabilities Toyota has the shortest design- to-market cycle in the industry; it also has the lowest inventory and shortest days supply on lot. It is very adept with managing technology and has launched such concepts as Just in Time and Toyota Production System. Like the other rivals, Toyota leverages many designs on one chassis, even across brands. Appendix 12 also details a full listing of capabilities. General Motors Value General Motors is the largest of the rivals. This gives it the highest value from network externalities. The company is not really known for quality and is usually viewed as a lowcost alternative to the other rivals. It has the broadest line with the greatest number of brands, allowing it to penetrate the market and obtain a 25 percent share in the U.S. car market (General Motors Corporation, 2005a, p. 47). The brand reputation for GM is fair to poor, as it has suffe red from a number of product recalls and quality problems. Appendix 11 details a full listing of value drivers. Cost As mentioned previously, GM and the rest of the automakers share a number of cost drivers. GM has loose control over the supply base and has poor organizational practices. As it recently posted an $839 million loss for the first quarter of 2005, GM has indicated that cost-cutting measures must be taken (General Motors Corporation, 2005b). Appendix 11 details a full listing of cost drivers. Resources GM has low-cost, high-quality manufacturing through a joint venture with Shanghai Automotive. Incidentally, GM will be the first western car company to offe r loans to Chinese consumers. Because GM is the largest of the rivals, it has an unparalleled global reach, with operations in more than 50 countries. GM has diversified its holdings via a 20 19 percent stake in Suzuki. GM has spent the least amount of money on R&D, only about 3.4 percent of sales. Appendix 12 details a full listing of resources. Capabilities GM has a good design-to- market cycle time, as it has heavily- leveraged information technology resources to make the design function more efficient. It has been successful with market predictions as well, with the launch of the SSR truck and the new ‘Cadillac image’ as examples. This has been achieved by using focus groups and market research. GM is also a member of USCAR, as it views technology advancement for the domestic makers as important. Appendix 12 details a full listing of capabilities. Ford Value Ford feels that quality is important, as evidenced by its former tagline “Quality is Job One”. It has, however, had execution problems, as the recent Firestone tire incident on the Explorer line called the level of quality into question. Ford does have a very well diversified product line, as it is second amongst the rivals in number of brands. It is taking on an average amount of risk with warranty practices that are middle-of-the-road with regard to the other rivals. Both Ford and GM have experienced some branding problems, with frequent recalls. Please return to Appendix 11 for a complete list of value drivers. Cost As mentioned previously, Ford and the rest of the automakers share a number of cost drivers. However, Ford has loose control over the supply base and has poor organizational practices. Ford has been more successful with cost-cutting measures than GM, as Ford was profitable the first of quarter 2005, though it did not perform as well as in the first quarter of 2004. According to Chairman Bill Ford, “The plan we launched in 2002 has led to profits and positive cash flow. Going forward, we will continue to focus on improving our quality, lowering our costs, and delivering exciting new products, as well as taking actions that strengthen our finances, optimize our global footprint, and lead to the faster development of new products” (Ford Motor Company, 2005a). Appendix 11 details a full listing of cost drivers. 20 Resources Ford has access to low-cost, high-quality manufacturing via a plant in China. Ford intends to build another plant in China and has purchased a 16 percent stake in Mahindra & Mahindra in India. Ford has global reach, as it is operating in 140 countries worldwide. It has diversified its holdings by purchasing a 33 percent stake in Mazda and owns the Hertz and Budget rental car companies. Of the four rivals, Ford spends the highest percent of revenue on R&D, approximately 4.3 percent. Please refer back to Appendix 12 for a full listing of resources. Capabilities Ford has an internal program to monitor the market trends, called the “Clipsheet.” This allows Ford to keep its finger on the pulse of the market and release innovative products, such as the new Mustang, which features retro styling that has also been successful for DCX. Ford has also taken steps to increase innovation through the management of technology, using the C3P program to manage all computer-aided design, manufacturing, and engineering information. Ford is also a member of USCAR. Appendix 12 details a full listing of capabilities. Willingness to Pay Framework BMW’s rivals all have different vehicles, and in some cases, different brands that have been marketed to compete in different segments. In the seven-plus passenger vehicle market, DCX has taken a cost leadership position, with an average price to the consumer of $33,700. DCX is not competing with the premium Mercedes-Benz brand in this segment. The other three rivals are competing with a combination of premium and standard brands. Their average price is higher, ranging from about $50,000 for Ford and up to $56,000 for Toyota. BMW is likely to be priced slightly higher, with an estimated cost for the new product to be around $60,000. Please see Appendix 13 for details. The rivals have been leveraging a strategy that takes into consideration the knowledge that consumers want options; they “want to be able to fit their cars to their personalities” (Ries, 2005). This customization of features allows a consumer to pay the price that suits their preferences as well as their ability to pay. For example, a base model Dodge Caravan starts around $18,000. However, through selecting options, a consumer can increase the price up to 21 $32,000 (CarsDirect.com, 2005). This flexibility has shifted the pricing power to the consumer, allowing customers themselves to determine their willingness to pay. Comparative Financial Analysis The financial statement information (FactSet online service) has been converted to U.S. Dollars using the year-end currency exchange rates as necessary. The analysis has been limited to certain ratios of profitability, solvency, and liquidity, as well as other facts deemed relevant to this industry; however, additional ratios are included in Appendices 14 through 19. Also, to avoid redundancy, the formulas for each ratio have not been given, unless it is a nonstandard ratio. To compare ‘apples to apples’, averages for the industry as a whole have been calculated, as well as a separate average for the main competitors listed above plus BMW, which will be referenced as ‘the group ’. Finally, the figures quoted are using a six- year average, unless specified. Profitability, Return on Assets, & Return on Equity In the six- year history analyzed, BMW achieved a solid 3.1 percent Return on Assets, vs. 2.2 percent for the industry. However, Toyota appears to be doing a muc h better job at utilizing its assets, as it had a strong 3.9 percent average ROA. An interesting observation is that U.S. firms had a much lower ROA than foreign firms, except for DaimlerChrysler. European- headquartered DCX’s deviation from this trend may be explained by the fact it has the U.S. native Chrysler division, which it acquired in 1998. A desegregated analysis of ROA shows what BMW and Toyota are doing to achieve above-average returns. Since ROA is a function of the Profit Margin and Asset Turnover ratios, each component was studied individually. Asset Turnover appears to be the biggest contributor to ROA for the foreign firms, which is about 40 percent higher, on average, than the domestic ones. This would imply that foreign companies are utilizing their assets more efficiently. A margin analysis shows another slight source of advantage for BMW and Toyota is their abilities to keep Cost of Goods Sold (COGS) relative to sales lower than the rest of the group, averaging 78 percent vs. 80 percent for the other three companies. However, compared to the broad industry, BMW is just slightly above the industry average of 77.4 percent. Selling General and Administrative (SG&A) expenses are about the same for the group as the industry average, except for GM, which appears to have lower SG&A 22 expenses. However, we are skeptical about this number, as a different data source listed an average of 15.3 percent of sales, which is more in line with the rest of the group. From a Return on Equity perspective, BMW, at 15.7 percent, and GM, at 15.6 percent, had a better return for their investors than the group average of 9.1 percent. However, the approach to achieve those results was different for the two companies. GM used a much higher leverage ratio, four times highe r than BMW, to accomplish the same results. Adjusted for risk, BMW and Toyota had better outcomes for their clients, as measured by ROE. Compared to the industry’s average ROE of 7.7 percent, the group as a whole is doing well at an average of 9.1 percent, again, with GM and BMW leading the way. But, the industry average includes the unacceptable ROE for Fiat, of -18 percent. Excluding Fiat, the industry average is 11 percent. Growth Rates On average, sales growth for the group has been around 6 percent per year, slightly lower than industry average of 6.7 percent. Toyota is leading the way at 10.3 percent, and BMW is a close second at 8.8 percent. The U.S. companies and DCX, however, have been growing at a much slower pace around 3.5 percent. Even though BMW’s sales growth is one of the highest of the group, the growth rate has been decreasing the past two years, whereas the rest of the group has been increasing on average. Another interesting pattern is in the operating income. Toyota has been growing its operating income steadily at around 19 percent per year; however, the rest of the group and the industry exhibit tremendous volatility, especially DCX, followed by BMW. Earnings Before Income and Taxes and net income growth rates follow the same pattern as operating income for the group with the exception of BMW. BMW shows less volatility in terms of EBIT and income growth than it did with operating income. Asset growth is a good indicator of future sales growth because companies normally add productive assets when there is demand for their products. Asset growth for the industry and the group has been around 11 percent. Two companies that have above-average asset growth are BMW and Toyota, of 17.8 percent and 14.2 percent, respectively. 23 Solvency & Liquidity The automotive industry is a capital- intensive business. Companies in this industry are debt heavy by definition because the assets required to run the operation are long- lived assets, and therefore companies will tend to carry large amounts of long-term debt. The average company in the industry has had its debt grow on average 15 percent per year. The companies in the group have had about the same growth except for Ford and BMW; Ford’s total debt has only increased 5 percent per year, whereas BMW’s has increased on average 22 percent annually. The debt growth in these companies does not take into account off-balance sheet debt, which has become a popular practice in the recent past. It is likely that Ford has engaged in this alternate accounting practice, in which case this debt would not be reflected in financial statements, and therefore it would appear that Ford has lower debt growth. Although BMW has had a higher total debt growth rate than its competitors, it has managed to keep its debt levels just about the same as the industry average of 43 percent, as measured by total debt to total assets, compared to 46 percent for the company. In fact, when measured by long-term debt to total capital, BMW, with 54 percent, is in a better position to take on more debt to support future growth than its peers in the group, except for Toyota at 33 percent, vs. the group average of 63 percent. Toyota has the best interest coverage ratio as well at 51 times compared to the industry average of 14 times, followed by BMW, at 7 times. From a liquidity perspective, the industry’s quick ratio is 1.0. All the companies in the group are close to the average, with the exception of GM, which is at 0.80. GM had had a low current ratio in the first three years of this analysis and then improved it in 2002 and 2003, nearing the industry average, as it was able to increase current assets and lower current liabilities. However, in 2004, GM’s current assets dropped from 39 percent of total assets to just 23 percent. At the same time, current liabilities remained the same, at around 38 percent, bringing the current ratio back down to 0.60 in 2004. The quick ratio is approximately 10 percent lower than the current ratio for the industry average, and there is not much fluctuation from company to company because on average, all of the companies in the industry carry 10 percent of inventory relative to total assets. An interesting point, however, is that Ford and GM carry lower inventory levels than the rest of the group. This could be an advantage for them over foreign companies that have to 24 carry higher inventory levels to meet customer demand because they would have to incur higher inventory carrying costs. A Cash Conversion Cycle (CCC) analysis was also performed, which measures how fast companies turn their receivables and inventories into cash, in tandem with how fast they liquidate their own accounts payable. However, this analysis was only performed for the group, as data for individual companies was not available. These findings are interesting because they explain why some companies in the group must borrow money to run their businesses. By far, the company that best manages its cash flows is Toyota, with a CCC of 76 days, compared to 200 for the group average. On the other hand, GM is the worst of the group, as it takes longer to turn its inventory and to collect its receivables. GM also takes longer to pay its short-term creditors, but not long enough to offset the first two factors to make a difference, as its CCC is a whopping 355 days. Other Relevant Facts A factor worth noting is the amount of money companies spend on Research and Development. It would seem logical that increased spending on R&D results in the generation of new and improved ideas that could then translate into successful commercial products. To this end, BMW is in a stronger position to bring better products to market, as it spends 20 percent more (as a percent of sales) in R&D, 4.9 percent, than its closest competitor, DCX, at 4.0 percent. Please see Appendix 19 for details. Summary The competitive landscape for the seven-plus passenger vehicle market consists of four primary rivals: DCX, Toyota, GM, and Ford. Based on a six forces analysis, the industry attractiveness is neutral. Focusing on the resources and capabilities of the rivals, it appears that DCX and Toyota are poised to be the most threatening. Toyota has a current product, the Lexus LX470, which would compete on the high end. DCX has a full line of products, ranging from the Dodge Caravan through the Chrysler Town & Country, which compete on the low end. DCX may also choose to enter the high-end market leveraging the MercedesBenz premium brand. Toyota has the strongest financial position, but BMW comes in a close second. Toyota would certainly have the resources to compete with a directly competitive minivan type of vehicle. DCX is not in as good a position as Toyota, but has a superior position to Ford and GM, and it has vast experience in the traditional minivan market. If the 25 BMW minivan is successful, it is likely that Toyota and DCX will retaliate with their own competitive models. Based on the competitive analysis, it is evident that BMW must work to defend its position as the first mover in the luxury minivan market if it wishes to maintain a sustainable advantage from this product launch. Intra-Industry Analysis Within the auto industry, brands and various car models, rather than firms, comprise the strategic groups, as many large firms own multiple brands that compete in various markets. The first strategic division is done by brand perception and quality. The top-of-the- line brands are placed in the luxury group, followed by the quality group, and then the value group. Within each of these brand groups, further separations by vehicle type include sedan, SUV, minivan, pick-up truck, and sports car. Luxury The luxury market includes the following brands: BMW, Mercedes-Benz, Cadillac, Audi, Porsche, Rolls-Royce, Bentley, and Lexus. Rolls- Royce and Bentley could be categorized as ultra- luxury brands, but the combined unit sales of the two is typically less than 2,000 units annually (BMW, 2005e, p.3; Bentley Motors, 2004), which is not a significant concern to the auto industry. Overall, the luxury customer is looking for the best in design, performance, quality, and service. Design and quality are not easily quantifiable and depend greatly on brand perception. Performance, in regard to comfort, is important to all luxury customers, and a significant portion of the luxury market also demands increased power and handling. The major vehicle types for this group are SUVs, sedans, and sports cars. Cadillac is the only competitor with a luxury pick-up truck, and the luxury minivan does not exist at this time. Each brand is positioning itself as a differentiator, trying to get an edge not only over the quality group, but over the other brands within the luxury group. Quality The quality group is tough to define, as many brands have models in both the quality and value groups. Ford, Chevy, Nissan, Toyota, Honda, and Dodge have multiple models in each group. For example, the Honda Civic would be considered a value car, while the top-of-theline Accord is firmly in the quality group. Additionally, specific models can be in different group, depending on the options and edition. For example, the base model Ford F-150 pick26 up fits in the value group, but a fully- loaded King Ranch edition has an MSRP above $40,000 (CarsDirect.com, 2005) and could almost be considered a luxury vehicle. The cutoff would more appropriately be determined on price. $20,000 is a commonly- used differentiation point, as autos below this price are very different in both perceived and actual value than those above the mark. Industry reports typically use this as a separation of groups, including USA Today (Kiley, 2003) and Forbes (Frank, 2004). Within the quality group, stiff competition occurs in each vehicle type, due to the number of competitors and slim margins. The generic strategy definition is difficult to determine for this group in particular, as each brand is trying to differentiate its products based on quality, while simultaneously competing on price. Value The value group consists primarily of foreign auto makers as well as the entry- level models for some of the larger manufacturers, such as GM and Ford, which are priced below $20,000. Competition is primarily based on price for this strategic group. Although, with car purchases accounting for 19.1 percent of total expenditures for U.S. citizens (Bureau of Labor Statistics, 2004), some differentiation, in regard to options and amenities, is required to be competitive. This low-cost leadership strategy has been very effective for some brands in particular; Honda has dominated with the Civic, but others have also done well, including Saturn models and the Focus by Ford. The Civic increased total U.S. sales by 15 percent in 2004 (Ohnsman, 2005) and over the years, has been the leader in the value compact sedan market. Mobility Barriers, Threats, & Opportunities Outside of the large capital expenditure and economies of scale barriers to entry into the auto industry, there are also strong mobility barriers between each of the strategic groups. The luxury group is unable to make the jump to either quality or value because to do so would require the abandonment of luxury market positions, and severe damage to the premium brands would result. In addition to brand destruction, luxury group members would have to change to low cost leadership practices. This would require decreases in service and selling expenses per unit. R&D expenses as a percentage of sales would also need to decrease, and doing so would cause design, performance, and overall quality to fall. Value and quality groups are unable to compete in the luxury market because of brand name and the associated lower perceived quality. Each of the luxury manufacturers have 27 strong brand recognition and are associated with different attributes of quality, performance, and elegance. There are also brand mobility barriers within groups. For example, GMC, Dodge, and Ford are the only companies associated with a full-size heavy-duty pick- up. Although, some Japanese manufacturers are building full-size trucks, like the Toyota Tundra, they are not competitive for heavy-duty use. These mobility barriers are the only issues holding some firms in their respective groups; the capabilities are there, but brand and manufacturing would require some adjustments. Some of the more established domestic manufacturers have recently encountered problems with profitability, primarily due to cost control issues and decreasing sales. The growth of the Asian manufacturers has escalated the already intense price competition. GM has seen its net income fall drastically over recent years because of decreasing market share; GM’s U.S. market share for cars has fallen from 32.7 percent in 1996 to 25.7 percent for 2003 (General Motors Corporation, 2004). Cost control has been difficult for GM and the overall industry, as inputs have increased. Steel is just one of the major inputs for auto manufacturers that have seen severe price inflation, as hot rolled steel spot rates increased 100 percent from December 2003 to April 2005 (Kimball, Chin, & Starno, 2005, p. 6). There are also continuous opportunities for the auto industry. Over the past decade, SUV sales have increased drastically, with overall sales growing 56 percent from 1997 to 2002 (U.S. Census Bureau, 2004b). In addition, SUV margins are much higher than other vehicles due to increased demand, as even dealers can earn $10,000 margins on some of the $50,000plus models (Sawyers, 2004). However, this opportunity might be limited, as SUV sales have begun to slow as the product moves into the mature phase of the product life cycle. Going forward, the biggest opportunity and threat for established firms is the possible switch to hydrogen or some other alternate fuel. Depending on how firms react to this development, it could be a tremendous opportunity or a threat large enough to force industry exit for some competitors. Governmental standards do not appear to be a major factor going into the future. Typically, new standards are implemented after the majority of manufacturers are already abiding by them. For example, airbag requirements began in 1999 (National Safety Council, 2001), after most firms were already including them as standard equipment. Technological improvements seem to be the current trend, as each manufacturer is trying to get some edge over its 28 competitors. Partnerships are developing quickly so manufacturers can get their hands on new technological developments. For example, many autos are arriving from the factory equipped with Bluetooth technology (Incantalupo, 2005; Phelan, 2005). BMW has added technology through a partnership with Apple to incorporate the iPod into the entertainment system as well as through the internal development and implementation of iDrive (Apple Computer Inc., n.d.). Strategic Positioning BMW’s introduction of a minivan is an attempt to capitalize on the development a completely new market. BMW’s strategy for product introduction should aim to leverage its existing distribution network, production facilities, human resource, and R&D capabilities. BMW will also want to maintain high standards of quality and performance. Moving forward, the Company’s position is not likely to shift because of this new product. With the minivan market, strategic changes are likely to be made only in regard to marketing and possibly to price. Customer perception of BMW could change depending on the market’s reception. Consumer acceptance of the minivan, like most vehicles, depends greatly on pricing, specific product features offered, and body style. It is imperative that the minivan’s quality be on par with BMW’s other produc ts, so as not to alter customer perception in a negative way. Customer perception is the most important variable in this new product launch and should be carefully planned for so as not to affect BMW’s quality strategy. Failure Analysis Failure has not forced any firms to completely leave the industry. However, at the end of 2000, when money was being lost on every Oldsmobile vehicle sold, GM announced that the Oldsmobile marketing division would be shut down in 2005 (CBS Worldwide Inc., 2000). The last new Oldsmobile vehicles remaining for sale in 2005 include the 2004 Silhouette minivan and Bravada SUV (General Motors Corporation, n.d.). Different reasons are given for Oldsmobile’s failure. Some observers blame a poor marketing effort. Aftermarket Business editor Silvey (2001) suggested the problem was that Oldsmobile did not do enough to promote vehicles that were competitive. WSJ reporters O’Connell and White (2000) stated that despite spending $4 billion on advertising over five years to reposition the brand as a competitor to high-end imports, a “stodgy image dogged the brand.” John Rock, 29 the Oldsmobile general manager in charge of the repositioning from 1992 to ’97, said he felt the repositioning strategy was sound but blamed the Leo Burnett USA advertising agency for ineffective implementation; dealers also blamed Burnett for a lack of a clear brand image (Kranz, 2000). Others have pointed to a lack of brand differentiation. Industry writer Ahrens (2004) noted that the Oldsmobile lost brand equity in the 1990s when differentiation among GM brands was limited to “badge engineering, the practice of applying different trim to look-alike and runalike GM cars.” Business Week (2005) suggested that one of the top-10 reasons for GM’s demise in general was a brand management strategy that “sought to sell cars from GM's different divisions as if they were packaged goods, using marketing rather than vehicle attributes to differentiate like models in the GM family.” Our analysis of the minivan and SUV markets indicate that GM failed to substantially differentiate the Oldsmobile brand from its other brands, such as Chevrolet, Pontiac, and Buick. This lack of differentiation failed to give consumers a reason to purchase Oldsmobile over its other brands. Given little difference in product features, when consumers did choose GM, they tended to pick GM’s other brands, which did not have the stigma of the aforementioned stodgy image. This led to declining and low U.S. sales for the Silhouette and Bravada: 22,824 in 2003 vs. 8,424 in 2004 (General Motors Corporation, 2005c). Threats & Opportunities Analysis Threats and opportunities have been discussed in detail throughout the competitor and intraindustry analyses. Overall, BMW’s launch of a new product is very important, as it is an opportunity to create an entirely new market while still staying with its strategy of quality and performance. If the new offering does well, this is a great opportunity to expand on BMW’s already popular line of sedans and SUVs. If this is the case, then there is also the threat of many automakers entering the market, as has been the strategy of many automakers in the past. Given the competition in the industry, BMW must be careful not to lose market share by releasing a product that its consumers do not buy. Additionally, because of the importance of maintaining its financial position, BMW must efficiently manufacture and market this new vehicle in order to avoid misallocating resources that could be used for other products. 30 Summary of External Analysis The external analysis focuses on the narrow industry of automobile manufacturers that distribute SUVs and minivans in the U.S. market and is comprised of a variety of different analysis tools. A six forces analysis determined that current circumstances are neutral with regard to industry attractiveness. Macro-environmental forces show that with regard to global, social, technological, governmental, ethical, economic, and demographic trends, multiple stakeholder needs must be taken into consideration. These include, but are not limited to: tariffs, societal norms with regard to status, process innovations, safety and labor regulations, environmental concerns, world market currency fluctuations, general economic conditions, and a constantly-shifting demographic pool. Four primary competitors were then identified and analyzed at the business level and corporate level strategies: DaimlerChrysler, Toyota, General Motors, and Ford. DCX and Toyota have been determined to pose the greatest threat to BMW’s entry into the minivan market, as Toyota has a superior financial position and DCX has the most market share and design experience. The intra-industry analysis divides brands into luxury, quality, and value groups. Finally, the failure analysis showed that no companies have failed in the last 20 years, although particular product lines have been discontinued. Internal Analysis Company Mission & Business Definition BMW’s mission statement is "To be the most successful premium manufacturer in the industry" (BMW, 2005f). Primarily an automobile manufacturer, BMW generates more than 80 percent its revenue from the sale of automobiles, while the remainder is generated from the sales of motorcycles and financial services (BMW, 2005e, p.32). Since 2000, BMW’s focus has been to sell premium automobiles in the international automobile market (BMW, 2005b). By expanding with new products and markets, BMW is aiming to surpass Mercedes-Benz as the number one premium automobile manufacturer in the world (Edmonson, Palmeri, Grow, & Tierney, 2003). The Company has expanded from three to 10 model series across three brands—MINI, BMW, and Rolls-Royce—to cover all premium segments deemed relevant (BMW, 2005e, p. 133; BMW, 2005c, p. 12). This brand and model line expansion is an effort to transform the Company from a specialty car maker to a company which offers a full product line of premium automobiles (Taylor, 2004). 31 BMW has focused on the premium segments of the automobile market because of its predicted growth potential and profitability. Through 2010, premium automobile sales are expected to grow 50 percent per year, compared to 20 percent annually for mass- market sales (Simpkins, 2004). BMW distinguishes premium cars from mass- market cars by attributes potential customers consider when shopping for a car. Consumers shopping for premium automobiles, unlike other car consumers, are very concerned with the appeal of the automobile. Many people want to be identified by the type of car they drive. Panke explained, “[I]n the premium market segment, whether it is a small premium car or a big car, basically the customer thinks: ‘Ooh! Am I a BMW person? Do I like this sporty dynamic challenging way BMW has or am I more the comfortable, enjoy-the- luxury-and-the-comfort type that goes for the other globally active premium brand of Germany [Mercedes]?’” (Simpkins, 2004) This positioning is consistent with a business strategy of focusing on a narrow niche with few market segments and differentiated products. By introducing new car models and lines, BMW is working to enable customers in the market for a particular type of premium automobile to increasingly find that one of BMW’s brands offers a model that fits their type (Haymarket Publishing Services Ltd., 2004). It will be a balancing act fo r BMW to add model lines without diluting the BMW brand for performance and quality (Taylor, 2004). Panke added: “The BMW brand stands for a promise of fascinating, individual automobiles and we shall continue to keep our promise in this respect. A part of this promise is never to build a boring BMW” (Panke, 2002). BMW’s bid to be number one is not planned to be supported by only model line growth, but also by geographic expansion. For example, BMW launched new sales organizations in both Hungary and in Portugal in 2005, and plans are being considered for expansion into the Indian market (BMW, 2005d, p. 14). For the fiscal year (January-December) 2005, BMW has set the following goals: • • An increase in sales of 7 to 9 percent (Edmonson, 2005) No change in earnings (BMW, 2005d, pp. 10 & 29) Panke described the earnings goal as “a great challenge” due to an unfavorable exchange rate for the U.S. dollar, an increase in the costs of raw materials, and intense rivalry (BMW, 2005d, p.11). 32 Long-term goals include: • • Selling 1.4 million automobiles by 2008, up from 1.1 million in 2003 (Edmonson, 2003) Reducing costs by 5 percent each year (Suddeutsche Zeitung, 2005) Part of the cost savings will derive from sharing common platforms and parts across models (Wernle, 2005). Management Style While management is hierarchical, each BMW employee is empowered to make decisions if they have the competency to do so (S. Pfeiffer, personal communication, May 17, 2005; Edmonson, G. 2003). Appendix 20 details correspondence with Pfeiffer, a BMW employee. Because of this, decisions can be made with a minimum of bureaucracy (Dalan, 2004). However, it is expected that decisions not be made haphazardly; planning is expected for any decision. After the purchase of Rover, BMW CFO Stefan Krause said: “We don’t want to waste money on trying things.” (Chief Executive Group L.P., 2003). Management tends to be low-key, but extremely focused, and has experience from a variety of functional areas (Dalan, 2004). For example, Panke actually started his career as a nuclear physicist, hired by McKinsey & Company as a consultant for BMW before eventually being employed full-time (BusinessWeek, 2004a). Panke’s management style is said to be very open and conducive in fostering debate among management to generate new ideas and to solve problems; he expects entry- level employees to raise sensitive issues through the ranks (BusinessWeek, 2004a). While this sounds like a very serious work environment, BMW has a corporate code, “Rule No. 7”, which states that managers must create a fun working environment (Edmonson, 2003). At the factory level, BMW makes production line workers accountable for lowering costs. For example, when BMW Group sold the Rover subsidiary, the Company kept a production plant in Cowley, England, to produce MINIs. Additionally, BMW’s management mandates employees to find at least three ways to cut costs per year. Employees can be rewarded with entertainment tickets or weekend use of a BMW car (Cellen-Jones, 2004). 33 Organization Structure, Controls, & Values Organizational Structure As mentioned previously, BMW AG is headquartered in Munich and has operations around the globe. It is a public company traded on the Frankfurt Stock Exchange in Germany (The Associated Press, 2005). The business is headed by two boards, as is typical of German public organizations: by a Board of Management, which is responsible and accountable for the operations, and by a Supervisory Board, which meets with the Board of Management to discuss the status of strategies. The Supervisory Board has the authority to hire and fire members of the Board of Management (BMW, 2002a, pp. 8-9), and represents two groups, stockholders and employees, with each group comprising half of the board membership (National Multimedia Group, 2003). Controls for Employee Behavior & Performance For employees located in Germany, one-page reviews are given by supervisors. Employees are graded on five criteria: • • • • • Work Quantity (number of projects) Work Quality (regarding project content) Intensity of the Work, Engagement, & Excitement Diligence, Precision, & Accuracy Teamwork An employee is assigned a certain number of points for each category. The points are then summed to reach a figure that determines the amount of any raise. Employees have little involvement in the review process, other than reading and signing the review (A. Zago, personal communications, May 13-19, 2005). Please see Appendix 21 for excerpts of this email communication. As another example, for employees of BMW Financial Services North America, a balanced scorecard is used to evaluate the performance of a business and of a department. Employee bonuses are partially based upon the results of the balanced scorecard (K. Flanagan, personal communications, May 13-16, 2005; S. Pfeiffer, personal communications, May 17, 2005). Appendices 20 and 22 detail correspondence with Pfeiffer and Flanagan, respectively. 34 BMW Financial Services also promotes the ULTIMATE CARE acronym: • • • • • • • • • • • • Uniqueness through diversity Leadership Teamwork Involvement in Community Mutual Respect Associate Growth & Development Taking risks Excellence through Quality & Innovation Courteous FAir Responsive Efficient Individual performance reviews are based upon aspects of the ULTIMATE CARE acronym (BMW Financial Services NA LLC, n.d.; K. Flanagan, personal communications, May 13-16, 2005). Please revisit Appendix 22 for emails exchanged with Flanagan. Organizational Values Producing “The Ultimate Driving Machine” requires that an organization have the resources and be driven to create such a product. Due to BMW’s stellar reputation within Germany as one of the most desirable employers, the Company receives thousands of applicants applying for less than 100 openings per year, allowing BMW to choose the cream of the crop. (A. Zago, personal communication, May 13-19, 2005). Panke noted that for a new manufacturing plant opening in 2004, BMW expected nearly 1,000 applications for only 71 jobs (Nation Multimedia Group, 2003). BMW places its well-trained manufacturing workforce in high regard, referring to plant employees as “manufacturing associates” (Excell, 2005). BMW spent €232 million (approximately $295 million) in training in fiscal year 2004. When BMW first obtained the Hamm Hall plant in the United Kingdom as a part of the Rover acquisition, BMW found that the skill level of the workers was not up to the Company’s high standards. All workers who wanted to continue to work at the plant had to apply and interview for jobs, and not all made the cut. BMW had all rehired workers, regardless of experience, go through an apprenticeship to be indoctrinated to BMW’s methods (Excell, 2005). BMW values transparent corporate governance (BMW, 2005e, p. 112), yet the Company has joined other major German corporations in refusing to comply with a voluntary corporate 35 governance code to disclose executive salaries, and has not bowed to threats that the disclosure will be made mandatory (U.P.I., 2005). Strategic Position Definition Corporate Level According to the Company’s 2004 annual report, BMW Group operates in three distinct businesses: • • • Automobiles Motorcycles Financial Services The Automobiles segment “develops, manufactures, assembles, and sells cars and off-road vehicles” under three brands: BMW, MINI, and Rolls- Royce. The Company also sells spare parts and accessories (BMW, 2005e, p. 101). The BMW brand features eight different product lines and almost 100 different models. MINI has seven different options since the convertible model was introduced last year, and Rolls-Royce, which celebrated its 100th birthday in 2004, makes only the Phantom (BMW, 2005e, p. 199). Please visit Appendix 23 for a complete list of models. The Motorcycles division “develops, manufactures, assembles, and sells motorcycles, as well as spare parts and accessories” (BMW, 2005e, p. 101). It has six product lines containing 21 various models (BMW, 2005e, p. 199). The Financial Services group “focuses primarily on leasing automobiles, providing loan finance for retail customers and dealers, accepting customer deposits, and insurance activities” (BMW, 2005e, p. 101). Given this business portfolio, BMW Group’s corporate level strategy is that of single business. According to Rumelt’s classification—and figures from BMW’s 2004 Annual Report—the specialization ratio is 0.84, the related ratio is 0.67, and the vertical ratio is 1.0. Please see Appendix 24 for details on these calculations. This strategy remains the same before and after the strategic announcement being analyzed, as BMW’s introduction of the minivan is an extension of its core business. Recent Mergers, Acquisitions, & Divestments BMW hasn’t made any recent mergers, acquisitions, or divestments, as it has been a bit hesitant to engage in such activity due to past performance. The Company’s biggest move came in 1994, when it acquired the Rover Group for £800M (approximately $1.3 billion). 36 However, after six consecutive years of large losses, BMW split its holdings, selling the car business to the Phoenix consortium and the Jaguar and Land Rover businesses to Ford (Department of Trade and Industry Automotive Unit, 2005). BMW faced strong criticism, including one shareholder who described the deal as “the worst investment decision in German history” (British Broadcasting Corporation, 2000). When divesting Rover, BMW officials cited the fact that the recent launch of its own X5 model overlapped with Land Rover, making brand differentiation difficult. However, when purchasing Rover in 1994, BMW justified the strategic move by the interest in expanding its product line with the Land Rover model. Additional suggestions for the failure of this acquisition are on two fronts: culture and direction of investment. Rover’s culture appeared to be of setting high abstract goals with the understanding that most will not be met, whereas BMW’s culture included setting clearly-defined, realistic goals that would consistently be reached. Secondly, BMW models are focused on narrow consumer segment s and produced in smaller quantities, whereas Rover is the opposite, selling to the masses in volume. BMW invested £2 billion (approximately $3.1 billion) in Rover factories, rather than the product lines, a departure from previous strategy and known corporate strengths. (British Broadcasting Corporation, 2000; Heller, n.d.). BMW Group was more successful with its acquisition of the Rolls-Royce brand name and logo, purchased for $66 million in 1998. At the time, it was considered quite the coup, as Volkswagen paid almost $800 million for Rolls-Royce, but neglected to also purchase the company’s intellectual property, allowing BMW—one of Volkswagen’s main rivals— to move in (The Schinner Law Group, n.d.). Although less than 1,000 Phantoms are sold annually (BMW, 2005e, p.3), the exclusivity factor plays well within BMW’s strategy. BMW Group’s current strategy is that of growing the Company under its own power, rather than through mergers and acquisitions. Recent Alliances, Partnerships, & Joint Ventures One of BMW’s most prominent joint ventures is a plant in Shenyang, China that opened in May 2004. Owning an equal share with Chinese partner Brilliance China Automotive Holdings Limited, this undertaking plays a strong role in the BMW’s strategy for Asia. China is one of the fastest growing automotive markets in the world, and this joint venture (for production, sales, and after-sales service) has allowed BMW to extend its market 37 position. An estimated €450 million (approximately $585 million) will be invested in China by the end of the calendar year. Currently, the BMW Group produces the 3 and 5 Series in China and will ramp up to an estimated 30,000 units annually, almost one-third of its current annual production. BMW is already reaping benefits, as China has mo ved from the 12th largest market for BMW Group products in 2002 to the eighth largest in 2003 (BMW Asia, 2004). BMW also boasts numerous partnerships with universities for the future benefit of the industry. For example, the Company announced in 2002 that it would sponsor a “$10 million endowment at Clemson University to establish a graduate engineering program that will offer masters and doctoral degrees in automotive engineering” (BMW, 2002b). Research partnerships abound, with more than 100 various memberships with professional associations and federations as part of research cooperation projects. One example is BMW Group’s CleanEnergy division, as it is working with Magna Steyr in the development and supply of a hydrogen tank, while also joining forces with GM in establishing a global standard for a liquid hydrogen tank (BMW World, n.d.). Business Portfolio Analysis Using the BCG Matrix, BMW Group’s automobile business is a star player, in terms of large share in the premium market segment and a high growth rate for its models. Its motorcycle and financial services units are considered cash cows, as each also have high shares in the premium market segment. However, the growth rate is steady, as demand for motorcycles has remained constant over the past five years, and financial services also see flat demand (BMW, 2005e, p. 4). Please visit Appendix 25 for a graphical representation. Corporate Level Summary BMW Group’s corporate level strategy is that of a single business. Although it is organized into three units—Automobile, Motorcycle, and Financial Services—most of the revenue is derived from the automobile division. BMW is structured in such a way that all of these businesses are vertically integrated. BMW focuses on internal growth vs. growth through mergers and acquisitions, as the Company has made some poor decisions in the past related to external growth. Consequently, it leverages partnerships and joint ventures to gain maximum value with the lowest risk. The BMW portfolio consists exclusively of 38 stars and cash cows, focusing on bringing profitable businesses to market and then leveraging to maximum potential. Business Level Strategy Each of BMW’s industrial businesses operates as focused differentiation, while the financial services unit is focused low cost. Please see Appendix 26 for a graphical representation. The BMW brand has the widest market appeal, though it is still in a niche segment, as the price point attracts those who earn more than $200,000 annually. This brand has the widest product offering, as it appeals to age segments from 24 to 65. However, it is a unique product that relies on quality and performance to differentiate itself from competitors. The motorcycle division is similar in that it offers one of the few direct drive motorcycles available on the market today. This is geared exclusively toward to the motorcycle enthusiast vs. the casual rider. Again, BMW Group is differentiating its motorcycles on quality and performance factors, as well as uniqueness features. The MINI product line targets a different demographic and price point. Although this target market prefers the BMW brand, they can’t afford it yet, and the MINI offers the consumer BMW quality and performance in a lowercost vehicle. This has allowed BMW Group to extend its customer base into lower- income brackets. This is a unique capability of the Company, as most luxury automakers would fear “compromising the brand”; but BMW has been able to maintain differentiation between BMW and MINI. At the other end of the spectrum, Rolls- Royce provides coverage for the ultra-premium segment, with the highest in quality and performance to an exclusively- unique niche segment. Finally, the financial services division is in focused low cost, as its primary goal is to ensure that any consumer who wants to buy a product from the Company has access to necessary financial resources. Business Level Strategy Changes The business level strategy of BMW will not change substantially after the launch of this new vehicle. In 2004, the Company added two product lines, the X3 and 1 Series, which include 10 models, as well as extended two product lines, which add another five models (BMW, 2005e, p. 199). Additional product lines, such as a series of minivan models, will allow BMW to continue to gain access to new consumer markets and therefore start to move the Company toward broad differentiation, as sales volume will grow and move the segment into the mass market. 39 The business level strategy of MINI, Rolls- Royce, and motorcycles also will not change as a result of the analyzed strategic move. However, the financial services unit may move toward cost leadership if consumers take advantage of this additional service at the same rate that BMW product volume sales grows. BMW Group’s overall business level strategy of focused differentiation strongly supports its corporate level strategy of single business. The Company is focused on providing products that are unique, and are of high quality and premium performance. This is a challenge for the best of companies, especially an automaker with many market pressures. By maintaining a single business strategy, BMW Group can ensure that it does not become distracted from the ideals outlined by its units’ defined strategies. The single business model allows for tight vertical integration within the portfolio so that quality is ensured, while also offering visibility into the market. These practices enable BMW to provide a unique driving experience to its customers, ranging from the MINI Cooper to the RollsRoyce Phantom. Resources & Capabilities V-P-C Framework The new BMW product has the potential to be a clear winner in value, compared to both SUVs and minivans. Its style is projected to be a type of crossover vehicle, with some characteristics from SUVs and minivans alike. In order for the new minivan to compete with existing competitors, it must have sliding doors, easy accessibility, folding third row seats, and solid safety and drivability performance. ConsumerReports.com notes that these are the differentiating factors for minivan purchasers (Consumers Union, 2004). In the SUV competitive arena, the most important factor is image (Consumers Union, 2004). SUV owners and purchasers want to identify themselves by driving a stylish four-wheel drive vehicle. Other important factors for SUV consumers are power and space. The majority of consumers would ideally like to have all the convenience of a minivan, while also having style, power, and off-road capabilities. BMW’s new offering looks to fill this need. Assuming BMW incorporates amenities and features found in the X5, while also adding minivan features, the total value offered will exceed all competitors. Please refer back to Appendix 13 for details. 40 A possible price for the new minivan is determined by comparing BMW’s existing product line, the expected value delivered by the new product, and by analyzing competitor pricing. The $60,000 MSRP suggested is discounted by BMW dealerships’ traditional 7.76 percent markup to get an invoice price of $55,346. At this price, the new product will compete with only the top-of-the-line models offered by competitors. Competing products were compared on value, pricing, and cost, as also detailed in Appendix 13. From this analysis, the new BMW model offers the most value to the customer, found by subtracting the generated value from the suggested price. BMW has the highest COGS margin in the industry at 37 percent. This COGS margin was adjusted to include only the expenses that are directly related to auto manufacturing; depreciation, amortization, lease expense, and SG&A were excluded. This is the most accurate way to determine cost, as auto manufacturers avoid exposing any data regarding costs. This high COGS margin is offset by the number of cars sold (turnover). The BMW brand broke the 1 million cars sold mark in 2004 for the first time ever (BMW, 2005e, p. 12), while the major competitors DaimlerChrysler and GM combine for nearly 10 million autos sold annually. Resources & Capabilities Analysis BMW’s value and cost drivers, propelled by its resources and capabilities, illustrate why the firm has had so much success. Value drivers for BMW include brand, service, quality, technology, breadth of line, and customization. Among the most important are quality and service, which have helped increase brand equity. In analyzing BMW’s resources and capabilities as part of a value chain analysis (as detailed in Appendix 27), it is quickly noted that with all processes and systems, BMW is in pursuit of high quality and service. Without BMW’s specific resources and capabilities, it would be unlikely to have so much brand equity and maintain such high standards of quality. BMW has a centralized, top-down structure. The executive management team is responsible for the decision- making, which is then passed down through the organization. In addition to the executive team, BMW also has a management board consisting of persons overseeing specific functions. The board consists of members from sales, marketing, financial, human resources, production, and executive. BMW also has regional directors for the different operating regions of the world. Finally, BMW has one director of 41 design. Although employees have a great deal of flexibility in terms of hours and scheduling, R&D and innovation ma nagement is done mostly in Germany at company headquarters. BMW realizes that its employees are the key to its success and implements programs in order to foster a learning environment at their facilities. The Lifelong Learning program and the Managers from Within initiative are just two examples. Consumer concerns about quality are significant in this industry, which is why BMW is aiming to increase employee morale, as it directly influences production quality. Technology continues to be one of the most significant resources for BMW. R&D is a very important aspect of the organization, as technological advancement not only allows it to produce vehicles of higher quality and more affluence, but also allows the firm to customize the vehicle to consumer tastes. Customization is a way that BMW differentiates itself from competitors, and BMW consistently delivers technological features inside vehicles that keep up with technological changes in society. Whether it be the iDrive personal entertainment and control mechanism or the BMW website for purchasing automobiles online, the Company exploits technology to expand possibilities. Operationally, carrying very little inventory and designing more than 300 work-time models and flexible facilities, BMW has been able to deliver on its 10-day order-todelivery goal. In order to maximize operational efficiency, BMW is beginning to design its production facilities so that multiple car lines can be manufactured in the same plant. Additionally, facilities are designed such that plants with less demand than others can be partially shut down to save on costs. The most important factor influencing operations is BMW’s partnership with Sprint, which allows connection and coordination at all facilities. This significantly reduces operational costs and allows BMW the flexibility to move production in order to take advantage of economies of scale. Procurement has also allowed BMW to effectively manage its desire for innovative products and design. BMW has developed a Management of Partner Networks, which is focused on innovation. Also, as previously mentioned, partnerships with Apple, Sprint, and SIRIUS have allowed BMW to differentiate itself from its competitors by including other firms’ popular products in its new vehicles. These networks are closely related to BMW’s need to closely monitor partnerships in order to keep its high standard of quality. 42 Additionally, these partnerships have allowed BMW to offer maximized customization for consumers, which fits its niche market target. Service is also an important aspect of quality. BMW’s solid relationships with dealers help it maintain the standards that BMW owners expect. Clean showrooms, an established network of certified service providers, and a driver’s training course are all specific examples of how BMW provides higher quality. The depth of automobile lines that BMW has traditionally offered consumers is also a value driver. Again, as shown in Appendix 23, consumers in many cases have more than 12 to 15 different choices within each line to suit their needs. Cost drivers have allowed BMW to stay profitable while serving the niche target market. Cost drivers include scope economies, an advanced learning curve, and other organizational practices implemented by the firm. BMW’s ability to produce multiple vehicles in one facility, thereby lowering the costs of production, demonstrates economies of scope. Additionally, BMW consistently shares assets across geographical locations, between facilities in different parts of the world, so that costs can be reduced. In this regard, all R&D and production improvements are implemented region by region in order to cover the costs of these investments slowly. They are then tested and spread to other locations as appropriate. The advantage created by an advanced learning curve is exhibited in BMW’s ability to design technologically advanced, flexible, and efficient facilities ahead of competitors. Costs are driven down by BMW’s ability to leve rage excess capacity when facing varying demand and, as the case has been recently, to take advantage of a weak dollar. Another component of the learning curve is BMW’s ability to consistently design automobiles that are generally well regarded by consumers. BMW’s general strategy is to design a car line and modify it only slightly in order to satisfy consumer tastes. For example, the success of the previous 3 Series has been such that many shareholders were livid when they learned of BMW’s plans to release a new body style, which it did in April 2005. Although the innovative design of both BMW’s facilities and automobiles may not be easily protected from imitation, its smaller size and intricate production processes will keep BMW with at least a temporary advantage over other firms. Flexible work-time schedules, which reduce employee idle time, cannot be readily copied by other firms, such as 43 DaimlerChrysler and General Motors, based on their sheer size. Additionally, because BMW produces fewer cars per year vs. these other firms, production facilities can be shut down or reconfigured to manufacture other vehicles in times of decreasing demand. Applying Strategic Execution Frameworks BMW will forever live and die with a design focus. Design drives innovation, production, and to some extent, budgeting. The activity system chart, as seen in Appendix 28, clearly depicts that BMW focuses all its efforts around technology and design, with major support coming from procurement and brand. ‘Stylish’ is the word with which BMW desires people to associate its cars, ‘performance’ and ‘innovation’ as its complements. BMW’s design team is referred to as artists, given free reign until financial constraints are hit. Innovation and production are adjusted based on model design. BMW design artists are located in the Forschungs-und Innovationszentru, (FIZ), the R&D design center in Munich (Breen, 2002). In control of the heart and soul of BMW is Wisconsin native Chris Bangle. His arrival at BMW in 1992 was a major reason why the design division is now the Company’s focus (Breen, 2002). Bangle has the final say for BMW, MINI, and Rolls-Royce designs. There are 220 artists that work in teams and compete with one another to win the design (Bangle, 2001). Bangle uses three guiding principles when managing these artists: • • • Protection of the creative team. Seldom is input from outside the design center productive, as the artists are easily confused by workers in other divisions. Ensuring the safeguard of the artistic process. BMW design is never compromised for deadlines, as a specific process is carried out for all new artwork. Good communication between commerce and art. This artwork does not come free; to ensure profitability, the finance department must coordinate with the design department (Bangle, 2001). New-car design costs for BMW can mount up to $1 billion (Breen, 2002). BMW’s design focus is consistent with its focus on the premium market. Powering this company daily is its people. The bulk of the BMW employees have the opportunity to choose from more than 300 flexible schedules (BMW, 2003b, p. 24). This benefit has allowed BMW factories to also maintain a flexible schedule that has increased efficiencies and the ability to fill orders faster than the rest of the industry. Not only does BMW make customized quality cars, but also it can do it all in 10 days. 44 Product Portfolio As mentioned as part of BMW’s internal analysis, automobiles, motorcycles, and financial services compose BMW’s total product portfolio. Appendix 29 shows a complete breakdown of these services in terms of human capital, revenue, profit, costs, and majority of sales. Of its businesses, the automobile segment is the largest and therefore the focus of this examination. Within the automobile segment, the 3 Series accounts for 40 percent of sales (BMW, 2005e, p. 12). BMW’s products are regarded as being of high quality, which is why they command a premium in terms of price. Although the industry has come under fire for quality issues, BMW has fared much better than its competitors, such as DaimlerChrysler (Mercedes brand) and General Motors. BMW has 10 different lines of cars some with up to 15 different models to chose from. Each individual model will differ in terms of size, horse power, interior space, body style line definition, and optional vs. standard features. Marketing Mix BMW designs its products in order to serve a very specific market. As described previously, BMW owners usua lly consist of wealthier individuals who are willing to pay a premium for a high-quality automobile. This has been its strategy since the Company’s inception and has worked very well in the past. However, BMW has, in the past several years, ventured in new directions, by manufacturing the 1 Series in Europe and offering it the United States, and is now entering the minivan market. Although the 1 Series still has the features and quality of a BMW, it is significantly lower in price. Similarly, the new model will be a cross between a traditional minivan and the X5. Changing directions is a way for BMW to continue to provide cars for people in many different stages of life with different price sensitivities and feature preferences. BMW attempts to provide depth in its product lines by offering many different models within each product line. The product and price of the 4 Ps have been previously discussed. Place, the manner in which BMW distributes its vehicles, is quite complicated. BMW has an intricate distribution network, as production facilities are located all around the world. Logistically, facilities are used depending on demand and production costs. This means transportation of the products must be flexible and available. BMW does not like to hold excess inventory in 45 any one facility and has an intricate manner of making parts available to any facility which might need them. The last P, promotion, refers to advertising, sales, and public relations. BMW’s marketing team has a reputation for being very fresh and appealing to consumers. Touted as “The Ultimate Driving Machine,” BMW has marketed its products as being top-of-theline in quality and drive. Marketing is an important aspect of BMW’s business and because of that, €3.8 million (approximately $4.8 million) was spent on sales, marketing, and advertising last year alone (BMW, 2005e, p. 68). Successful marketing has undoubtedly made an impact on revenue, as BMW is the third most recognized automobile name, behind Toyo ta and Mercedes (BusinessWeek, 2004b). BMW has recently decided to move toward a pull strategy by producing what are termed ‘mini- movies’ that can be downloaded over the Internet in order to market its new products. At the end of commercials are URLs that point consumers toward these entertaining, cutting-edge vignettes, which are usually between three and five minutes long (BMW, 2003a). BMW settled upon this approach as a way to keep with technological trends even in regard to marketing (Web Publications Pty Limited, 2001). An important part of BMW brand promotion relies upon the quality and service provided by BMW dealerships. Dealers have the most direct access to customers, in terms of information, sales, service, and product repair. BMW’s tight control of quality, with regard to dealerships, results because of the contact dealers have with consumers. In addition to selling BMW products, dealers also provide key feedback from consumers in terms of R&D, price, and style. Creating lasting relationships with appropriate dealers has also been BMW’s strategy for retaining customers. Once an automobile has been purchased, the most important aspect of that vehicle then becomes performance and service. As described previously, high standards are maintained so that consumers will become repeat customers throughout their lives. Although BMW also has traditional customer retention programs in place, such as BMW newsletters, a drivers training course, and BMW owner networking clubs, it feels that dealerships add the true value to consumers. BMW’s new creation is in response to the saturation of the SUV and minivan markets. Both vehicle types are in the mature stages of their product life cycles, as depicted in Appendix 30. Demand, although increasing in the SUV market, has steadied, and the 46 market is saturated. Minivan sales on the other hand, are starting to decline. Disappointing sales, considering industry incentives, such as cash-back rebates and very low financing options, are concerning. However, with the new product, BMW hopes a new market will be created that will take advantage of both the staple features of the minivan and those of the faddish SUV. BMW’s new offering will continue with the high-quality, high-price strategy, but will have features that will be attractive to new groups of consumers it has not yet been able to reach. Price and positioning of this new vehicle will dictate success in this new market. VRIO Analysis Assessing BMW’s resources and capabilities, in terms of sustainability, gives an important perspective for the future. The complete VRIO analysis is provided in Appendix 31. BMW has been successful because it has been able to make planning, organizational, and brand advantages lasting, by integrating them with the Company’s operations and production. Although the industry is very competitive and BMW is considered a smaller firm, sustainable competitive advantages, such as brand, manufacturing capabilities, and partnerships, are likely to keep sales strong in the future. Other characteristics, such as innovation management and design, keep BMW in parity with the rest of the industry. Still, with a new product on the horizon, advantages either temporary or sustainable can have a large impact on sales and revenue. Technology Strategy A 70-page addendum to BMW’s 2004 Annual Report is titled “Setting the Course, Extending the Lead,” a fitting tribute to its efforts of technological innovation. The Company’s strength is all about premium, from brand name to performance superiority, and it boasts unwavering commitment to this claim, including being the “most successful premium manufacturer in the automobile industry” (BMW, 2005e, p.131). The technological distinction is supported in part by two recent awards. Last July, BMW Group was honored with the “Best Innovator 2004” award as the most innovative company in Germany, as presented by the German publication Wirtschaftswoche and management consultants AT Kearney. This recognition was preceded by a 2002 honor equivalent to an “innovations management Oscar”, in which BMW Group became the first European company to receive 47 the Outstanding Corporate Innovator Award in the United States (Web Publications Pty Limited, 2004). As the supplement details, “The history of the automotive industry is a story of constant innovation and growing complexity. Each new model cycle brings new features and more variants.” In fact, the X5 is described to have involved the development of three new engines, five interior variants and more than 2,000 modified details (BMW, 2005e, p.138). The following two process innovation examples detail BMW’s efforts to continually lead the industry in technology. The Company opened FIZ in 2004, and this site hosts both the Project House and the Powerwall. The Project House is designed for “networking and optimum working conditions” (BMW, 2005e, p.143), where Development engineers, production planners, and purchasing experts consider, shape, and plan new developments together, making them not just more creative, but also more efficient. Increasingly complex products can thus be developed increasingly quickly and even more in tune with the customer—an advantage which can hardly be overestimated in the premium segment, where innovation and product substance decide on success (BMW, 2005e, p. 142). The Powerwall is an approximately 21-foot long virtual reality screen, where “entire vehicles or individual parts can be displayed, examined, and optimized in 3D, long before the first prototype is built” (BMW, 2005e, p.139). These full-scale animated visuals allow employees the ability to grasp complex ideas more quickly. The Annual Report adds Development engineers compare different model alternatives by computer animation; they run through entire production processes in virtual reality and identify potential sources of error, long before they can become a problem in reality. All this means more room for ideas, greater speed in their realization and, ultimately, a huge advance in innovation (BMW, 2005e, p. 142). BMW’s technology strategy expands beyond the production floor, as there are additional examples of process innovation that involve the Company’s efforts of sustainability in all aspects of operation. For example, in the paint shop, fully automated robots apply waterbased paints to car bodies, as well as a powder-based topcoat, both of which are environmentally friendly (BMW, 2005e, p.168). BMW Group is also on the forefront of product innovations. For example, the Company claims it was the world’s first to gear long-term development of vehicles consistently to hydrogen-based operations, in an effort to avoid emissions and to take advantage of regenerative sources of energy (BMW, 2005e, p.177). Additional examples over the past 48 fiscal year include improvements in engines and other technical developments, such as transmission, active steering, all- wheel drive, and the MINI convertible soft top system (BMW, 2005e, p.180). The Company taps many resources when researching innovations, which include partnerships with suppliers and universities. Additionally, BMW sponsors the Virtual Innovation Agency, where any inventor from any industry can submit ideas and suggestions to BMW Group (BMW, 2004c). As the Company’s corporate level strategy is focused on just a single business, having a strong technological strategy ensures continued market share in the core industry. Additionally, the business level strategy of focused differentiation is also supported, by innovations that provide unique value to the customer and command a premium to remain in exclusive and narrow market segments. Financial Analysis For the purpose of this analysis, the statements have been translated at the year-end exchange rate for statements reported in non-U.S. Dollar currency. Further, commentary about the analysis has been limited to certain ratios of profitability, solvency, and liquidity, as well as other facts deemed relevant to this industry; additional support for this analysis is provided in Appendices 14 through 19. Profitability The comparative ratio analysis will serve as a backdrop to this section. BMW has been profitable in every year analyzed. As mentioned previously, the Company averaged an ROA of 3.3 percent for the past six years and a 17 percent ROE during the same period. However, in the period from 2002 to ’03, BMW experienced a decrease in these two measures. ROA went from 4.3 percent in 2001 to 3.3 percent in 2003, calculated in Euros; ROE dropped from 23.8 percent to 13 percent in the same period. The cause for the drop was a combination of lower asset turnover and lower equity multiplier ratios. Asset turnover decreased because sales growth was negative from 2002 to ’03 and total assets went up 10 percent in the same period. The equity multiplier determines a large portion of ROE and with shareholder equity increasing more than total assets, the multiplier decreased. The equity multiplier magnifies results, whether positive or negative, because it is a measure of leverage. 49 Gross margins also declined in 2002 and ’03. Gross margins (including depreciation and amortization) had been increasing steadily until 2001, when they reached 25 percent, and subsequently dipped below 23 percent in 2003. Increased depreciation could be blamed for the decrease in 2002, but in ’03 depreciation expense and COGS both increased. The rise in COGS could also be attributed to the increase in prices of raw materials around the globe, particularly steel (Bruynesteyn, 2005, p. 26). Growth Rates Growth rates are analyzed to try and ascertain why the Company would want to add a new product to the existing line. It is believed BMW is looking to continue to increase sales and income, as both had declined in 2002 and ’03. Historically, BMW’s sales have had a growth rate of 5.5 percent per year, but in 2003, sales growth actually declined, as sales dropped to €41.5 billion (approximately $56.2 billion) from €42.3 billion (approximately $57.3 billion). The firm achieved returned to positive growth in 2004, however. Net income followed the same pattern as sales, with an average growth of 33 percent, which cons tituted a decline in 2002 and ’03. The Company is looking to continue the historical trend of positive sales and income growth with the introduction of the new vehicle. Support for this theory maybe the fact that BMW has taken on more debt to finance the average growth in total assets of 14 percent; BMW’s balance sheet shows a 65 percent increase in long-term debt in 2001 accompanied by a similar but smaller increase in assets. Not all the cash was invested in productive assets, however, as some of the cash was used to service an item called “LongTerm Receivables”. Part of the debt was used to service this long-term receivable, which is essentially a portfolio of loans serviced by BMW’s financial services group. From a cash flow perspective, the Company had positive operating cash flow for the past six years, averaging 17 percent of sales, or $7.5 billion. With its positive cash flow generation capabilities, BMW is able to support organic growth through its operations. Solvency & Liquidity Although the Company had a higher total debt growth rate than its competitors, it managed to keep its debt levels just below the group average, with total debt to total assets at 46 percent, vs. 47 percent for the group. When measured by long-term debt to total capital, BMW is in a better position to take on more debt to support future growth than its competitors, with an industry average of 54 percent, except for Toyota, as its long-term debt 50 to capital ratio is only 33 percent. Furthermore, BMW’s interest coverage ratio is at a healthy average of 7 times, and even stronger in 2004, at 15 times. In terms of liquidity, the Company is doing a good job of managing its current operating needs with short-term obligations. The nearly one-to-one ratio of current assets to current liabilities is indicative of the capital intensiveness of the industry. The Cash Conversion Cycle was mentioned previously in the comparative analysis section and it would be helpful to elaborate on it again, with regard to BMW’s position. There is a disturbing trend in how fast the number of days to close the CCC is rising. The concern is especially troublesome because the Company is liquidating its accounts payable more quickly and taking longer to collect its receivables, and it is also taking longer to turn over its inventory. Finally, although BMW has had positive net operating cash flow, Dirty Free Cash Flow (Net Cash Flow from Operations – Capital Expenditures) was negative the entire period under analysis. It is not concerning that the Company continues to invest in productive assets for future growth, with its capital expenditures at an average of 14 percent of sales. Other Relevant Facts It is worth noting that BMW has a history of spending resources on R&D in excess of the industry average, as detailed in Appendix 19. This supports the theory laid out earlier that the Company is investing in productive assets for future growth, and product design is an extension of that process. BMW has been able to make its workforce more productive, as employee head count has dropped 1.5 percent on average and sales per employee has increased 7.8 percent on average. Furthermore, the average cost per employee in salaries and benefits has only increased by 5.4 percent. Overall, BMW is in financially healthy from a profitability and solvency point of view. Furthermore, the investments the company has made in long-term assets and R&D will provide financial and production support for the minivan launch. Net Present Value Analysis BMW’s enterprise value is calculated using the discount cash flows method. The Weighted Average Cost of Capital (WACC) was calculated using data gathered from Bloomberg and BMW’s 2004 Annual Report and the cost of debt used came from BMW’s average cost of 51 debt for its 10- year corporate bonds, which averaged 4.7 percent (BMW, 2005e, p. 95). The beta for BMW, the expected market return, and the risk- free rate all came from Bloomberg online service’s equity risk premium calculation. The assumptions made to calculate free cash flow was to start with income statement results from 2004 and keep all costs constant as a percent of sales as of 2004. The one exception is the tax rate; because the effective tax rate could not be predicted, the marginal tax rate given in the BMW 2004 Annual Report is used. Finally, it is assumed that sales and free cash flow would grow at 3.5 percent, which is the average inflation rate for “advanced economies”, as reported by the IMF (IMF, 2003, p. 212). To determine inc remental working capital, current assets and current liabilities are calculated using the same method as the income statement. That is, keeping all the relevant balance sheet items constant as a percent of sales. The final NPV values are for BMW Group as it is now, without the new vehicle. A scenario analysis is performed with other assumptions to calculate incremental NPVs from this new product. Please see Appendix 32 for details of the WACC calculation and assumptions and Appendix 33 for the enterprise value results. After forecasting the free cash flows for BMW for six years into the future starting in 2005 and using a WACC of 7.2 percent, BMW’s enterprise value is estimated to be €37.5 billion (approximately $48.7 billion), which is comprised of €5 billion (approximately $6.4 billion) for the NPV of free cash flows and €32.5 billion (approximately $41.6 billion) for terminal value. Scenario Analysis Three scenario analyses were performed for the new minivan. The sales and costs are specific to the new minivan and not for BMW as a whole. The financial results for the new car will either be an addition or subtraction to the existing financial results for BMW. There are a myriad of possible outcomes with the introduction of this new vehicle. It is possible the minivan turns out to be a complete bust, in which case BMW would lose all the money it invested in the project. If this were the case, it is also possible that the negative perception of the new minivan could carry over to the other vehicles and hurt sales of other product lines as well. One of the biggest assumptions in the scenario analysis is that the new vehicle is well accepted by consumers. The analysis performed is based on the price/demand relationship projected for the new vehicle. The demand curve was obtained by using unit sales figures for 52 a similarly-priced and recently- introduced vehic le by BMW, the X5. (Please see Appendix 34.) It is assumed the new car will have the same percentage change in units sold year-overyear for the first six years from introduction. The price used for the demand was based on the V-P-C analysis. Given that the actual demand schedule for the car cannot be known, to make a projection, it is assumed that economic theory will hold and that there is some price elasticity in the demand for the car. At a price of $65,000, BMW will sell fewer cars than at $55,000. For costs, it is assumed that BMW is able to transfer its manufacturing expertise into the production of the new minivan rather quickly and not have any production costs overruns. As such, it is assumed that costs stay the same in proportion to sales of 2004. Forecasts can be seen in further detail in Appendix 35. Scenario 1 The price of the car is $65,000. At this price, BMW is expected to reach sales of $5.4 billion by Year 6 by selling 83,000 new minivans. The net present value of free cash flows for the new car, including terminal value, is $3.6 billion. In this scenario, as well as scenarios 2 and 3, it is assumed BMW spends more on marketing costs (as a percentage of sales) in the first two years than it did in 2004 because of higher marketing costs to get the word out. In all three scenarios, BMW loses money on the new vehicle in the first two years, but net income is positive in Years 3 to 6. Scenario 2 The price of the car is $60,000. At this price, BMW is expected to reach sales of $6.7 billion by Year 6 by selling 113,000 new minivans. The net present value of free cash flows for the new car, including terminal value, is $4.5 billion. Scenario 3 The price of the car is $55,000. At this price, BMW is expected to reach sales of $5.1 billion by Year 6 by selling 141,000 new minivans. The net present value of free cash flows for the new car, including terminal value, is $5.1 billion. Summary Relative to the industry, BMW is in healthy financial shape, from a profitability and solvency point of view. Furthermore, the investments the Company has made in long-term 53 assets and research and development will provide financial and production support for the new product the Company is introducing. Analysis of Effectiveness of the Strategy This analysis indicates the current attractiveness of the industry is neutral. BMW would be a new entrant into the seven-plus passenger vehicle segment, and thus may change the industry conditions slightly, making it less attractive to new entrants. This effect is likely to be minor, as the automobile manufacturing industry is vast, and the target demographic is relatively small. However, for BMW, the changing of the competitive landscape in this narrow segment would be highly beneficial to the Company. BMW does not currently have a product for this consumer segment, and the level of disposable income for this group is high. It is probable that BMW will be able to capture market share, given the limited number of options available. BMW has a very strong financial position. In fact, among the rivals, it is second only to Toyota. BMW is currently posting a 3.1 percent ROA, whereas the industry average is only 2.2. Toyota and BMW are also the fastest growing among the rivals, with Toyota posting 10.3 percent sales growth, and BMW a close second with 8.8 percent. Perhaps the best indicator of the ability to launch a new product is debt position. BMW has a very good debt position, one of the lowest among the rivals, and it is not currently highly leveraged. This means that it has ready access to capital to ensure that it can invest in the R&D and market research to provide the best vehicle for the target segment. BMW is a company focused on innovation. Its strategy has been to provide a complete line of vehicles that are focused on style and performance. The business level strategy is that of focused differentiation, and the introduction of a unique vehicle that satisfies an unmet need in a particular market demographic is certainly consistent with that strategy. Overall, the business level strategy will not change substantially after the move. By providing a vehicle that is consistent with the overall product line, BMW will satisfy its objective providing “The Ultimate Driving Machine” to its target market. Up to this point, BMW has been very successful with its strategy. There have been moments in the past when BMW ‘upset’ its customer base by innovating a bit too much; a recent complaint about the iDrive console controller in the new 5 and 7 Series are good examples. But the Company managed to turn what may have been viewed as a mistake into an advantage. By adopting a strategy of constant innovation, tempered with conservative overtones, it has managed 54 to continue to attract new customers, while preventing the current customers from defecting to other brands. Over the years, BMW has worked to expand the product line to capture increasingly more of the ‘luxury sport’ segment. By keeping the product lines highly differentiated, BMW can capture the young professional as well as the mature high- income driver. This is a fairly unique capability from a marketing perspective. For example, a yo ung recent college graduate can enter into the BMW family by purchasing a MINI Cooper, and continue to upgrade vehicles throughout a lifetime. This concept, which one might refer to as a ‘lifetime of ownership’ strategy, is a differentiator for BMW. The introduction of the minivan fits very well with this overall strategy. As mentioned above, BMW can capture the young professional with a variety of vehicles: the MINI Cooper, the 3 Series, the X3, or the soon-to-be introduced 1 Series. The natural progression is then to move up to the 5 Series or the X5. What BMW has been missing is the crucial link between the late20s/early-30s segment and the mid-40s and on segment. During this period, many of the BMW owners will have children and require a high-occupancy vehicle. They may be able to get by with an X5, but many will be required to look elsewhere for a seven-plus passenger vehicle. During this ‘defection period’, BMW risks its loyal customers being exposed to an alternative brand, which may be more attractive for various reasons. By introducing a vehicle that addresses this market need, BMW ensures that their fiercely loyal customer base will not be exposed to another automaker’s vehicle. The minivan also addresses a gap in the product line-up from a cost perspective. Currently, the 5 Series is priced from $41,000 to $50,000. The 7 Series is priced $70,000 and up. The X5 is an alternative, starting around $50,000, but it does not have available seven-passenger seating. The minivan, with a price around $60,000, provides a perfect transition for these high- income families to shift from sport-sedan to family vehicle, without the need to sacrifice style and performance. It is apparent that the firm will be better off with a complete product line that will allow BMW to provide a ‘lifetime of ownership’ for its customers. The seven-plus passenger vehicle market is growing; providing a high-performance alternative is an attractive option. BMW has the financial and engineering resources to launch a product like the minivan, and it has vast experience in launching new product lines with great success. There are nay-sayers in the market and press who claim that a ‘minivan’ will harm BMW’s brand. These same pundits claimed the 55 same thing about the X5, and again about the X3; however, these products have been huge successes. BMW’s challenge will be to ensure that the new product is not viewed as a minivan, but as a high-performance, high-occupancy vehicle aimed at the discerning consumer who wants to transport their family in style. Recommendations One short-term and one long-term recommendation are introduced across three areas: marketing, manufacturing, and design. The recommendations for design are expanded to include implementation strategies. Marketing Short- & Long-Term Recommendations The introduction of a new a product carries many risks, from not achieving full market to a complete bust. The marketing campaign to introduce the new minivan from BMW should be carefully thought out, as the Company is deviating from its traditional product design and focus. The product positioning of the minivan should be that of a crossover between a minivan and an SUV, without ever mentioning the word minivan. The convenience features of the minivan that will be inherent in the new vehicle should be communicated, but on their own and not in reference to the minivan. It is believed that any association of the new minivan with a traditional minivan will have extreme negative effects on BMW’s ability to sell the new product. In the past, BMW’s marketing campaigns have focused around the performance aspect of its vehicles, and it is recommended that the tradition be continued. Additionally, it is recommended that BMW include non-performance values and attributes of the new minivan. The marketing campaign should send a message that this vehicle cannot only perform, but also has versatility. One possible way to communicate this is to show a sixsome getting out of the minivan at a Golf and Country Club, instead of a foursome. Thus, telling the consumer audience that you can carry all your friends, plus their clubs in one vehicle. The message here is that the customer has room in one vehicle to transport multiple people, as is the case in a minivan, but it is being done in style, and social image stays in tact, especially for the male consumer. The message for the ‘soccer mom’ is that you can carry all your kids, their friends, and their backpacks, all in one vehicle, in comfort and in style. As consumer tastes and preferences change over time, BMW must address those needs with new product offerings that fit the new market. Our long-term recommendation from a 56 marketing perspective is to create the image tha t BMW is growing with its customers. The message needs to be one that demonstrates to its long-time customers and new entrants to the market, that BMW cares and understands their changing needs by providing vehicles that are useful, contemporary, and unique, while at the same time, preserving the traditional social status for which BMW stands. As BMW transitions itself to a broad product- line provider, the industry will change as competitors react to the new competitive force in previously- unchallenged markets. Manufacturing Short- & Long-Term Recommendations BMW Group should move production to be in close proximity to its target market. The Company’s new minivan is rumored to be built on the same platform as the X5, making Spartanburg, S.C., a natural cho ice, where the X5 is also made. Infrastructure and interest for this product is not equal globally, and it has been determined that BMW’s new product will compete only in the United States, where competitors’ similar products are popular and where infrastructure can handle such large vehicles. Although minivans—and even a “mini- minivan” concept—are gaining popularity in Europe, sales are still only a third of what they are in the United States (Kole, 1996). This method will assist BMW in its two long-term goals, as stated on page 33 of this analysis. Keeping production local will contribute to reducing costs, as finished goods will not have to be shipped across an ocean, which includes tariffs. This factor will also save time in moving finished goods to the marketplace. Having more products available for consumers to purchase could help the Company’s units sold figure grow as forecasted. Indirectly, rivalry in the industry could also increase as a result of timely delivery to the U.S. market. The use of contract manufacturers goes hand- in-hand with localized production. Even the best industry forecasters cannot be certain when a product is going to explode as a national fad, as was the unexpected cases of pet rocks in 1970s, parachute pants in the ’80s, and Billy Ray Cyrus’ “Achy Breaky Heart” in the ’90s. Should interest in the new BMW offering take off, the use of contract manufacturers would be able to ramp up quickly to help the Company meet increased demand. BMW Group could produce 75 percent of estimated demand in Spartanburg, and the remaining 25 could be contingently outsourced. If demand is large, Spartanburg has 25 percent remaining capacity to increase production, while being supported in the interim by contract manufacturers. This also works both ways, as it frees BMW from investing too much, 57 in case the product does not generate expected sales. Contract manufacturers are very flexible in their abilities to make various models and do not need significant lead time. As detailed in the supplier power portion of the six forces analysis, BMW already takes advantage of this with the X3. We recommend in the long run that manufacturers incorporate use of flexible strategies in domestic production plants; that is, be able to assemble a variety of vehicles in the same plant. As mentioned previously, the uncertainties, dynamic changes, and complexity of today’s society demands constant adjustment. The ability for any one plant to be able to transition from making one model to another will allow an automobile manufacturer to be able to quickly respond to an ever-changing market, whether that is regarding customer demand for a particular vehicle, or adjusting other models according to market trends. Once demand shifts, the Company can cross over to production of a different model in the blink of an eye. Meeting customer expectations in this fashion reduces vulnerability and helps overall sales increase (Gupta & Singh, 2001). One example of this is GM’s Lansing Grand River manufacturing complex, as described in a 2002 issue of Assembly Magazine. Capable of building five different cars and trucks simultaneously, the plant also utilizes lean and agile manufacturing practices. Dr. David Cole, director of the Center for Automotive Research said in the article, the building “represents a paradigm change in the industry” (Weber, 2002). Competitive strategies include a reduction in size, labor, and construction costs; “plant configuration… to facilitate just- in-time parts delivery from off-site suppliers”; emphasis on “assembly, body, and paint as discrete and highly- focused business units”; and use of a “time-saving system that is programmed to adjust” robots, conveyors, and other equipment “to different body styles…, from job to job, on the same line” (Weber, 2002). This type of strategy would also allow production to expand, with little impact on existing operations. A manufacturer could also produce vehicles destined for both domestic and overseas consumption on the same assembly line (Weber, 2002). These factors combine to make BMW a more competitive player in the industry, increasing both rivalry and threat of entry. The manufacturer will also gain power with regard to supplier relationships. This longterm recommendation would also align with BMW Group’s history of technological prowess with regard to process innovation. 58 Design Short- & Long-Term Recommendations & Implementation Short-Term: Incorporate Consumer Preferences into Design BMW is adamant that this new product is neither a minivan nor a SUV, but is rather a combination of both. In that regard, product success is dependent on whether or not BMW can accurately incorporate features required by consumers of this crossover. BMW’s initiative, in relation to product functionality, will affect what features are included, power capabilities and overall design. As this minivan will be the first of its kind, determination of these specific features could be troublesome. However, it is imperative that BMW design a vehicle that is as functional as a minivan with some of the stylized features of SUV in order to differentiate it from the numerous minivans and SUVs currently on the market. We suggest that BMW incorporate several features into the new car design that have been deemed necessary by consumers. As mentioned in previous sections, features appealing to minivan consumers are not necessarily the same as those for SUV consumers. To attract minivan consumers, the new vehicle must be have sliding doors, be comfortable, have a good deal of space, be accessible, and above all, have very high safety ratings. SUV consumers, on the other hand, are more interested in the overall style of the vehicle, its power, entertainment capabilities, roominess, and performance. It has been reported by BMW that this new vehicle will look somewhat like the X5. With that in mind, it becomes apparent that BMW is likely to encounter various problems in incorporating different features into these models. For example, it is recommended this vehicle be lower to the ground to promote accessibility. Minivans are generally much lower to the ground than SUVs as SUVs need higher clearance, which presents a clear conflict. Additionally, we recommend that this new vehicle have sliding doors, which neither the X3 nor the X5 have. Finally, to keep SUV clientele satisfied, it is suggested this vehicle perform as other BMW sedans. With a heavier body style and a low height, this may be a challenge for designers. In the V-P-C section, it was determined that this new vehicle should be priced between $55,000 and $65,000 in order to be profitable. Because this is an entirely new product vs. a product extension, we recommend that BMW be flexible in terms of pricing. With the launch of the X3 in 2004, BMW instituted a price point that was too high, which lead to low volume sales from the start. Not until BMW lowered the price of models with smaller engines and 59 less features did the vehicle begin to sell as expected. We recommend that BMW price the vehicle such that it maintains profit margins and the target price points that are inherent to company goals, while at the same time, such that the product is attractive to SUV and minivan consumers. It is recommended that BMW do extensive research on consumers’ price propensity before launching the vehicle in order to avoid anothe r X3 predicament. As referenced in Append ix 35, if the new vehicle is priced at $65,000 and is well liked by consumers, sales are likely to be around 100,000 units in the first three years of production. However, if the new vehicle is not well liked by consumers and sales are low, the price should move down to $60,000. At this level, sales are likely to be around 139,000 units in the first three years. With only a $5,000 price difference, changing price points have a very big impact on BMW sales. On the other hand, pricing the vehicle low at $55,000, sales volume is likely to be higher, 181,000 units in the first three years, but margins will be decreased. If new vehicle sales are not as BMW forecasts by the third year, the Company should move to the $55,000 price point. Although by reducing the price of the minivan, BMW may be sending a signal that the product is not worth the price, it would help with quicker consumer adoption, since consumers are very price sensitive in the auto market. Price determination for the new vehicle will be somewhat dependent on costs. To keep the new minivan in the price range below the X5 but above some of the smaller sedans, BMW must keep costs low. It is recommend ed that BMW take advantage of its under-utilized production facility in South Carolina for production of this vehicle. Not only are the facilities capable of producing this vehicle, the weakness of the dollar is favorable for the German firm. Moreover, production of the new vehicle in the United States will keep it close to the consumers it is directly intended for. If there is a sharp increase in demand, vehicles can be produced quickly and distributed to customers to preserve BMW’s goal of a 10-day turnaround period. BMW’s value and cost drivers are unlikely to change with this new product. BMW’s focus on customization, quality, service, and technology continue to be important. As BMW is attempting to target consumers with small children and/or older consumers, the focus should move toward service. In addition, as BMW is unlikely to release any automobile that does not meet very high quality standards, the focus then becomes technology and customization. In terms of cost drivers, BMW may suffer a loss of economies of scope, as this is a new 60 vehicle unlike any it has built previously, as well as unlike any other in the industry. Still, a continued move toward efficient and innovative organizational practices is a clear advantage for the firm. As quality has become an issue in the luxury market recently, it is also recommended that BMW focus on high quality and service both in terms of product design and delivery. BMW’s current resources and capabilities will undoubtedly play a large role in the success of this product. Resources such as flexible production facilities, a high quality service network, and electronic vehicle selection will provide value to consumers. In terms of capabilities, BMW’s advantage work-time efficiency, customer relationship management, and brand will be most important with this product launch. Although no new resources or capabilities are needed to properly launch the new minivan, BMW’s dependency on specific ones may change. For example, because this is a new product, brand image and the good relationships that BMW has established with dealers are paramount to product success. High brand awareness will help BMW market the vehicle, but dealers are crucial to correct product placement and exceptional service from the start. Imitation is the biggest threat that BMW will face if this product is successful. Whether the new vehicle provides a sustainable or temporary competitive advantage is likely to rest on this one issue. It is recommended that BMW be very secretive about product details, features, and designs until the product is launched, in order to combat imitation. BMW should try and capitalize on the advantage of being the first mover with this product. Provided another automaker does not release a similar vehicle in the mean time, BMW will be in a better position to capture a larger share of the ‘crossover’ market. Additionally, BMW needs to protect its engine patents and technology agreements with partners that are significant to this new product. Implementation of these ideas will require a strong commitment by management to push this product vehicle as completely new to the industry. Additionally, it is imperative that dealers and service providers are well informed about the differences between this vehicle and others that are similar. Initially, there may be some confusion on the part of consumers as to what differentiates this product from others, and for whom this product is ultimately intended. Specific marketing initiatives have been discussed previously and are critical in order to reach the right consumers in the short-term. 61 Long-Term: Continue New Market Expansion with SUT In the long term, BMW can continue its success by leveraging its design capabilities. Three potential design plans are to: take the minivan global, continue alternative fuel engine development, and develop and produce a Sport Utility Truck (SUT). In order to market the minivan outside of the United States, design changes must be made depending on the market. Size is likely to be the biggest adjustment needed, as other countries simply do not have roads to accommodate large vehicles. BMW should have no trouble designing and developing a smaller minivan, as its design team is very much in touch with European consumer demands. Engine development is one of BMW’s core competencies and should be used to continue alternative fuel engine experimentation. BMW has led the way for the entire industry in hydrogen engine progression; its H(2)R set nine world records for hydrogen engine speed, including a sub six second 0-60 mph time and a top speed more than 186 mph (The Auto Channel, 2005). This performance was designed to demonstrate the power and performance of BMW’s hydrogen engine, but also to prove its reliability and durability (The Auto Channel, 2005). Alternatively- fueled engines are going to be the future; BMW is almost there with its hydrogen engine and should continue this work in order to establish a firstmover advantage. For the long term, we propose a completely new design project for BMW, an SUT or Sport Utility Truck. Currently, Hummer and Cadillac both offer luxury SUT models, but these are built on truck chassis and meant for heavy-duty use. BMW’s proposed SUT would ideally be similar to the X5, but be a little bigger with a small truck bed. The goal of this vehicle would be to offer product to luxury customers who value the convenience of a truck-bed, without sacrificing performance, ride, or comfort. Cadillac company research from 2001 states that 20 percent of luxury households own a pick-up truck (Ward’s Dealer Business Staff, 2001). BMW could look to capture some of this market. In order to enter and capture a large share of this large and growing SUT market, BMW will need to make considerable changes in terms of production and focus. A SUT would be a completely new product for BMW, rather than just a new model or a line extension. BMW will need to adjust management focus, because trucks would be an entirely new automobile line for BMW. In order to do this, we suggest designating a specific division to development 62 of the SUT. Plants will also need to be reformatted to accommodate truck production, and experts in truck manufacturing would need to be consulted to facilitate this transition. The production location and target market would be the United States, the world’s largest truck market. Despite all the necessary changes, BMW’s existing value drivers in R&D, interchangeable part manufacturing, and design will assist in carrying out this difficult process. BMW must be willing to make large up-front investments in order to develop the SUT. Manufacturing the SUT would mean drawing upon current resources and capabilities as well as acquiring new ones. BMW currently does not have the competencies or the ability to leverage the partnerships that Cadillac has with GM Trucks in manufacturing its SUT, for example. Although, BMW currently manufacturers Range Rover engines and could use the same or similar engine design for the SUT (Hutton, 2005). Considerable research regarding market potential and time required to recoup the investment should be done before major commitments are made. Also, extensive market research should be done in designing the truck, in order to ensure consumer needs are met. Even though there is considerable risk in this venture, it does continue with BMW’s plan to provide an auto solution for all stages of a consumer’s life. It is recommended BMW continuously reevaluate demand and market conditions during development and production. The Company should also establish clear goals in terms of design, qua lity, production, and financial and market share targets when planning for this vehicle, as this would help minimize financial risk and brand equity risk. The following is a suggested timeline (Assuming BMW has no previous work on the SUT): Year 1 • • • • Determine potential market Survey potential customers regarding desired characteristics and design elements Design a plan to determine what corporate and manufacturing changes will be made Determine cost, production timelines, and potential profits 63 Years 2-5 (Assuming profitability is likely) • • • • Allocate specific design artists to SUT development Begin manufacturing adjustments Continue to monitor potential market for trend changes and analyze for profit potential Have prototype featured at major auto shows (by the end of year 5) Year 6 and Forward • • • • Launch product and a marketing campaign focused on promoting convenience Continue to monitor profitability and terminate line if it falls below established cut-off Keep SUT management separate in initial years following product release because they will be well prepared to deal with any issues that arise. Continue R&D work to improve subsequent models and to address any current problems Conclusion Overall, BMW looks like a good investment opportunity. The Company has strong financial fundamentals, strong ROA, and is second only to Toyota in financial strength. While the Company has traditionally been viewed as a provider of luxury performance sedans, the recent success of the X and Z lines illustrates that BMW is capable of much more. The introduction of the MINI Cooper and the 1 Series proves that BMW can capture the young cons umer, and hopefully generate a ‘customer for life’. The success of the X line shows that BMW can design a superior truck- like vehicle as well as a sedan. The stock has been somewhat flat over the past 24 months (BMW, 2005c). With the introduction of another successful product, such as the minivan, it is likely that the stock will respond in a positive fashion. However, BMW is a company with a solid foundation, more suited for the long-term investor. 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Retrieved May 5, 2005, from https://www.linkedin.com/profile?viewProfile=&key=13315. 77 Appendices Appendix 1: Personal Communication with Sarah Lovegrove Richard Upton sent an email to a general BMW customer information email address, customer.information@bmw.co.uk, and received a reply from Sarah Lovegrove: -----Original Message----From: Rick Upton [mailto:rickupton@yahoo.com] Sent: 25 May 2005 20:06 To: customer.information@bmw.co.uk Subject: BMW AG vs. BMW Group To Whom It May Concern: I am writing a paper for school about BMW, and am trying to figure out, what is the difference between BMW AG and BMW Group? I have searched through numerous BMW and non-BMW sites, and cannot find any information about why one term is used sometimes, and other times the other term is used. Best regards, Rick Upton -----Original Message----From: Customer.Information@bmwfin.com Sent: Thursday, May 26, 2005 1:43 AM To: rickupton@yahoo.com Subject: RE: BMW AG vs. BMW Group Dear Mr. Upton Thank you for your email to BMW Customer Information dated 25 May 2005, We can confirm that the differences between BMW AG and BMW Group are as follows:BMW AG - this is the German version of BMW LTD BMW Group - this defines the entire group itself and all its subsidiaries If you would like to out more information about BMW, may we suggest that you contact BMW Education. We have provided the details for your convenience. www.bmweducation.co.uk The education department can also be contacted on the following details: BMW Education Programme, PO Box 633, Harrow, HA1 2GS Tel: 0870 333 0427 Fax: 0870 333 0131 Email: bmweduc@bmweducation.co.uk We hope this information is of use. If we can be of further assistance please do not hesitate to contact the Customer Information team. Yours sincerely Sarah Lovegrove Product Information Advisor BMW Group United Kingdom Tel: Fax: Email: 0800 325600 0870 5050206 customer.information@bmw.co.uk 78 Appendix 2 : BMW History Year Event 1916 BFW plant in 1922, but Bayerische Motoren Werke continues to date its foundation from the founding of BFW.” “On 21 July, Rapp-Motorenwerke is renamed Bayerische Motoren Werke GmbH. The ongoing war means that the “Bayerische Flugzeug-Werke (BFW) was founded on 7 March and incorporates Otto-Werke. BMW acquires the 1917 small company grows quickly. With expansion in mind, the firm builds a spacious plant right next to the Oberwiesenfeld airfield in Munich and continues to build engines for army planes until 1918.” “Construction designs for the first post-war BMW motorcycle are ready by summer 1947, and the first R 24 is raffled to the employees shortly before Christmas 1948. The first standard-production model sells spectacularly in a country long-deprived because of war and its after-effects. In addition, some 18% of all BMW machines are exported abroad as early as 1950.” “BMW comes close to being bought but is saved by a nimble small car, the BMW 700. Of Italian design, the car possesses a unitary construction and BMW motorcycle engine (initially 32 hp, later 32 or 40 hp) in the back. Named “the lion-hearted weasel”, it is immensely popular with the car-buying public and as race car. BMW regains its rightful position and embarks on fresh projects with renewed confidence.” “The exterior of the new BMW head office is finished on time for the 1972 Olympic Games. Continuing growth means the company has already outgrown its new home when it moves in the following year. This new nerve centre and the BMW museum are a stone's throw from the tent-like canopies of the city's Olympic Park, and symbolize prosperity, autonomy, and technical perfection.” “In the early 1980s, BMW bought a former barracks in Munich's northern suburbs and set about turning it into a Research and Innovation Center (FIZ). It consists of design, construction and test facilities, a prototype construction unit, and pilot plant. The first teams started work in 1985. Officially opened in 1990, the FIZ continues to increase its range of activities.” “With the brands BMW, MINI, and Rolls-Royce Motor Cars, the BMW Group has been focusing on selected premium segments in the international automobile market since 2000. In the succeeding years, the launch of the BMW 1 Series meant an expansion of the model range in the premium segment of the lower middle class and the BMW 6 Series did likewise in the segment of the large coupes and convertibles. The MINI marquee was launched and production began in the Oxford plant in 2001. In 2003, the BMW Group assumed marquee responsibility for Rolls-Royce Motor Cars. At the same time, the Worldwide Head Office and Manufacturing Plant in Goodwood, GB, was built.” Source: BMWGroup.com (BMW, 2005b) 1948 1959 1973 1990 2000- Appendix 3 : Company Strategy “Identifying potential and encouraging growth. Knowing what we represent. Recognizing where our strengths lie and making the best use of every opportunity. Following a clear strategy. Goals we have attained are in essence the point of departure for new challenges. “This is the philosophy that inspires every individual at the BMW Group. It influences the company's structure and it plays a vital role in the decision-making process. Our corporate ethos finds its expression in the uncompromising pursuit of the superlative. The result? Outstanding brands with an unmistakable profile. Automobiles and motorcycles which fascinate people all over the world and which win legions of new admirers every day. And a degree of success which sees the BMW Group goes from strength to strength. “With the three brands, BMW, MINI and Rolls -Royce Motor Cars, the BMW Group has its sights set firmly on the premium sector of the international automobile market. To achieve its aims, the company knows how to deploy its strengths with an efficiency that is unmatched in the automotive industry. From research and development to sales and marketing, BMW Group is committed to the very highest in quality for all its products and services. The company’s phenomenal success is proof of this strategy's correctness.” Source: BMWGroup.com (BMW, 2004b) 79 Appendix 4: Six Forces Industry Analysis Levels 1 & 2 Factors Underlying Rivalry Demand Conditions Effect on Industry Moderately Favorable: New automobile sales (total U.S. car and light truck sales) were 16.9 million in 2004. This is an increase of 1% (Porretto, 2005). However, even with low financing options, low interest rates and cash-back programs, auto sales are sluggish. In 2005, auto sales are only expected to increase by about 1.3% (16.9 million up from 16.86) (Porretto, 2005). However, it is important to note that luxury automobile sales rose 6.1% to 1.97 million (Green, 2005). Moderately Favorable: The SUV market has 5.9% of the total auto market. Large SUV sales have decreased by 0.5% to 5.9% in 2004 (Hakim, 2004). Medium and small SUV sales also decreased by 0.6% to 15.9% in 2004 (Hakim, 2004). However, there has been an increase in consumer demand for vehicles which carry 6-8 passengers with multi-terrain capabilities. Moderately Favorable: Minivans account for 6.5% of total automobile sales; 1.1 million minivans are expected to be sold in 2005 (Clanton, 2004). Part of the increase in demand is directly correlated with the increase in demand for similar products such as SUVs. Unfavorable: Exit barriers are very high in the auto industry because producers have high sunk costs in specialized assets, labor agreements and contracts, and interrelationships between business segments. R&D costs are also significant and time to get the product to market is generally lengthy. Moderately Unfavorable: Many plants have the ability to produce a multiple array of automobiles. Moreover, a complete discontinuation of an automobile is possible although costly. Moderately Unfavorable: Again, many plants have the ability to produce a multiple array of automobiles. A complete discontinuation of this type of automobile is possible, although it too is very costly. Moderately Unfavorable: The cost of setting up plants, accessing the proper parts, securing adequate labor, and distribution channels is very high. There are high transaction and storage costs, which become a problem when demand fluctuates. The up-front costs of this type of industry are significant even though labor and parts costs have increased in recent years. Labor movement, part standardization, and part interdependence are some of the ways firms are trying to cut down production costs. Firms are forced to compete on value as cost efficiency in terms of production and delivery is difficult. Strength 2 Rank 1 Auto Industry (general) 2 3 SUVs 2 2 Minivans 2 1 Exit Barriers Auto Industry (general) 4 2 5 1 SUVs 4 2 Minivans Cost Conditions 4 4 3 3 Auto Industry (general) * includes SUVs & Minivans 4 1 80 Product Differentiation Auto Industry (general) Moderately Favorable: Different automobiles have various features, styles, seating capacity, mileage, colors, and electronic capabilities. Traditional lot and Internet availability of specific automobiles is a factor. Warranty, reliability, and crash test results are also very important to consumers. Favorable: Seating capabilities, other features such as fourwheel drive, styles, and features differentiate SUVs from other types of automobiles, and amongst other SUVs as well. Favorable: Product features available on different brands of minivans allow consumers a large number of choices. Each individual product will differ in terms of features and capabilities bundled with the automobile itself. Unfavorable: For automakers, switching from producing vehicles to producing another product is not very easy. There are many start-up costs, including investment in capital, labor, and R&D. However, for an automaker to switch which types of automobiles it produces or to produce more than one type of vehicle is not as difficult. Automakers frequently add products when other manufacturers have success with a certain model. Unfavorable: Switching from producing an SUV to producing another type of automobile is not as high as switching from producing automobiles to another product completely. Most plants have equipment that will allow them to produce various different types of automobiles. Competition is increased because most automakers could enter the SUV market if they chose to. Unfavorable: Switching between production of a minivan to production of another type of automobile is a possibility for automakers. Again, most plants have equipment that will allow a producer to build a variety of automobiles. Thus, competition is increased because automakers could enter the minivan market if they chose to. 2 4 2 1 SUVs 2 3 Minivans Switching Costs 2 4 2 5 Auto Industry (general) 4 3 SUVs 4 1 Minivans 4 2 Industry Roughly Equal in Size Unfavorable: There are numerous car manufacturers. The automobile industry is oligopolistic in nature because the largest four firms are responsible for 70% of all auto sales (Hoover’s Inc., 2005a, 2005b, 2005c; Porretto, 2005). Due to mergers and acquisitions in the industry, although some automobile brands are small, some firms are in sum larger than others. This can translate into an advantage for those large firms across all product lines. 3 6 Auto Industry (general) 4 1 81 SUVs Minivans Moderately Favorable: The SUV market is roughly equal in size in terms of manufacturers. There are many diffe rent SUV brands and models, including 19 compact, 24 mid-size, 16 full-size, and 26 luxury SUV (CarsDirect.com, 2005). The larger players in the total SUV market are GM (49%), Ford (36%), and Toyota (15%). In the medium-sized SUV market, GM (25%), Ford (24%), and DaimlerChrysler (18%) dominate the market. Finally, in the small SUV market DaimlerChrysler (22%), Ford (15%), and Honda (14%) have the largest share (CarsDirect.com, 2005). Moderately Favorable: The minivan market is roughly equal in size. There are 16 different brands of minivans and five full-size vans currently available in the market (CarsDirect.com, 2005). The larger players in the minivan market are DaimlerChrysler (39%), GM (18%), Ford (14%), and Honda (14%) (CarsDirect.com, 2005). Neutral: Each automaker is currently producing, or will produce in the future, an SUV or minivan. In the luxury market there is an oligopoly structure consisting of MercedesBenz, BMW, and Lexus. Most firms have contracted a larger number of firms to provide products. Also, firms are generally contracted to help with the distribution of the automobiles once they are produced. Some luxury firms also have contracts with electronic service providers such as GPS system engineering, MP3 capabilities, and satellite radios. 2 3 2 2 Industry Structure 3 7 Auto Industry (general) * includes SUVs & Minivans 3 1 Overall Analysis Factors Underlying Threat of Entry Economies of Scale Effect on Industry Moderately Favorable: Typically, assembly plants are built domestically with a capacity for producing 100,000 to 400,000 cars annually (Womack, Jones, & Roos, 1990, pp. 202-203). Dedicating an assembly plant to only producing a single model could be risky, since a large capital investment must be made to configure the assembly lines for a model which may turn out to not be popular. However, this barrier can be lowered. One way to lower the bar is to use one assembly line for multiple cars by using flexible manufacturing (Davis, 2003; Keenan, 2003; Maynard, 2003). Another way is to outsource manufacturing (Siekman, 2005). Moderately Favorable: Foreign automobile manufacturers may attempt to leverage their current SUV or minivan production by introducing the same vehicle to the U.S. market. However, the vehicle may not generate sufficient demand without customization to match the local market. 4 Strength 2 Rank 2 By All Manufacturers 2 1 By Automobile Manufacturers that Make SUVs or Minivans and do not Sell any Automobiles in the U.S. Market Level of Product Differentiation By All Manufacturers 2 2 2 Moderately Favorable: Manufacturers offer differences in quality for which customers will pay a wide range of prices. 2 3 1 82 Cost Advantages Independent of Scale By New Manufacturers Favorable: Manufacturers in the industry are typically very large and therefore can obtain economies of scope with brand awareness, back office functions, as well as common manufacturing components and processes across models. Moderately Unfavorable: New entrants of current or new manufacturers without union agreements, and high pension and health care costs (like Ford, GM, and DaimlerChrysler) will have cost advantages (Kurylko, 2003). Favorable: The capital requirements to build an assembly plant are enormous. For example, $1.43 billion for Nissan in Mississippi (CanadianDriver Communications Inc., 2003), and $1 billion for Hyundai in Alabama (Southern Business & Development, 2003). Large automakers are not the only ones who can afford to make this type of investment; Samsung Motors started operations in 1998 with an investment of $2.8 billion (a business which has since been purchased by Renault) (Fisher, 2000). The capital requirements to develop a new model of car are large, even when an existing platform can be leveraged. For example, Honda developed the 1998 model of the Honda Accord for “only” $600 million, leveraging a flexible platform; in comparison, the 1996 Ford Taurus cost $2.6 billion to update (Dawley, Kerwin, Naughton, & Thornton, 1997). 3 4 1 2 By All Manufacturers Capital Requirements 4 1 1 1 By All Manufacturers 1 1 Access to Distribution Channels By Any Manufacturers not yet Selling Minivans and SUVs in the U.S. Market By Auto Manufacturers already Selling in the U.S. Market Retaliation by Competitors By All Manufacturers Switching Costs Moderately Unfavorable: For dealers, the costs may vary depending on the agreement between the dealer and the manufacturer. Discontinuing the sale of SUVs and minivans could be a breach of contract. Additionally, dealers have quotas for each model they sell, ensuring sales attention to every product. Inventory is another significant consideration, as every major dealer has millions of dollars in inventory and delivery in-route. Consumers, on the other hand, have little to lock them into becoming repeat purchasers of a brand. Moderately Favorable: Automobile dealers will often sell more than one manufacturer’s products. Therefore, it is possible for new entrants to gain access to distribution channels, as Cross Lander has been able to do for its SUVs (Stoll, 2004). However, prime locations may be difficult to find. Favorable: Companies already selling in the U.S. market can leverage their existing distribution channels. 3 6 2 2 51 1 2 Moderately Favorable: Companies not wanting to lose market share will retaliate, especially since there is overcapacity (Peter, 2004). 2 4 5 1 7 By All Manufacturers 4 1 83 Government Regulation Neutral: There are substantial regulations for selling automobiles in the U.S., including certification by the Environmental Protection Agency for safety measures, such as the availability of airbags and seatbelts, as well as fuel efficiency requirements for vehicles under 8,500 pounds (Stoll, 2004; Gardner, 1996; International Trade Association, 2004). Neutral: These manufacturers may have to do some learning to understand and navigate the government regulations, since regulations vary from country to country. Global standardization of regulations has only just begun, and is far from being completed (O’Donnell, 2004). 3 8 By All Manufacturers 3 1 By Manufacturers not already Selling Autos in the U.S. Market Overall Analysis Factors Underlying Supplier Power Concentration of Suppliers or Supplier Groups 3 2 2 Effect on Industry Strength 2 Favorable: According to U.S. Department of Labor, only 12.5% of all workers are union members (ACB Journals, 2005), and within automotive industry, only 25% of workers are unionized (McElroy, 2004), making laborers a dispersed group. Moderately Favorable: There are at least 26 steel suppliers interested in working together with the automobile industry (AISI, 1999), however the top three (U.S. Steel, Mittal, and Nucor) will have an estimated 58% of domestic market share in 2005 (Andrea, 2005). Favorable: Suppliers in this industry handle everything from paint, rubber, and engine fluids to door handles, seats and radios. Some auto manufacturers produce own parts, but don’t have capacity for complete vertical integration. Moderately Favorable: Smaller number of suppliers. Some auto manufacturers produce own components, but don’t have capacity for complete vertical integration. Favorable: Multiple companies in the industry, including auto manufacturers producing own components. Moderately Favorable: Growing with the emerging hybrid options. Moderately Unfavorable: Six major players, however, all are in Europe. Favorable: Very fragmented industry. Neutral: Auto manufacturers pay high wages, reducing ability to make profit; however, these factors are offset by increased production efficiencies and use of automation on the plant floor. Rank 9 Labor 1 4 Steel 2 3 Commodity Components* Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Buyer Profits Labor 1 7 2 1 2 4 1 4 3 5 6 2 1 8 5 4 84 Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Supplier Industry Growth Unfavorable: Supplier passes on numerous costs to buyer, such as tariffs on foreign imports. Buyer also gets locked into prices either through long-term contracts or spot buys. However, inflation is slowly creeping up the supply chain. Favorable: Auto manufacturers have purchasing power due to their relative concentration in relation to the fragmented nature of suppliers, whose products are only differentiated on price. Favorable: Auto manufacturers have purchasing power. Unfavorable: Supplier in power as auto manufacturers are trying to drive demand for new car sales by marketing electronic innovations. Not Applicable: Most are produced in-house. Auto manufacturers’ COGS include this. Moderately Unfavorable: Costs are lower, but still have to pay for special equipment, tooling, parts and plant readiness. Favorable: Auto manufacturers have purchasing power. 4 3 1 6 2 4 3 4 1 3 5 1 8 2 7 6 Labor Steel Commodity Components Model-Specific Components Electronics Powertrain** Neutral: General production labor is decreasing as plants become more efficient and integrate automation, but demand is growing for IT systems support technicians as computer technology is integrated into newer manufacturing models. Industry viewed as unattractive, so not many graduates are looking to enter, however, estimates are for 9,000 new jobs to be created in factories over the next three years (Stoltz, 2005). Favorable: Players are all established and no recent innovations for other use of steel. CAGR for the next 10 years is 1.4% (OYCF, 2002). Favorable: Low-margin industry not attractive. Favorable: Low-margin industry, not attractive. There are no new auto manufacturers being created to open up to new models. Unfavorable: Market for auto sensors is expected to rise to $4.6B by 2007 (IHS, 2004). Not Applicable: Most are produced in-house. Moderately Unfavorable: Becoming more important as automakers add more niche models to their lines. Popular with European automakers, but Japanese auto manufacturers are generally too concerned with controlling production process to adopt this trend. U.S. companies are in talks to consider this as a new strategy (Siekman, 2005). Neutral: New tools are invented as process and design improvements are made. 3 3 1 1 2 4 3 6 5 4 2 8 Contract Manufacturers 4 1 Manufacturing Tools Strategic Importance of the Firm to the Supplier Labor 3 2 7 8 Favorable: Manufacturers are reducing the number of employees needed through productivity gains. Also, high wage rates allow them to draw from a large labor pool. This makes having a job very important if you can get one. 2 3 85 Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Strategic Importance of the Supplier to the Firm Labor Moderately Favorable: Automobile industry provides a strong share of the market, but other uses, such as for buildings are open. Favorable: Suppliers make their components specifically for the industry and therefore rely on auto manufacturers to buy their products. Favorable: Suppliers make these components specifically for a model and therefore rely on particular auto manufacturers to buy their products. Favorable: Electronics currently comprises 25% of a car’s total cost and that is expected to rise to 40% by 2010 (IHS, 2004). These suppliers will want to take advantage of that. Not Applicable: They are one-and-the same. Most are produced in-house. Favorable: Suppliers rely on auto manufacturers, but at the same time, are providing numerous benefits to their customers. Favorable: Tools are made specifically for automobile industry. 3 1 2 6 2 5 2 3 2 3 5 2 8 4 7 1 Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Percent Volume Sold to the Firm Unfavorable: Most jobs require a secondary education or extensive training, forcing manufacturers to only hire qualified employees. Also, design and engineering of product very labor intensive. Unfavorable: Government safety regulations lead manufacturers to use steel in order to pass standardized crash tests. Unfavorable: Components are made specifically for auto manufacturers. Unfavorable: Components are made specifically for particular auto manufacturers. Unfavorable: Autos are now differentiated by the software that controls them, with almost every part of a vehicle now controlled electronically (IHS, 2004). Suppliers can gain concessions from auto manufacturers with the threat of halting production of high-demand components. Not Applicable: They are one-and-the same. Most are produced in-house. Unfavorable: Using these suppliers “free automakers from adding labor or investing in capital to build cars that won’t generate a lot of sales” (Siekman, 2005). Unfavorable: Tools are made specifically for automobile industry. 5 3 4 4 4 4 6 5 5 1 3 4 4 4 7 2 8 3 Labor Favorable: There are approximately 149 million workers in the United States, and only 689,000 of them work in various manufacturing and non-manufacturing jobs, such as dealerships, suppliers, and other industry services, which totals less than 1% (Bureau of Labor Statistics, 2005; Stoltz, 2005). 2 7 86 Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Differentiation of Suppliers’ Products/Services Labor Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Substitutes for the Suppliers’ Products/Services Labor Steel Commodity Components Moderately Favorable: Although 13 million short tons was shipped to the automotive industry in 2002, that figure is only 13% of total, as other uses are available, such as construction, maintenance, machinery, tools, rail transportation, oil and gas industries, electrical equipment, appliances, utensils and cutlery (U.S. Census Bureau, 2004a). Unfavorable: Components are made specifically for automobile industry. Unfavorable: Components are made specifically for automobile industry. Unfavorable: Other uses are available. Favorable: Production can be controlled in-house so 100% produced should go into final product. Moderately Favorable: The top six produced more than 380,000 vehicles, only 2% of all vehicles made (15,787,972) in 2004 (Siekman, 2005; Morgan & Company, Inc., 2005). Unfavorable: Tools are made specifically for automobile industry. 3 5 4 4 4 1 3 4 3 2 1 8 6 4 4 Moderately Unfavorable: Most production positions are easily trainable, but there is a growing demand for qualified IT systems support technicians. Favorable: Pretty much a raw material/commodity product. Favorable: Marginal differentiation for interior components, tire sizes and treads, and paint colors. Hoses, belts, fluids, etc. are standardized. Neutral: Differentiation based on OEM and its product line of models. Moderately Unfavorable: Differentiation based on OEM and its product line of models. Unfavorable: Options include diesel, gasoline, electric, hydrogen fuel cell, and hybrid, which would have to be outsourced. Unfavorable: Very flexible with production, as they can produce many different models for various OEMs at the same time. Moderately Unfavorable: Tools are made specifically for automobile industry. 2 4 1 2 3 4 5 4 8 7 6 3 2 5 4 3 1 5 7 Favorable: Automated machines and robots are replacing certain production functions; however design and engineering of models still require humans. Unfavorable: OEMs are testing aluminum, plastics, etc., but not feasible yet. Favorable: However, suppliers rely so heavily on OEMs to purchase their products, OEMs can threaten a particular supplier’s business with a move to a competitor and therefore can demand specific requirements. 2 4 4 3 1 8 87 Model-Specific Components Electronics Powertrain** Unfavorable: Parts are made for particular models. Unfavorable: There were; however, electronics is the substitute that is now becoming industry standard. Unfavorable: All cars need an engine and transmission. Options are substitutable and include diesel, gasoline, electric, hydrogen fuel cell, and hybrid. Unfavorable: In-house production is the only other option. These suppliers have multiple benefits: lower labor costs, ability for OEMs to focus on high-volume models, better flexibility in meeting demand (Siekman, 2005). Favorable: Could conceivably use other products, like a plank of wood or a paper clip, but not realistically feasible. Production efficiency is with the tools. 3 4 5 6 2 1 Contract Manufacturers Manufacturing Tools Suppliers Earn Low Profits 4 5 2 4 7 4 Labor Steel Commodity Components Model-Specific Components Electronics Powertrain** Contract Manufacturers Manufacturing Tools Threat of Forward Integration by the Supplier Labor Steel Commodity Components Model-Specific Components Electronics Powertrain** Unfavorable: Unionized labor pays very well and the industry as a whole pays above average, as it is tough to attract employees into the industry. One site estimated auto parts manufacturing industry pays 35% more than typical industry job wage (Career Pro News, 2005). Neutral: Made huge profits in 2003, but barely covered cost of capital in other years. Favorable: Auto manufacturers have purchasing power. Favorable: Auto manufacturers have purchasing power. Unfavorable: Suppliers able to take advantage of industry growth. Not Applicable: Most are produced in-house. Neutral: Win-win situation for both parties. Favorable: Auto manufacturers have purchasing power. 4 2 3 1 1 5 3 3 2 1 3 6 5 1 8 4 7 10 2 3 6 7 5 4 Contract Manufacturers Favorable: Skills are present, but interest most likely not there, as well as capital needed to build a plant. Favorable: No interest or know-how. Also lack labor and capital. Favorable: It’s a start to have all the parts, but automobile industry is very labor and capital intense. Favorable: It’s a start to have some of the parts, but automobile industry is very labor and capital intense. Favorable: Automobile industry is very labor and capital intense. Not Applicable: Most are produced in-house, so already considered vertically integrated. Unfavorable: These are not just assemblers, as they also take on engineering and manufacturing strategies and there are fewer layers of management, i.e. it’s easier to get the job done. Downside would be lack of marketing know-how and brand recognition. 1 1 1 1 1 1 3 1 88 Manufacturing Tools Overall Analysis Favorable: Automobile industry is very labor and capital intense. 1 3 8 * Commodity Components includes tires, batteries, fabric, fluids/chemicals and paint, as well as other raw materials, such as iron ore, copper, brass, zinc, rubber and glass. ** Powertrain includes engine and transmission. Factors Underlying Buyers’ Price Sensitivity Product Differentiation Effect on Industry Strength 2 Rank 2 Individual End Consumers New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Buyer Earns Low Profits Favorable: In the luxury car markets, differentiation is at its highest. As prices decline, differentiation also decreases, but even at its lowest levels , is still fairly strong. When consumers are spending such a large percentage of their income, they demand specific features. Manufacturers look to differentiate their products through partnerships and other design initiatives, until the cost exceeds the benefit (Brand Noise, 2004b). According to Marcus Stahl, general manager of Nokia Automotive Accounts, “Consumers today expect to find state-of-the-art communications equipment in the cars they buy—not only in the premium segment, but in all segments.” (Brand Noise, 2004a) Favorable: Differentiation is not much of an issue because new car dealers usually sell only one brand of new cars. The only way to switch products is to carry a different brand all together. Unfavorable: Rental car agencies have car categories that they offer. They simply look for a car that matches that category at the lowest price, while meeting its customers’ expectations. Moderately Favorable: Differentiation on purchase price, resale value, fuel economy , and an overall total cost of ownership. Fleet managers must keep costs down, which is difficult as fleet leased automobiles have low resale values, similar to rental cars. 1 1 2 2 5 3 2 4 2 Moderately Favorable: Americans might have higher incomes as compared to the rest of the world, but they spend most of it, $40,677 on average in 2002. Automobile expenditures accounted for 19.1% of this (Bureau of Labor Statistics, 2004). According to the U.S. Department of Commerce, Americans save less than 1% each year. Money earned is money spent. Favorable: Since 1980, the average gross margin for newvehicle sales has decreased every year, from 10% to below 6% (Bruynesteyn, 2005, p.33). Although the margins for SUVs are higher than the other automotive categories because of high prices and gas-guzzler loopholes. For large SUVs a dealer might earn $10,000 per vehicle gross margin (Sawyers, 2004). 6 Individual End Consumers 2 1 New Car Dealerships 1 2 89 Rental Car Agencies Fleet Corporate Leasing Product’s Strategic Importance Individual End Consumers Moderately Favorable: None of the top-three publicly reporting agencies had a net profit margin more than 3% in 2004. Moderately Favorable: For sales, is one of the top-five expenditures and must be carefully managed considering low resale values and rising gas prices. 2 3 2 1 4 3 New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Product’s Portion of Buyer’s Costs Individual End Consumers Favorable: Individual transportation is of critical importance. In most parts of the United States, public transportation or taxi service is not a legitimate substitute. The importance is reflected in the 19.1% of total expenditures for car sales (Bureau of Labor Statistics, 2004). Favorable: New car dealers strive to carry the complete product line of the brand it retails. Dealers want to offer products for all customers possible. Moderately Favorable: Demand for SUVs and minivans has increased over recent years. For the largest public agency, Hertz, car rental accounted for 81% of total revenue in 2004. Of that, SUV and minivan rental is a growing portion (The Hertz Corporation, 2005). Neutral: Many times sedans are not big enough for traveling sales people who might have to carry products with them. Although, there are many types of automobile alternatives. 1 1 1 2 2 3 3 1 4 5 New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Factors Underlying Buyers’ Bargaining Power Buyer Concentration Individual End Consumers New Car Dealerships Favorable: The average of a compact SUV is $24,282 and $48,586 for a luxury SUV. The most popular and original minivan, the Chrysler Town & Country, ranges from a base of $25,090 to a loaded version going for $35,445. Also the SUV market has grown at 7% for 2004 (Jedlicka, 2004). Favorable: SUVs have been growing in sales over the past years; between 1997 and 2002, SUVs have increased in sales by 56% (Census Bureau Reports, 2004b). Minivans have grown, but at a much lower rate. SUVs have an MSRP above the $28,000 average for the new car industry, according to an Auto Channel report in 2004. The average new minivan will retail around the average price. Moderately Favorable: SUV and minivan rental has increased, primarily for family travel. Moderately Favorable: Corporate leasing has increased its use of minivans and SUVs for cargo and passenger space requirements. Fleet Corporate leasing for sales organizations is one of the top-five expenditures. Effect on Industry 1 1 1 2 2 4 2 3 Strength 2 Rank 8 2 Moderately Favorable: Each end customer buys only a handful of vehicles in their lifetime, although consumers tend to move in the same direction as would one single buyer. Favorable: There are thousands of new car dealerships across the country, most of which are independently owned. 2 1 1 90 Rental Car Agencies Fleet Corporate Leasing Unfavorable: The top-five agencies account for nearly all sales. Neutral: Some corporations or government agencies lease thousands of automobiles a year, but when compared to the overall market, any individual account is not critical. The “big three” car manufacturers (GM, Ford, and DaimlerChrysler) alone sold more than 10 million autos in 2003 (Classified Ventures, LLC, 2004). Moderately Unfavorable Moderately Unfavorable: On an aggregate basis, individual consumers will purchase the majority of the 16.8 million autos expected to be sold in 2005 (Bruynesteyn, 2005, p.8). Neutral: Dealerships are the channels for new car purchases for individual customers. Moderately Unfavorable: The Travel Industry Association of America (2003) reported that 79% of U.S. domestic persontrips in 2003 were taken by car, truck, camper/RV, or rental car, up 11% since 1994. Neutral: Only a few customers are big enough to individually have an imp act on a major car manufacturer. Neutral: The switching costs depend on product performance, brand loyalty, and quality of service. These differentiating factors are what bring customers back for repeat purchases. Favorable: Depending on the agreement between the dealer and the manufacturer. Discontinuing the sale of SUVs and minivans could be a breach of contract. Additionally, dealers have quotas for each model they sell, ensuring sales attention to every product. Inventory is another significant consideration, as every major dealer has millions of dollars in inventory and delivery in-route. Unfavorable: Agencies can interchange which brand they offer and frequently do based on costs. Unfavorable: Leasing managers are not hesitant to make a switch if the price is right. When cost savings are larger than switching costs, these large businesses and government agencies will make the move. Neutral: Consumer reports are published annually. Dealers offer comprehensive booklets on each model. Manufacturer websites offer all relevant facts and details about their products. Although, information is readily available for all models. Neutral: Direct relationships with manufacturers provide the most complete source of information. Neutral: Large rental car agencies deal directly with the manufacturer and have access to all levels of management. Neutral: The larger the account, the more information and assistance the manufacturer will be willing to extend to leasing managers. 5 3 3 4 Buyer’s Strategic Importance to Firm Individual End Consumers New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Switching Costs Individual End Consumers 4 4 3 7 1 2 4 3 2 2 3 4 1 1 New Car Dealerships 1 2 Rental Car Agencies Fleet Corporate Leasing Buyer Information Individual End Consumers New Car Dealerships Rental Car Agencies Fleet Corporate Leasing 5 3 5 3 4 10 3 1 3 3 3 3 2 4 91 Backward Integration Threat Favorable: They are too diverse and have no desire to run an automotive manufacturing plant together. Individually, there is a lack of capital and know how to develop such a business. Automobiles assembled with retail prices for components would cost 300-400% more than MSRP, excluding the labor involved (Investopedia, n.d.). Favorable: Dealerships also lack the tremendous capital as well as know how. Favorable: Agencies have no expertise in production and expansion into this industry would be a far stretch from its core business, especially considering the large start-up costs of automotive manufacturing. Favorable: Companies that fleet lease perform various business activities. Few of them are large enough to afford venturing into the automotive industry. Those that are large enough lack interest and are only concerned about the leasing aspect. 1 11 Individual End Consumers 1 3 New Car Dealerships Rental Car Agencies 1 1 1 2 Fleet Corporate Leasing Percent Volume Sold to the Buyer Individual End Consumers New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Market Growth 1 4 4 Neutral: Individuals purchase an overwhelming majority of the 16.8 million autos expected to be sold in 2005 (Bruynesteyn, 2005, p.8). SUVs alone accounted for 4.5 million (Webster, 2004). However, individuals tend to buy in low quantities, mostly one. Moderately Unfavorable: All individuals purchasing new cars must go through a dealer. Moderately Unfavorable: The total is large in dollars because of the size of the industry, but as a percentage it is pretty low. This is offset somewhat by the frequent turnover of autos in the rental car industry. Moderately Unfavorable: Fleet leasing has a decent sales value and a turnover of 2-3 years. Moderately Favorable: Luxury and SUV hybrids have increased in sales by 15%, while truck-based large SUVs have decreased by 2% for 2004 with an average growth of 7% for SUVs (Jedlicka, 2004). Minivans decreased with customer retention falling from 63.5 to 48.1% between 2003 and 2004 (Doelen, 2004). Moderately Favorable: Sales mirror the individual consumers. Moderately Favorable: According to an Accenture study, the U.S. car rental industry should have a CAGR of 6% for 2005 (Wason, 2002). The industry is already valued at $18 billion for the U.S. as of 2003 (Sheehan, 2003). Favorable: CAGR of 7.7% from 1983-2002 (Levecke, 2004). 9 3 2 4 1 4 3 3 2 4 4 Individual End Consumers 2 1 New Car Dealerships Rental Car Agencies Fleet Corporate Leasing Overall Analysis 2 4 2 2 2 2 3 92 Factors Underlying Substitutes Buyer’s High Propensity to Substitute Vehicles in general SUV Products Effect on Industry Strength 2 Rank 3 1 3 Minivan Products Price Performance of Substitutes Vehicles in general Favorable: There are no viable substitutes to vehicle transportation. Moderately Unfavorable: There are a number of SUVs on the market: 19 compact, 24 midsize, 16 full-size, and 26 luxury SUVs (CarsDirect.com, 2005). Moderately Unfavorable: There are a number of minivans on the market: 16 minivans and 5 full-size vans (CarsDirect.com , 2005). 1 4 4 3 2 2 1 SUV Products Minivan Products Switching Costs Vehicles in general SUV Products Minivan Products Overall Analysis Moderately Unfavorable: There is a wide variety of vehicle options. Neutral: There are a wide variety of SUVs available on the market, but only a limited number in the full-size and luxury segments have seating for six or more passengers. These products tend to be on the high side of the price range. Unfavorable: All minivans and full-size vans offer seating for six or more passengers. Prices range from $15,000 to $30,000. Full-size vans range in price from $15,000 to $35,000 (CarsDirect.com, 2005). Favorable: Consumers typically will need to sell current vehicle in order to purchase new vehicle. Favorable: Consumers typically will need to sell current vehicle in order to purchase new vehicle. Favorable: Consumers typically will need to sell current vehicle in order to purchase new vehicle. 4 3 3 5 1 1 1 1 2 2 1 1 3 2 Factors Underlying Complements’ Power Relative Concentration Effect on Industry Strength Rank 2 Unfavorable: Despite the seemingly high number of refined gasoline distributors, the high concentration in the numb er of refiners (the top five generate 88% of sales (FactSet)) allow for some price collusion (Cole, 2002). Moreover, OPEC controls supply of crude oil, further enhancing the power of this group due to OPEC’s position as a cartel. Favorable: There are many lending institutions, big commercial banks, and loan wholesalers. The top five generate 53% of total sales for the group (FactSet). Loans are commodity products and lending institutions almost exclusively compete on price. 4 Gasoline Refiners/ Distributors 4 2 Banks & Other Lending Institutions 1 1 93 Liability Insurance Companies After-Market Accessories Suppliers Maintenance Companies Relative buyer or supplier switching costs Gasoline Refiners/ Distributors Banks & Other Lending Institutions Liability Insurance Companies After-Market Accessories Suppliers Maintenance Companies Ease of Bundling Gasoline Refiners/ Distributors Banks & Other Lending Institutions Liability Insurance Companies After-Market Accessories Suppliers Maintenance Companies Differences in PullThrough Gasoline Refiners/ Distributors Banks & Other Lending Institutions Liability Insurance Companies After-Market Accessories Suppliers Favorable: There are a high number of liability insurance providers. The top-five providers generate 51% of total sales for the group. Favorable: This group includes car seats, bike racks, satellite radios, towing accessories, etc. This is a very diverse group of complements with many product offerings and a wide range of customers. Their power to the minivan should be low. Favorable: There are many providers. 1 3 1 5 1 1.5 4 5 Unfavorable: There are no switching costs to go from one distributor of gasoline to another, however, the fact the industry’s product only uses gasoline (or some form of oilbased fuel) makes this a high switching cost. Favorable: Switching from one lender to another is simple and inexpensive. Auto manufacturers can provide financing for consumers. Favorable: Cost of insurance depends on consumers’ past driving record. Liability insurance is readily available to everyone. Switching costs are minimal. Favorable: After-market accessories are sold by many different suppliers; these products can be acquired independently of industry’s products. Favorable: Maintenance service cost is uniform across providers with relatively low variation; switching from one to another is not costly at all. Unfavorable: Minivans and SUVs mostly use refined fuels derived from crude oil. Very difficult to not bundle. Moderately Unfavorable: Bundling of auto loans is prevalent in the auto industry, but loans can be attained independently. Moderately Unfavorable: Liability insurance is mandated by law in most states and all states have financial responsibility laws. Moderately Unfavorable: Easily bundled. Many dealerships used some bundling strategies to increase sales, but accessories are usually a small percentage of the total cost of purchasing a new vehicle. Moderately Unfavorable: Easily bundled. Many dealerships used some of bundling strategies to increase sales. 5 4 1 1 1 2 1 5 1 4 5 4 4 3 2 5 1 4 4 2 4 4 3 1 2 1 4 5 Unfavorable: Oil prices affect consumer driving behavior. Unfavorable: Low interest rate increases demand for cars because of cheaper cost of borrowing and vice versa. Neutral: Liability insurance is required by law. Premiums are determined by consumers driving records. Favorable: Consumers consider the vehicle before they consider the options or accessories. It is a convenience factor. 5 4 3 1 94 Maintenance Companies Asymmetric Integration Threats Gasoline Refiners/ Distributors Banks & Other Lending Institutions Liability Insurance Companies After-Market Accessories Suppliers Maintenance Companies Rate of Growth of the Value Pie Neutral: The cost of maintenance does not play a big role in the buying decision of luxury items; however, the availability does, especially for women (Automotive Aftermarket Industry Association, 2004). 3 3 1 Favorable: Unlikely; core competence is not manufacturing vehicles. Favorable: Unlikely; core competence is not manufacturing vehicles. Favorable: Unlikely; core competence is not manufacturing vehicles. Favorable: Unlikely; core competence is not manufacturing vehicles. Favorable: Unlikely; core competence is not manufacturing vehicles. 1 1 1 1 1 3 Neutral: Growing, but at a slower pace because of lower demand for large SUVs, due in large part to higher gasoline prices, and the mature stage of the minivan product. However, the introduction of smaller, more fuel-efficient SUVs has sparked demand in this vehicle segment with sales up (Green, 2005). As for the oil and gas industry, fossil fuels are being depleted without replenishment, therefore the value it adds to the pie naturally diminishes over time depending on the rate of depletion. Moderately Favorable: Growing, but at a slower pace because of lower demand for large SUVs, due in large part to higher gasoline prices, and the mature stage of the minivan product. However, the introduction of smaller, more fuel-efficient SUVs has sparked demand in this vehicle segment with sales up (Green, 2005). Banks and lending institutions are creating some additional value by introducing creative financing options for consumers, but these products are constrained by macro economic forces, specifically interest rate levels. Moderately Unfavorable: Growing, but at a slower pace because of lower demand for large SUVs, due in large part to higher gasoline prices, and the mature stage of the minivan product. However, the introduction of smaller, more fuelefficient SUVs has sparked demand in this vehicle segment with sales up (Green, 2005). Insurance companies do not add to the pie, in fact they probably take away from the pie because liability insurance is government mandated. Moderately Favorable: Growing, but at a slower pace because of lower demand for large SUVs, due in large part to higher gasoline prices, and the mature stage of the minivan product. However, the introduction of smaller, more fuel-efficient SUVs has sparked demand in this vehicle segment with sales up (Green, 2005). It is very difficult to estimate the value this group adds to the pie because of the high number of suppliers. 6 1 3 2 4 5 3 Gasoline Refiners/ Distributors 4 2 Banks & Other Lending Institutions 3 1 Liability Insurance Companies 4 4 After-Market Accessories Suppliers 3 5 95 Maintenance Companies Moderately Favorable: Growing, but at a slower pace because of lower demand for large SUVs, due in large part to higher gasoline prices, and the mature stage of the minivan product. However, the introduction of smaller, more fuel-efficient SUVs has sparked demand in this vehicle segment with sales up (Green, 2005). It is very difficult to estimate the value this group adds to the pie because of the high number of suppliers. Furthermore, many of them are privately-owned companies, which add to the difficulty of gathering information. 3 3 Overall Analysis 3 Level 3 Competitive Force Rivalry Threat of Entry Buyer Power Supplier Power Substitutes Complements Overall Analysis Effect on Industry Moderately Unfavorable Moderately Favorable Moderately Favorable Neutral Moderately Favorable Neutral Neutral Score 4 2 2 3 2 3 3 Rank 1 2 4 3 5 6 96 Appendix 5: Automobile Ownership Correlation with Per Capita GDP SUMMARY OUTPUT Regression Statistics Multiple R 0.99 R Square 2 Adjusted R Standard Error Observations 0.98 0.98 332.86 32 Std. Error 318.11 0.001 ANOVA df Regression Residual Total 1 30 31 SS 200,343,259.3 3,323,807.4 203,667,066.7 MS 200,343,259.3 110,793.6 F 1,808.3 Significance F 0.00 Intercept X Variable 1 Coefficients (2,765.65) 0.03 t Stat (8.69) 42.52 P-value 0.00 0.00 Lower 95% (3,415.32) 0.03 Upper 95% Lower 95.0% (2,115.97) (3,415.32) 0.03 0.03 Upper 95.0% (2,115.97) 0.03 RESIDUAL OUTPUT Standard Residuals (1.34) (1.48) (1.84) (1.37) (0.56) (0.52) (0.18) 0.08 (0.07) 0.18 0.66 1.25 1.46 0.96 1.07 0.83 0.55 0.13 (0.06) 0.11 0.71 1.15 1.51 1.11 0.93 0.56 (0.09) (0.46) (0.99) (1.68) (1.34) (1.26) Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Predicted Y Residuals 6,505.90 (438.41) 6,895.94 (486.09) 7,385.83 (601.57) 7,562.75 (448.67) 7,505.38 (181.79) 7,843.47 (168.95) 8,087.96 (58.59) 8,376.50 25.11 8,701.15 (21.62) 8,876.10 58.62 8,915.07 217.10 8,935.25 410.80 9,098.70 479.51 9,490.16 313.73 9,817.00 349.43 10,150.26 271.72 10,489.15 179.16 10,903.85 41.09 11,312.45 (19.42) 11,541.49 34.39 11,544.28 231.25 11,595.54 375.80 11,646.89 493.12 12,042.09 362.70 12,381.55 302.95 12,754.11 182.17 13,257.90 (29.95) 13,710.44 (149.12) 14,242.84 (324.50) 14,901.25 (550.62) 15,100.54 (437.78) 15,334.52 (411.58) Data used for the regression OECD Countries Real Per Motor vehicles/ Capita GDP 1,000 people 329,962.29 6,067.49 343,843.41 6,409.86 361,277.98 6,784.26 367,574.03 7,114.08 365,532.30 7,323.58 377,564.54 7,674.52 386,265.77 8,029.37 396,534.48 8,401.61 408,088.46 8,679.53 414,314.65 8,934.72 415,701.56 9,132.17 416,419.71 9,346.05 422,236.60 9,578.21 436,168.16 9,803.89 447,799.96 10,166.43 459,660.27 10,421.98 471,720.85 10,668.31 486,479.47 10,944.94 501,021.01 11,293.03 509,172.22 11,575.87 509,271.67 11,775.53 511,095.85 11,971.34 512,923.44 12,140.01 526,988.17 12,404.79 539,069.15 12,684.50 552,327.80 12,936.28 570,257.25 13,227.95 586,362.52 13,561.33 605,309.89 13,918.34 628,741.97 14,350.63 635,834.32 14,662.76 644,161.28 14,922.93 Source: IMF data tables (IMF, 2003) 97 Appendix 6: Currency Exchange Rates Volatility, measured as the standard deviation of monthly percent changes vs. the U.S. Dollar. 8.0% 7.0% 6.0% EUR 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5/00 7/00 9/00 11/00 1/01 3/01 5/01 7/01 9/01 11/01 1/02 3/02 5/02 7/02 9/02 11/02 1/03 3/03 5/03 7/03 9/03 11/03 1/04 3/04 5/04 7/04 9/04 11/04 1/05 3/05 JPY GBP CHF AUD Source: FactSet online service Appendix 7: Target Market Statistics U.S. Population by age group Age Group 25 to 29 years 30 to 34 years 35 to 39 years 40 to 44 years 45 to 49 years 50 to 54 years 55 to 59 years 60 and 61 years 62 to 64 years 65 to 69 years 70 to 74 years 75 to 79 years 80 to 84 years 85 years and over 1990 Census 21,313,045 21,862,887 19,963,117 17,615,786 13,872,573 11,350,513 10,531,756 4,228,303 6,387,864 10,111,735 7,994,823 6,121,369 3,933,739 3,080,165 2000 Census 19,212,244 20,365,113 23,083,337 22,822,134 20,181,127 17,397,482 13,383,251 4,515,448 6,272,531 9,569,199 8,931,950 7,385,783 4,931,479 4,160,561 -9.9% -6.9% 15.6% 29.6% 45.5% 53.3% 27.1% 6.8% -1.8% -5.4% 11.7% 20.7% 25.4% 35.1% Age Group 1990 Census 2000 Census % Change 115,191,743 142,634,282 35 years and over 23.8% 2005 Forecast 35 years and over 2000 Actual 142,634,282 2005E % Change 162,999,395 14.3% The 30-34 age group from the 2000 census will be five years older, thereby moving into the target market age 2010 Forecast 35 years and over 2005E 162,999,395 2010E % Change 182,211,639 11.8% The 25-29 age group from the 2000 census will be 10 years older, thereby moving into the target market age Source: US Census Bureau (U.S. Census Bureau, n.d) E=Expected Appendix 8: U.S. Market Share Data Passenger Vehicles Overall Market Share (2002) GM 28.4% Ford 20.2% Chrysler 13.1% Toyota 10.4% Honda 7.4% Nissan 4.4% Mitsubishi 2.0% Others 14.1% Source: (Lazich, 2004, pp. 255-56) Luxury Car Market Share (2002) Lexus 11.6% BMW 11.4% Benz 10.4% Cadillac 9.3% Lincoln 7.5% Others 49.8% Source: (Lazich, 2004, p. 255) 98 Market Share per Segment (Q1 2003) Minivan 18.2% 13.9% 38.9% 7.0% 13.9% 0.8% 7.3% Small SUV 12.5% 15.4% 21.5% 7.4% 14.1% 5.9% 23.2% Mid SUV 25.2% 24.1% 17.9% 13.1% 6.2% 5.0% 8.5% Large SUV 48.9% 36.2% 0.0% 14.9% 0.0% 0.0% 0.0% Prestige Mid SUV 9.1% 23.6% 7.5% 27.3% 14.3% 7.2% 11.0% Prestige Large SUV 60.5% 39.5% 0.0% 0.0% 0.0% 0.0% 0.0% GM Ford DaimlerChrysler Toyota Honda Nissan Others Source: Automotive Industries, 24 June 2003. p. 183 (6). Appendix 9: Competitor Business Level Strategies Overall Low Cost Uniqueness Perceived by Customer Mass Market ? General ? Toyota Motors ? Daimler Chrysler & Ford Narrow Segment (Niche, Few Market Segments) Daimler Chrysler Uniqueness Perceived by Customer Low Cost General Motors Low Cost Uniqueness Perceived by Customer Mass Market ? Dodge ? Chrysler ? Jeep ? Mercedes Benz ? Maybach Uniqueness Perceived by Customer Mass Market Narrow Segment (Niche, Few Market Segments) Narrow Segment (Niche, Few Market Segments) ? Saturn ? Chevrolet ? Saab Pontiac Buick ? Cadillac GMC Oldsmobile ? Hummer Uniqueness Perceived by Customer ? Smart Low Cost Toyota Ford Low Cost ? Mazda Mass Market ? Toyota ? Lexus ? Scion Mass Market ? Ford Mercury ? Lincoln ? Volvo ? Jaguar ? Land Rover ? Aston Martin Narrow Segment (Niche, Few Market Segments) Narrow Segment (Niche, Few Market Segments) 99 Appendix 10: Competitor Products & Product Markets DaimlerChrysler Passenger Cars Compact Toyota General Motors Ford PT Cruiser Dodge Neon Chrysler Sebring Dodge Magnum, Stratus Mercury Sable Midsize Scion tC, xA, xB Toyota Corolla, Matrix, Prius Toyota Avalon, Camry, Solara Sporty Dodge SRT4 Chevrolet Aveo, Cobalt Pontiac Sunfire, Vibe Saturn Ion Buick Century, LaCrosse, LeSabre Pontiac Bonneville, G6, Grand Prix Saturn L300 Chevrolet Impala, Malibu, Monte Carlo Chevrolet Corvette Pontiac GTO Buick Park Avenue Cadillac CTS Saab 9-2X, 9-3 Ford Focus Mazda 3 Ford Crown Victoria, 500, Taurus Mazda 6 Ford Mustang, Thunderbird Mazda Miata, RX8 Jaguar X-Type Lincoln LS Mercury Grand Marquis, Montego Volvo S40, S60, V50, V70, XC70 Jaguar S-Type Lincoln Town Car Volvo S80 Jaguar XK8, XJ, XKR Luxury Cars Near-Luxury Mercedes-Benz C230, Lexus ES300, IS300 C240, C320 Chrysler 300, 300c, Crossfire Mid-Luxury UltraLuxury Mercedes-Benz C55, Cadillac STS-Deville, CTS CLK320, CLK500, Saab 9-5 E500, SLK350 Mercedes-Benz S500, Lexus LS430, SE430 Cadillac XLR CL500, CL55, CL600, CL65, CLK55, E55, S430, S55, S600, SL500, SL55, SL600, SL65 Jeep Liberty, Wrangler Chrysler Pacifica Dodge Durango Jeep Grand Cherokee RAV4 Chevrolet Equinox Saturn Vue SUVs Compact Midsize Full-Size Luxury Buick Rainer, Rendezvous Chevrolet Blazer, Trailblazer GMC Envoy Pontiac Aztek Toyota Land Cruiser, Chevrolet Avalanche, Sequoia Suburban, Tahoe, Trailblazer GMC Envoy XL, Yukon Mercedes-Benz G500, Lexus GX470, Cadillac Escalade, SRX G55, ML350, LX470, RX330 Hummer H2 ML500 Saab 9-7 Toyota 4Runner, Highlander Ford Escape, Freestyle Land Rover Freelander Mazda Tribute Ford Explorer Mercury Mariner, Mountaineer Ford Excursion, Expedition Lincoln Aviator, Navigator Land Rover Range Rover Volvo XC90 Trucks Compact Dodge Dakota Toyota Tacoma Full-Size Dodge Ram 1500, 2500, 3500 Toyota Tundra Chevrolet Colorado, SSR GMC Canyon Chevrolet Silverado 1500, 1500HD, 2500HD, 3500 GMC Sierra 1500, 1500HD, 2500HD, 3500 Ford Ranger Mazda B2300, B3000, B4000 Ford F-150, F-250, F-350 100 Minivans & Vans Minivans Chrysler Town & Country Dodge Caravan, Grand Caravan Toyota Sienna Vans Buick Terraza Chevrolet Astro, Uplander GMC Safari Pontiac Montana SV6 Saturn Relay Chevrolet Express GMC Savana Ford Freestar Mazda MPV Mercury Monterey Ford E-150, E-250, E-350 Appendix 11: Competitor Value & Cost Drivers DaimlerChrysler Value Drivers Apparent high quality for MB brand (though there have been some problems, not for other brands Varies by brand, MB has good service reputation, other brands average Very well diversified Mass customization for Mercedes brand Many suppliers are geographically close. (Walker, 30) Warranty programs, best 7/70 for MB (Walker, 30) Good for MB brand MB able to take advantage of economies of scope Japanese automakers value quality in general, Toyota is a pioneer in this regard Not known for high quality, usually viewed as low cost alternative “Quality is Job 1” which means they understand the importance, but have execution problems Toyota General Motors Ford Quality Delivery Service Technology Breadth of Line Customization Does Not Apply Don’t really need service because it’s done right the first t ime Average service Average service Geography Does Not Apply Yes, but less than the Yes, leader among other three the rivals Not so much for Toyota Mass customization or Lexus, but yes for Scion (personalization) Highest advantage, often Many suppliers are require suppliers to be geographically close. within driving distance of (Walker, 30) plant Warranties, average 3/36 with higher levels for powert rain. Very much so, with Lexus Yes, but not as much as DCX Warranties average 3/36, some have 5x60 Poor, frequent recalls Yes, largest manufacturing company in the world, greatest benefit Yes, second in this group Mass customization to a greater extent with premium brands Many suppliers are geographically close. (Walker, 30) Warranties 4/50, better than Toyota & GM Poor, frequent recalls Risk Assumption Brand/Reputation Network Externalities Environmental Policies Complementary Products Cost Drivers Scale Economies Scope Economies Learning Curve Vertical Integration Organizational Practices Yes, almost as strong as GM Does Not Apply Does Not Apply Yes Yes Yes Looser control over supply base Average Yes Yes Yes Tight integration to supplier base Highest, developed TPS (legendary for their ability to reduce costs in operations (Walker, 34) Yes Yes Yes Looser control over supply base Poor Yes Yes Yes Looser control over supply base Poor 101 Appendix 12: Competitor Resources & Capabilities DaimlerChrysler Toyota General Motors Resources Low-Cost/High- Joint venture with Joint venture with Paired with Toyota for Quality Beijing Automotive Guangzhou NUMMI in 1984. Manufacturing Industry Holding Automobile Group Joint venture with Co. (BAIC) to build to build engines in Shanghai up to 25,000 China (Hoover’s Automotive Mercedes annually Inc., 2005d). Industry, becoming (Hoover’s Inc., Paired with GM for first western car 2005d). NUMMI in 1984 company to offer auto loans to Chinese consumers (Hoover’s Inc., 2005d) Organization Federated IT structure Will consolidate Hybrid, improve Structure Four operating units North American control and in business structure Engineering and efficiency while Hybrid manufacturing into enabling flexibility one company by and speed of 2006, in an effort response to facilitate cooperation, improve synergies and “strengthen focus on quality, supplier coordination, and enhance overall speed and flexibility” (Toyota Motor Corporation, 2004). Number of “Has manufacturing “Operates more than “Approximately 370 Manufacturing facilities in 37 60 manufacturing locations in the US, Plants/Global countries and sells facilities in 26 more than 20 in Reach its products in 200 countries Canada, and a countries around the throughout the number of others in world” (Hoover’s world” (Hoover’s more than 50 Inc., 2005d). Inc., 2005d). additional countries” (Hoover’s Inc., 2005d). Diversified Own 33% stake in 50% stake in Hino Also makes Holdings Mitsubishi and Motors locomotives and 3.3% in Volvo; own 5% stake in Yamaha heavy-duty 33% stake in automatic European transmissions Aeronautic Defense (Allison & Space Company Transmission) Also makes heavy 20% stake in Suzuki trucks (Freightliner unit) Ford Plans to build a second Ford plant in China. “In March 2005 took full control of its operations in India with the purchase of a 16% stake from Mahindra & Mahindra Ltd.)” (Hoover’s Inc., 2005d). Hybrid “Operates through 7,000 locations in more than 140 countries” (Hoover’s Inc., 2005d). Own 33% stake in Mazda Owns rental car companies Hertz and Budget. 102 Supplier Portal A member of Covisint Geographic (an internet-based proximity to a trading exchange) majority of its Also have own online suppliers procurement system % of Revenue spent on R&D Capabilities Design-toMarket Cycle Pooling 3.98% (FactSet, 2005) 3.95% (FactSet, 2005) A member of Covisint A member of (an internet-based Covisint (an trading exchange) internet-based Also have own online trading exchange) procurement system Also have own online procurement system 3.41% (FactSet, 2005) 4.30% (FactSet, 2005) Market Prediction Forecasting (days on lot before being sold) Managing Technology Some challenges, not Shortest in industry Very good, leverage Average as adept as IT to launch Toyota/GM products quickly Use parts and frames Use parts and frames Use parts and frames With Mazda in across many across many across many product Southeast Asia product lines product lines lines Very good, big Somewhat insular, Good, historically use Clip Sheet success with 300 slow to respond, focus groups and (collection of all line and minivans in very conservative market research, media/press general approach but stable recent success of mentions, product line has Cadillac and SSR including market many fans line is a good trends, technology example and product developments) (Dow Jones Reuters Business Interactive LLC, 2003) Average inventory: Average inventory: Average inventory: Average inventory: 515,805 251,492 1,170,461 873,935 Average days supply: Average days supply: Average days supply: Average days 76 (Ward’s 42 (Ward’s 77 (Ward’s supply: 78 Automotive Automotive Automotive (Ward’s Yearbook, 2004, p. Yearbook, 2004, p. Yearbook, 2004, p. Automotive 259) 259) 259) Yearbook, 2004, p. 259) A member of Launched concepts A member of USCA R, C3P program USCAR, an such as JIT and the an organization (standardizing organization formed TPS. Very adept formed in 1992 to CAD/CAM/CAE) in 1992 to “further with managing “further strengthen (SEMTA.org.uk) strengthen the technology the technology base A member of technology base of of the domestic auto USCAR, an the domestic auto industry through organization industry through cooperative research formed in 1992 to cooperative (USCAR, 2005). “further strengthen research (USCAR, the technology 2005). base of the domestic auto industry through cooperative research (USCAR, 2005). 103 Appendix 13: Value-Price-Cost Analysis Value of Minivans Rank and Rating* Points BMW SAV Chry sler Tow n&C ount Dodg ry Lim e Gr ited and Editio Cara van n Toyo ta Sie nna Chry sler Tow n&C ount ry Lim ited Dodg Editio e Gr n and Cara van Feature Rank Seating 1 1 Sliding Door 1 2 Sliding Doors 2 Power Sliding Doors 1 Folding 2nd Row Seats 1 Folding 3rd Row Seats 1 Quality/Service 2 Space 1 Comfort 2 Fuel Economy 2 2-Wheel Drive 3 All-Wheel Drive 2 Style (interior) 2 Style (exterior) 2 Towing/Power 2 Ease of Access 2 Maneuverability/Drive 1 Safety Crash Test Ratings 1 Airbags 2 Brakes 2 Electronics DVD Player 3 Steering Wheel Controls 3 Keyless Entry 3 Navigation System 2 Door Alerts 2 Amenities Cup Holders 2 Individual Climate Control 3 Cruise Control 3 Outside Noise Control 3 Window Capabilities 3 Ownership Reliability 1 Resale Value 1 Warranty Terms 1 Total 3 0 0 0 6 0 9 8 8 2 0 6 9 8 7 7 8 8 8 7 4 6 6 4 0 3 6 6 8 0 3 8 6 7 6 6 6 6 6 8 8 9 5 6 6 8 8 7 8 9 9 6 7 4 6 6 4 4 5 6 6 8 6 5 8 6 8 6 6 6 6 6 6 8 7 2 6 0 5 6 6 9 8 9 3 6 4 6 6 4 0 8 6 6 8 4 6 3 7 7 6 0 4 6 6 7 7 2 2 6 0 2 5 6 8 3 9 7 8 4 6 6 4 4 6 6 6 2 4 6 5 7 8 6 6 4 6 6 7 7 8 5 6 4 7 7 6 8 7 8 7 6 4 6 6 4 6 7 6 6 7 6 7 7 7 900 0 0 0 1800 0 2700 2400 2400 600 0 1800 2700 2400 2100 2100 2400 2400 2400 2100 1200 1800 1800 1200 0 900 1800 1800 2400 0 900 2400 1800 2100 1800 1800 1800 1800 1800 2400 2400 2700 1500 1800 1800 2400 2400 2100 2400 2700 2700 1800 2100 1200 1800 1800 1200 1200 1500 1800 1800 2400 1800 1500 2400 1800 2400 1800 1200 1800 1800 1800 1200 2400 400 1200 600 0 1000 1200 1200 1800 2400 2700 600 1200 400 600 600 800 0 1600 600 600 800 400 1800 900 2100 2100 1800 0 1200 1800 1800 1400 2100 1000 1200 600 0 400 1000 1200 1600 900 2700 1400 1600 400 600 600 800 800 1200 600 600 200 400 1800 1500 2100 2400 1800 1200 1200 1800 1800 1400 2100 1600 1200 600 800 1400 1400 1200 1600 2100 2400 1400 1200 400 600 600 800 1200 1400 600 600 700 600 2100 2100 2100 Toyo ta Sie nna BMW SAV BMW X5 BMW X5 164 215 187 167 208 49200 64500 39900 37400 44400 *Rating Scale: 0=N/A, 1=Poor, 2=Poor, 3=Below industry standard, 4=Optional, 5=OK, 6=Standard, 7=Good, 8=Very Good, 9=Match Industry Source: Various resources contributed to the creation of this matrix 104 Value of SUVs Rank and Rating* Points 470 Linc oln N aviga tor Ultim Cadil ate lac E scala de Plati num Chev y Tah oe - L T Ford Expe ditio n GM E nvoy XL Chry sler Pacif ica- L imite d Volv o XC 90 Linc oln N aviga tor Ultim ate Cadil lac E scala de Plati num Chev y Tah oe - L T Toyo ta Se quoia - Lim ited BMW - X5 Pacif ica Feature Rank Luxury SUV Space Maneuverability/Drive Ride Seating Capacity Towing/Power Comfort Convenience Image/Identity Fuel Economy Safety Brakes Crash Rating Stability Control Ground Clearance Appropriate Tires 4-Wheel Drive All-Wheel Drive Electronics Keyless Entry Navigation System DVD Player Sound System Steering Wheel Controls Amenities Individual Climate Control Cruise Control Ownership Outside Noise Control Resale Value Reliability Warranty Terms Total Adjusted Total** 1 1 1 1 1 2 2 1 2 2 1 2 2 2 1 2 3 2 2 2 3 3 3 3 1 1 2 8 8 8 3 7 8 8 8 2 7 8 7 7 7 6 0 6 4 4 7 6 6 6 8 8 3 6 9 9 8 7 7 8 8 7 5 7 9 6 6 7 0 6 4 4 4 7 6 6 6 8 8 5 6 7 7 7 8 7 8 9 8 3 6 7 7 7 7 6 0 6 4 4 7 6 6 6 8 7 8 7 7 6 6 7 7 8 8 6 3 7 8 7 6 6 6 0 6 6 4 7 6 6 6 8 5 2 7 6 5 5 7 8 7 6 9 3 7 7 7 7 7 6 0 6 4 4 6 6 6 6 7 7 6 6 Large SUV 3 3 6 8 8 7 6 8 1 3 6 6 8 7 6 0 6 4 4 5 4 6 6 7 3 6 6 7 8 6 8 8 7 7 6 1 3 8 6 7 7 6 0 6 4 4 6 4 6 6 7 2 2 6 6 3 8 7 7 7 6 7 2 6 7 0 6 7 6 0 6 4 4 5 6 6 6 8 6 3 6 Medium SUV 3 8 7 6 3 7 7 7 3 7 9 3 3 6 0 6 6 4 4 5 6 4 6 7 6 6 6 5 3 8 6 7 8 9 6 3 6 7 6 8 5 0 6 6 4 4 6 6 6 6 7 6 2 7 7 6 7 8 3 7 8 7 2 6 9 6 6 7 6 0 6 4 4 5 6 6 6 8 6 7 7 2400 2400 2400 900 2100 1600 1600 2400 400 1400 2400 1400 1400 1400 1800 0 600 800 800 1400 600 600 600 800 2400 900 1200 2700 2700 2400 2100 2100 1600 1600 2100 1000 1400 2700 1200 1200 1400 0 1200 400 800 800 1400 600 600 600 800 2400 1500 1200 Luxury SUV 2100 2100 2100 2400 2100 1600 1800 2400 600 1200 2100 1400 1400 1400 1800 0 600 800 800 1400 600 600 600 800 2100 2400 1400 2100 1800 1800 2100 2100 1600 1600 1800 600 1400 2400 1400 1200 1200 1800 0 600 1200 800 1400 600 600 600 800 1500 600 1400 1800 1500 1500 2100 2400 1400 1200 2700 600 1400 2100 1400 1400 1400 1800 0 600 800 800 1200 600 600 600 700 2100 1800 1200 900 900 1800 2400 2400 1400 1200 2400 200 600 1800 1200 1600 1400 1800 0 600 800 800 1000 400 600 600 700 900 1800 1200 Large SUV 2100 2400 1800 2400 2400 1400 1400 1800 200 600 2400 1200 1400 1400 1800 0 600 800 800 1200 400 600 600 700 600 600 1200 1800 900 2400 2100 2100 1400 1200 2100 400 1200 2100 0 1200 1400 1800 0 600 800 800 1000 600 600 600 800 1800 900 1200 Medium SUV 900 2400 2100 1800 900 1400 1400 2100 600 1400 2700 600 600 1200 0 1200 600 800 800 1000 600 400 600 700 1800 1800 1200 1500 900 2400 1800 2100 1600 1800 1800 600 1200 2100 1200 1600 1000 0 1200 600 800 800 1200 600 600 600 700 1800 600 1400 2100 1800 2100 2400 900 1400 1600 2100 400 1200 2700 1200 1200 1400 1800 0 600 800 800 1000 600 600 600 800 1800 2100 1400 166 173 173 161 161 143 148 145 145 153 160 36700 38500 38600 35000 35700 31400 32800 31800 31600 32500 35400 73400 77000 77200 70000 71400 47100 49200 47700 47400 48750 53100 *Rating Scale: 0=N/A, 1=Poor, 2=Poor, 3=Below industry standard, 4=Optional, 5=OK, 6=Standard, 7=Good, 8=Very Good, 9=Match Industry **Total adjusted for image: Total value multiplied by 2 for luxury segment SUVs or 1.5 for large and medium segment SUVs Toyo ta Se quoia - Lim ited Daim ler-C hrys ler Ford Expe ditio n 470 GM E nvoy XL BMW - X5 4.8 Volv o XC 90 BMW -SAV BMW -SAV Lexu s LX Lexu s LX 105 Price Cadil lac E scala de Platin um Ford Expe ditio n Kin g Ra nch Linc oln N avig ator - Ultim ate Chry sler Tow Limit n & Coun ed E ditio try n Chry sler Pacif ica L imite d MSRP Invoice COGS Margin BMW Margin Dealer Minivan SUV $70,795 $60,000 $36,260 $27,625 $38,260 $65,875 $57,795 $71,025 $46,240 $47,160 $40,920 $37,215 $46,090 $65,304 $55,346 $33,808 $25,933 $34,798 $58,210 $51,903 $66,639 $41,158 $41,473 $37,701 $34,645 $43,651 $33,803 $28,649 $21,943 $25,574 $42,780 $38,498 $50,353 $31,099 $30,762 $28,487 $22,487 48.24% 48.24% 35.09% 100.00% 26.51% 26.51% 25.83% 24.44% 24.44% 25.83% 24.44% 35.09% 100.00% 7.76% 7.76% 6.76% 6.12% 9.05% 11.64% 10.19% 6.18% 10.99% 12.06% 7.87% 6.91% 5.29% $47,275 $42,648 $31,343 26.51% 9.79% Notes • BMW competes in the luxury market all models are compared at the base price for the premium edition • All MSRP and Invoice prices from CarsDirect.com • Based on BMW's current product offerings, the value the minivan is intended to deliver, and competitor pricing the MSRP will be $60,000 • Using the percent difference between the X5 MSRP and invoice prices the minivan is projected to have and invoice price of • COGS were determined by multiplying COGS margin by invoice price • BMW Dealer Markup: 7.76% Margin, BMW 48.24% 48.24% 35.09% 100.00% 26.51% 26.51% 29.33% 24.44% 24.44% 29.33% 24.44% 35.09% 100.00% 26.51% Margin, Dealer 7.76% 7.76% 6.76% 6.12% 9.05% 11.64% 10.19% 6.18% 10.99% 12.06% 7.87% 6.91% 5.29% 9.79% BMW - X5 4.8 BMW - SAV Minivan Chrysler Town & Country - Limited Edition Dodge Grand Caravan Toyota Sienna Lexus LX 470 SUV Lincoln Navigator - Ultimate Cadillac Escalade - Platinum Chevy Tahoe - LT Ford Expedition King Ranch GM Envoy XL Chrysler Pacifica Limited Volvo XC90 Toyota Sequoia - Limited BMW MSRP $70,795 $60,000 $36,260 $27,625 $38,260 $65,875 $57,795 $71,025 $46,240 $47,160 $40,920 $37,215 $46,090 $47,275 Invoice $65,304 $60,000 $33,808 $25,933 $34,798 $58,210 $51,903 $66,639 $41,158 $41,473 $37,701 $34,645 $43,651 $42,648 COGS $33,803 $28,649 $21,943 $0 $25,574 $42,780 $36,682 $50,353 $31,099 $29,311 $28,487 $22,487 $0 $31,343 Notes • BMW competes in the luxury market all models are compared at the base price for the premium edition • All MSRP and Invoice prices from CarsDirect.com • Based on BMW's current product offerings, the value the minivan is intended to deliver, and competitor pricing the MSRP will be $60,000 Notes • COGS were determined by multiplying COGS margin by invoice price • BMW Dealer Markup: 7.76% Toyo ta Se quoia - Lim ited Dodg e Gra nd C arav an Chev y Ta hoe - LT Toyo ta Sie nna GM E nvoy XL BMW - X5 4.8 470 Volv o XC 90 BMW - SA V Lexu s LX 106 Large SUV Average MSRP: $42,584 Average net price: $33,121 Average discount from MSRP to net price: 22.2% Midsize SUV Average MSRP: $30,667 Average net price: $25,218 Average discount from MSRP to net price: 17.8% Compact SUV Average MSRP: $24,282 Average net price: $20,989 Average discount from MSRP to net price: 13.6% Luxury SUV Average MSRP: $48,586 Average net price: $43,725 Average discount from MSRP to net price: 10.0% Cost 2004 Revenues COGS COGS Margin 1-COGS Margin BMW 60,155.95 31,138.40 0.48 0.52 Ford* 171,652.00 127,320.76 0.26 0.74 DCX 192,752.77 125,108.40 0.35 0.65 Toyota 163,637.00 120,262.00 0.27 0.73 GM 190,812.00 144,179.00 0.24 0.76 BMW Navigator 4x4 Town/Country Envoy XL X5 4.8 Luxury Edition Limited Denali 4x4 LX 470 Invoice Price $ 65,304.00 $ 49,237.00 $ 33,808.00 $ 58,210.00 $ 37,701.00 Cost to produce 33,803.18 36,520.94 21,943.47 42,780.37 28,487.16 • COGS were adjusted by company to exclude depreciation, SG&A, and other expenses that are not directly related to vehicle manufacturing. • BMW has a much greater COGS margin, but this is offset by lower turnover, because of less vehicles sold annually. • Units are in millions of $ *Ford: Selling & Administrative costs removed from COGS calculated as follows: % Sales for Selling & Admin Ford Selling & Administrative Costs Selling & Admin average for other industry firms 0.16 20,598.24 Toyota GM DCX 0.16 0.12 0.12 Source: Financial Statements 107 Appendix 14: Profitability Ratio Analysis Return on Assets 2001 2002 2003 3.7% 3.7% 3.2% -0.3% 2.6% -0.2% 3.4% 4.5% 4.9% 0.2% 0.5% 0.7% -1.9% -0.3% 0.2% 1.0% 2.2% 1.7% Profit Margin 2002 2003 4.8% 4.7% 3.3% -0.3% 5.9% 6.7% 0.9% 1.5% -0.6% 0.3% 2.9% 2.6% Return on Equity 2001 2002 2003 17% 15% 12% -2% 14% -1% 9% 12% 13% 3% 25% 11% -68% -17% 4% -8% 10% 8% Asset Turnover 2001 2002 2003 0.76 0.76 0.68 0.74 0.81 0.77 0.82 0.77 0.73 0.59 0.55 0.43 0.58 0.57 0.54 0.70 0.69 0.63 BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 1.8% 2.9% 2.4% 2.3% 2.8% 2.4% 2000 2.9% 1.2% 3.1% 1.5% 1.2% 2.0% 2004 3.3% 1.4% 4.9% 0.6% 1.1% 2.3% Avg 3.1% 1.3% 3.9% 1.0% 0.5% 1.9% 1999 17% 14% 6% 29% 28% 19% 2000 21% 6% 8% 15% 18% 13% 2004 13% 7% 13% 10% 21% 13% Avg 16% 6% 10% 16% -2% 9% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 1.9% 3.4% 3.2% 3.4% 4.5% 3.3% 2000 2.9% 1.5% 3.5% 2.4% 2.0% 2.5% 2001 4.9% -0.4% 4.1% 0.3% -3.4% 1.1% 2004 5.0% 1.7% 6.7% 1.4% 2.0% 3.4% Avg 4.0% 1.5% 5.0% 1.7% 0.8% 2.6% 1999 0.91 0.85 0.77 0.68 0.63 0.77 2000 0.99 0.82 0.88 0.63 0.61 0.79 2004 0.66 0.78 0.73 0.42 0.56 0.63 Avg 0.80 0.80 0.78 0.55 0.58 0.70 BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 83.7% 79.0% 77.6% 79.3% 78.8% 79.7% 2000 81.9% 83.2% 78.2% 78.0% 79.8% 80.2% Cost of Goods Sold 2001 2002 2003 74.6% 74.6% 77.1% 84.1% 81.2% 80.5% 76.8% 76.4% 79.1% 79.4% 81.2% 81.5% 85.4% 81.7% 82.8% 80.1% 79.0% 80.2% Operating Margins 2001 2002 2003 6.8% 7.3% 6.5% 0.1% 2.5% 2.4% 7.4% 8.5% 9.0% 6.0% 6.1% 7.1% -3.2% 1.0% 1.0% 3.4% 5.1% 5.2% 2004 76.7% 80.6% 79.1% 81.4% 82.6% 80.1% Avg 78.1% 81.4% 77.9% 80.1% 81.8% 79.9% 1999 14.2% 15.1% 16.4% 10.7% 15.1% 14.3% Sales, General, and Administrative Expenses 2000 2001 2002 2003 2004 13.3% 16.4% 16.4% 15.9% 15.5% 14.5% 15.2% 15.7% 16.6% 16.2% 15.3% 14.5% 13.9% 11.9% 11.9% 12.2% 13.1% 12.7% 11.4% 10.5% 15.4% 17.9% 17.4% 16.2% 14.6% 14.1% 15.4% 15.2% 14.4% 13.8% Equity Multiplier (Equity Leverage) 2001 2002 2003 2004 4.7 4.0 3.8 3.8 5.3 5.3 5.1 5.4 2.7 2.7 2.7 2.7 15.3 49.6 17.0 16.7 34.7 50.7 26.1 18.4 12.5 22.5 10.9 9.4 Avg 15.3% 15.6% 14.0% 11.8% 16.1% 14.5% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 1.0% 5.7% 6.0% 9.5% 6.1% 5.7% 2000 2.3% 2.1% 6.5% 8.8% 4.8% 4.9% 2004 7.3% 2.8% 9.0% 8.0% 2.8% 6.0% Avg 5.2% 2.6% 7.7% 7.6% 2.1% 5.0% 1999 9.5 4.9 2.4 12.4 9.7 7.8 2000 7.2 4.7 2.4 9.6 14.6 7.7 Avg 5.5 5.1 2.6 20.1 25.7 11.8 Source: FactSet for all data except Ford profitability analysis; Ford's data source is Bloomberg 108 Appendix 15: Growth Rates Analysis Sales Growth 2002 2003 29.6% 17.6% 15.3% 9.2% 10.3% 15.8% 5.0% -0.8% 0.1% 1.0% 12.1% 8.6% EBIT Growth 2002 2003 14.7% 7.1% 2924.3% -74.6% 52.1% 14.4% -3.1% 27.1% 139.5% -8.9% 625.5% -7.0% Operating Income Growth 2001 2002 2003 202.9% 39.0% 5.6% -94.0% 1984.1% 2.2% 14.6% 25.9% 23.0% -33.7% 6.9% 15.4% -63.5% 25.8% -10.2% 5.3% 416.4% 7.2% Net Income Growth 2001 2002 2003 72.0% 27.6% 15.4% -125.4% NM -109.9% 16.0% 59.2% 32.2% -86.5% 188.9% 64.9% -195.3% 0.0% 313.1% -63.9% 55.1% 63.1% Asset Growth 2002 2003 29.3% 32.7% 5.7% 13.9% 17.4% 23.0% 12.0% 27.3% 4.8% 7.2% 13.8% 20.8% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 -8.4% -2.2% 17.7% 9.4% 12.6% 5.8% 2000 -3.8% 1.3% 2.6% 3.6% 4.6% 1.7% 2001 2.9% -11.0% -0.1% -3.1% -4.5% -3.2% 2004 15.2% 12.3% 15.8% 4.8% 4.5% 10.5% Avg 8.8% 4.2% 10.3% 3.2% 3.1% 5.9% 1999 2000 464.1% 125.3% 6.4% -62.8% 16.6% 10.4% 39.5% -4.3% 2.1% 7.4% 105.8% 15.2% 2004 28.7% 33.0% 23.0% 18.2% 31.6% 26.9% Avg 144.3% 311.5% 18.9% 7.0% -1.1% 96.1% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 2000 -4.2% 28.8% 0.8% -50.8% 13.7% 11.7% 46.0% -0.5% -41.6% -4.1% 2.9% -3.0% 2001 9.7% -95.2% 12.4% -39.5% -78.5% -38.2% 2004 Avg 17.1% 12.2% 209.6% 485.7% 14.4% 19.8% 5.8% 6.0% 29.9% 6.0% 55.3% 105.9% 1999 23.4% -11.3% 33.0% 103.0% -67.2% 16.2% 2000 44.8% -54.8% 14.1% -25.8% -21.0% -8.5% 2004 23.1% NM 32.2% -2.0% 298.0% 87.8% Avg 34.4% -60.3% 31.1% 40.4% 54.6% 20.0% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 16.6% 37.1% 17.5% 15.1% 15.1% 20.3% 2000 -7.0% 23.0% -16.7% 10.0% 8.9% 3.6% Total Debt Growth 2001 2002 2003 57.9% 20.6% 25.2% 1.4% 2.6% 14.6% 42.9% 21.7% 17.9% 14.9% 21.4% 34.6% 1.5% -0.1% 7.1% 23.7% 13.3% 19.9% 2004 19.8% 9.2% 17.9% 10.5% -3.8% 10.7% Avg 22.2% 14.6% 16.9% 17.7% 4.8% 15.2% 1999 4.7% 11.9% 25.5% 8.3% 16.7% 13.4% 2000 -12.0% 5.1% -10.9% 11.1% 2.8% -0.8% 2001 34.2% -1.0% 7.0% 4.7% -3.7% 8.2% 2004 18.1% 10.7% 23.0% 7.4% -3.1% 11.2% Avg 17.8% 7.7% 14.2% 11.8% 4.1% 11.1% Source: FactSet online service 109 Appendix 16: Solvency Analysis Total Debt / Total Assets 2001 2002 2003 50.9% 47.5% 44.8% 43.9% 42.6% 42.9% 34.5% 35.8% 34.3% 55.1% 59.7% 63.1% 62.1% 59.2% 59.2% 49.3% 49.0% 48.9% Interest Coverage 2001 2002 2003 5.2 6.3 11.8 0.2 6.8 1.7 35.8 56.8 86.3 1.2 1.3 1.3 0.4 1.1 1.2 8.5 14.5 20.4 Long Term Debt / Total Capital 2001 2002 2003 56.4% 47.9% 45.3% 59.4% 58.3% 57.9% 33.1% 35.4% 34.2% 84.2% 95.2% 88.3% 94.0% 95.7% 91.1% 65.4% 66.5% 63.4% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 40.9% 36.6% 27.6% 50.8% 55.6% 42.3% 2000 43.2% 42.9% 25.8% 50.2% 58.9% 44.2% 2004 45.4% 42.3% 34.3% 65.0% 58.7% 49.1% Avg 45.5% 41.9% 32.1% 57.3% 59.0% 47.1% 1999 67.1% 43.5% 30.3% 75.0% 73.5% 57.9% 2000 63.0% 53.6% 30.0% 68.6% 83.7% 59.8% 2004 46.9% 55.9% 34.2% 88.2% 86.9% 62.4% Avg 54.4% 54.8% 32.9% 83.2% 87.5% 62.6% BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 1.7 14.2 17.0 2.2 2.2 7.5 2000 1.9 5.5 22.4 1.8 1.8 6.7 2004 15.4 5.5 86.3 1.1 1.7 22.0 Avg 7.1 5.6 50.8 1.5 1.4 13.3 Source: FactSet online service 110 Appendix 17: Liquidity Analysis BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 1.33 1.01 1.42 0.78 0.97 1.1 2000 1.14 0.87 1.45 0.71 1.01 1.0 2001 0.89 0.64 1.31 0.71 0.99 0.9 Current Ratio 2002 2003 0.97 1.06 0.94 0.92 1.46 1.16 0.96 1.04 1.17 0.56 1.1 0.9 Cash Ratio 2002 0.16 0.17 0.30 0.26 0.34 0.25 2004 1.09 0.88 1.16 0.61 1.16 1.0 Avg 1.08 0.88 1.33 0.80 0.97 1.0 1999 1.04 0.74 1.27 0.69 0.92 0.9 2000 0.91 0.67 1.30 0.64 0.94 0.9 2001 1.15 0.85 1.45 0.79 1.05 1.1 Quick Ratio 2002 0.73 0.72 1.32 0.89 1.09 0.9 2003 0.81 0.70 1.02 0.97 0.47 0.8 2004 0.83 0.66 1.02 0.54 1.07 0.8 Avg 0.91 0.73 1.23 0.75 0.92 0.9 BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 0.22 0.24 0.39 0.17 0.21 0.25 2000 0.27 0.15 0.34 0.14 0.16 0.21 2001 0.19 0.18 0.32 0.22 0.20 0.22 2003 0.15 0.20 0.30 0.34 0.36 0.27 2004 0.16 0.15 0.30 0.32 0.28 0.24 Avg 0.19 0.18 0.33 0.24 0.26 0.24 Source: FactSet online service Day Sales in Inventory Company BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 56 56 26 37 15 38 2000 45 50 27 43 17 36 2001 49 48 31 48 16 38 2002 52 45 31 58 16 40 2003 57 47 28 72 19 45 2004 63 50 26 82 23 49 Avg. 54 49 28 57 18 41 1999 48 46 39 52 44 46 2000 51 45 43 61 46 49 Days in Accounts Payable 2001 43 43 48 66 45 49 2002 31 36 45 68 42 44 2003 31 36 41 66 39 43 2004 32 37 40 70 40 44 Avg. 39 41 43 64 43 46 Day in Accounts Receiveables Company BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 78 79 53 178 337 145 2000 86 79 73 205 320 153 2001 95 77 90 232 337 166 2002 96 78 96 279 349 180 2003 109 92 95 315 327 188 2004 123 100 90 343 319 195 Avg. 98 84 83 259 331 171 1999 86 89 40 163 308 137 2000 80 84 57 187 290 140 Cash Conversion Cycle (Days) 2001 100 82 73 214 308 155 2002 117 87 81 269 323 176 2003 136 103 82 321 306 190 2004 154 113 76 355 301 200 Avg. 112 93 68 251 306 166 111 Appendix 18: Cash Flow Analysis Net Cash Flow from operations - (Percent of Sales) 2000 2001 2002 2003 2004 Avg 13.5% 15.3% 17.4% 19.0% 21.0% 16.9% 9.9% 10.4% 11.9% 12.1% 7.8% 10.7% 8.7% 10.9% 10.7% 13.5% 13.2% 11.7% 11.6% 5.6% 10.5% 4.8% 7.6% 9.5% 18.7% 13.0% 10.1% 11.1% 11.8% 13.6% 12.5% 11.1% 12.1% 12.1% 12.3% 12.5% Net Cash Flow from Invesing - (Percent of Sales) 2000 2001 2002 2003 2004 -8.6% -15.8% -23.2% -27.0% -27.0% -20.2% -8.7% -8.7% -11.9% -11.8% -10.9% -10.0% -12.6% -13.8% -13.4% -19.9% -14.3% -25.2% -33.2% -18.5% -20.0% -9.8% -1.4% -1.4% -4.5% -15.9% -11.7% -14.2% -17.5% -15.0% Company BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 15.5% 12.0% 13.3% 16.6% 17.1% 14.9% 1999 -22.1% -21.4% -14.8% -21.5% -23.1% -20.6% Avg -20.6% -13.8% -12.6% -22.1% -10.0% -15.8% Company BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Net Cash Flow From Financing - (Percent of Sales) 1999 2000 2001 2002 2003 2004 Avg 42.7% -19.7% -4.4% 33.5% 35.2% 33.7% 20.1% 87.5% 90.6% 8.8% -29.6% 15.3% 23.0% 32.6% 19.6% 50.1% -11.7% 25.6% 1.8% 10.6% 16.0% 31.9% 71.5% 244.1% 153.5% 735.5% 164.4% 233.5% 41.0% 11.2% -13.1% -61.1% -43.8% -63.0% -21.5% Increase (Decrease) in Cash (Excluding Exch. Rate Effects) (Percent of Sales) 1999 2000 2001 2002 2003 2004 Avg 0.1% 16.6% -7.6% -0.1% -7.5% 5.3% 1.1% 9.3% -13.6% 25.4% -2.4% 16.6% -27.8% 1.3% 8.1% 23.7% -4.0% 7.4% -1.1% 9.3% 7.2% 2.4% 0.5% 91.3% 14.0% 143.6% 21.2% 45.5% 5.8% 4.1% 11.5% 25.1% 43.3% -0.9% 14.8% Source: FactSet online service Appendix 19: Capital Expenditures & R&D Expenses Capital Expenditures - (Percent of Sales) 2000 2001 2002 2003 2004 19.4% 20.9% 22.9% 23.8% 26.1% 18.5% 18.0% 16.9% 16.5% 17.0% 10.8% 9.1% 10.8% 10.4% 8.6% 18.6% 16.4% 14.8% 11.6% 12.9% 5.8% 4.8% 5.0% 5.1% 4.8% 14.6% 13.9% 14.1% 13.5% 13.9% Research & Development Expense (Percent of Sales) 2000 2001 2002 2003 2004 0.0% 4.3% 4.8% 5.2% 5.3% 3.9% 3.9% 4.1% 4.1% 4.0% 3.6% 3.9% 4.2% 3.9% 3.9% 3.6% 3.5% 3.1% 3.1% 3.4% 4.0% 4.6% 4.7% 4.6% 4.3% 3.0% 4.0% 4.2% 4.2% 4.2% Company BMW AG DaimlerChrysler AG Toyota Motor Corp. General Motors Corp. Ford Motor Co. Group Average 1999 17.7% 19.2% 13.6% 18.8% 5.9% 15.0% Avg 21.8% 17.7% 10.6% 15.5% 5.2% 14.2% 1999 0.0% 3.8% 3.5% 3.9% 4.4% 3.1% Avg 4.9% 4.0% 4.0% 3.3% 4.5% 4.1% Source: FactSet online service 112 Appendix 20: Personal Communication with Sonja Pfeiffer Sonja Pfeiffer is a Controller for BMW Fina ncial Services, working in Woodcliff Lake, N.J. Communication with Pfeiffer was facilitated by openBC, an online networking service. Below are excerpts from an email exchange between Pfeiffer and Richard Upton: 15/05/2005, 2:28 pm Hi Rick, BMW is a great company and that is the reason why the fluctuation is so low. Another reason could be that the benefits are great. […] BMW has a hierarchical management style for an external person but each employee has its own decision rights which gives the associates the feeling that the structure is structured but not hierarchical. […] Each associate in Woodcliff Lake has a personal balance scorecard which is driven by the team balance scorecard and the company balance scorecard. […] BMW Group has two different brands, BWM, MINI, RollsRoyce. BMW brand produces cars and motorcycles. BMW Group headquarter is divided into different divisions e.g. finance division, motorcycle […] I do not want to say that the functions are not centralized at all but I would say they are roughly not centralized. For example, do the three brands share marketing, information systems, human resource, and other functions? No! […] Big focus beside the profit it to keep up and increase the brand image, customer satisfaction and training of the associates, high qualify products, being different compared to our competitors […] There are many different mission statements and at the end they all have the content to make customers happy, communication easy and increase the value of the company by e.g. better knowledge... Appendix 21: Personal Communications with Dr. Alessandro Zago Dr. Alessandro Zago is an Innovation Manager who was contacted via the LinkedIn networking online service. A phone conversation with Zago revealed that he is now working in Germany for BMW AG. Below are excerpts of emails sent between Zago and Richard Upton: 19. Mai 2005 06:54 Alessandro, Thank you very much for talking to me today. I'm sorry I was not able to call back within an hour; there was an emergency at work that required my constant attention. In today's interview, you mentioned that BMW employees in Munich are evaluated in five basic areas […] Would you please verify these four areas, and send me the fifth? ----------------Thursday, May 19, 2005 2:43 AM Richard, No Problem. I understand. On the evaluation I got some clarification. The points are: 1. work quantity (number of projects) 2. work quality (regarding the content of projects) 3. intensity of the work/engagement/excitement 4. diligence/precision/accuracy 5. Teamwork 113 Appendix 22: Personal Communications with Kevin Flanagan Kevin Flanagan is a Senior Security Analyst at BMW Financial Services in Ohio, who was contacted for information via the LinkedIn networking online service. Below are excerpts of emails between Flanagan and Richard Upton: On 5/13/05, Kevin Flanagan wrote: […]There are actually 3 BMW companies operating in North America. There is the BMW North America Sales Company (responsible for vehicle sales and marketing through dealership network), there is the BMW North America Plant (manufacturers vehicles in Spartanburg, S.C.), and there is the BMW Financial Services Americas, which handles the financing, leasing and banking services throughout US, Canada, Mexico, and several South/Latin American countries.[…] I can give you some information on the culture for BMW Financial Services. But you need to keep in mind that we are a fairly autonomous organization and operate differently from our parent company in Munich and our sister companies here in the US. There is some overlap and I communicate with the other companies on a regular basis, but we (BMW FS) have some unique values that you won't find in the other BMW companies.[…] We are committed to the concept of Ultimate Care which is an acronym, but also something that we take seriously. We stress mutual respect for other employees, for our customers, and doing the right thing and empowering people to make judgments that will benefit the customer.[…] We measure company and departmental performance using the Balanced Scorecard Methodology. This is tied to an annual bonus, not only does it measure company/department performance, but also measures team member's commitments to our ultimate care culture. This makes our values somewhat measurable and ensures that we keep them in alignment.[…] In addition, each of the components of ultimate care are included in employee performance reviews, so employees are measured against there commitment to our culture (in addition to performance) on an annual basis. Sent: Monday, May 16, 2005 5:56 AM […] BMW FS Americas is a subsidiary of BMW FS out of Munich which I believe is a division of BMW Auto Group (out of Munich). I believe the plant and the sales group report directly into BMW Auto Group. Our parent company (FS) has some influence over what we do, but we are still free to make most strategic decisions, the financial market here in the US is different than in other parts of the world, so they respect that difference and provide us with some autonomy. Significant decisions need to go through Munich. In addition, I have feeling if our performance (BMW FS Americas) wasn't as good as it has been, FS would probably try to take more control. I'm not sure how the sales company needs to follow Munich's lead, but I think the US, Canada, etc. regulations on auto sales require them to have some flexibility as well. As for the plant, they need to follow strict guidelines for operations in order to provide consistency in product. As far as "upward influence", if the people in Munich see us doing something that works well, they will see if they can bring it into the parent company. Two things that come to mind here are the leadership training program we have and the IT System Architecture methodology. These were born here, and are being adopted/investigated at other divisions.[…] 114 Appendix 23: BMW Group Automobiles by Line 1 Series 116i 118i 120i 130i 118cd 120d 3 Series Sedan 316i 318i 320i 325i 330i 318d 320d 330d New Sedan 320i 325i 330i 320d Coupe 318Ci 320Ci 330Ci 320Cd 330Cd Touring 316i 318i 320i 325i330i318dConvertible 318ci 320Ci 325Ci 330Ci 320Cd 330Cd Touring 523i 525i 530i 545i 525d 530d 535d Z4 Roadster 2.0i Roadster 2.2i Roadster 2.5i Roadster 3.0i 5 Series Sedan 525i 530i 545i 525d 530d 535d Convertible 630i 645Ci 6 Series Convertible 630i 645Ci 7 Series 730i 750i 760i 730Li 740Li 750Li 760Li 730d 745d X5 3.0i 4.4i 4.8is 3.0d X X3 2.5i 3.0i 2.0d 3.0d M M3 coupe M3 convertible M5 M6 Motorcycles Enduro F 650 GS F 650 GS Dakar R1150 GS Adventure R1200 GS Roadster F 650 CS R 850 R R 850 R Comfort R 1150 R R 1150 R Rockstar K 1200 R Cruiser R1200 C Classic R1200 C Independent R1200 C Montauk R1200 CL Sports Bikes K1200 S Sports Tourer R1100 S R1100 ST R1100 RS Tourer & Luxury Tourer R1200 RT K1200 GT K1200 LT MINI One One D Cooper Cooper S Convertible One Convertible Cooper Convertible Cooper S Convertible Rolls-Royce Phantom Source: BMW 2004 Annual Report (BMW, 2005e) Appendix 24: Rumelt’s Category Scheme for Multi-Business Firms Ratio Definition Specialization Ratio The proportion of a firm’s revenues that can be attributed to its largest single business in a given year. Related Ratio The proportion of a firm’s businesses that is attributable to its largest group of related businesses, where “related” means sharing markets or sharing value chain activities such as technology, operations, logistics, or procurement. BMW Group is divided into three businesses, two of which are industrial = 2/3 = 0.67 Vertical Ratio The proportion of a firm’s revenues that arise from byproducts, intermediate products, and end products of a vertically-integrated sequence of processing activities. BMW Automotive + Motorcycles / All BMW Group’s businesses Automotive + Motorcycles + are vertically related. Financial Services 43,662/(43,662 + 8479) = 0.84 Sources: BMW 2004 Annual Report (BMW, 2005e) & Modern Competitive Strategy (Walker, 2005, p.220) 115 Appendix 25: BCG Matrix for BMW Group & Automobile Brands BMW Group High Relative Market Share High Low ? Autos ? Market Growth Rate Low ? Motorcycles Financial Services Automobile Brands High Relative Market Share High Low ? ? MINI, M, X, Z ? Rolls-Royce, 1 Series Market Growth Rate ? 3, 5, 6, 7 Series Low 116 Appendix 26: BMW Business Level Strategies Uniqueness Perceived by Customer Low Cost Mass Market Narrow Segment (Niche, Few Market Segments) ? BMW ? Financial Services ? MINI ? Motorcycles ? Rolls -Royce Appendix 27: BMW’s Value Chain Infrastructure (±) Centralized structure; (±) Top-down management style; (±) 49.6% of the company owned by a single family HR (±) Unionized workforce (+) Flexible working hours (+) Ability to "telework" (+) Life-long learning program (+) Employees viewed as key to (+) On-line recruiting system success, called associates (+) Managers from within (+) Student & undergraduate opportunities Procurement (+) Management of Partner Networks; (+) Networks focused on innovation; (+) "Efficient Dynamism" program for R&D partnerships and focus; (±) Exclusive partnerships with Apple, Sprint, and SIRIUS Technology (±) High selection criteria for (+) Sequence centers for production suppliers and dealers of multiple cars in one facility (+) Development of hydrogen cars (+) Development of environmentally sound components (+) Information System quick problem detection (+) Car models have interchangeable parts (+) On-line design & sale for consumers Service (+) BMW ownership of a bank (+) World-wide connection of facilities via Sprint partnership Distribution Operations Marketing (+) Manufacturing capabilities at 24 locations in 13 countries (+) 10-day order to delivery system (±) Very little inventory on-hand (+) Over 300 work-time models (+) Innovation Management superior to competitors (±) Suppliers integrated into vehicle development (+) " (+) Clean, lavish dealer showrooms (+) Very high quality mechanics & service (+) Developed service network with certified BMW providers (+) Drivers training course (+) Quality strategy (+) Merchandising of brand (+) Ability to customize vehicles (±) Move toward a pull-strategy (+) High brand awareness Source: BMW 2004 Annual Report (BMW, 2005e) 117 Appendix 28: Activity System Driver Training Program Classy Dealerships BMW Banking Services Brand Merchandising High Returns on Financing High Quality Consistent Marketing Hydrogen Car Development High Service Standards for Dealers Effective Management Implementation High Profitability (ROE) Technology Top Certified Mechanics Innovation Partnerships to Add Features Customization Numerous Style Awards Management of Partner Networks Design Suppliers Integrated into Design Process Low Inventory Levels Procurement International Production 18 Countries Interchangeable Parts Flexible Manufacturing 10 Day Order to Fulfillment Most Important Important Least Important 118 Appendix 29: BMW Product Portfolio Analysis HR Revenue Profit Costs Revenue by Region *all numbers in thousands Autos 99,043 $42,544 $3,159 $39,385 Germany Europe North America Motorcycles 2,918 $1,029 $31 $998 Germany USA Italy Financial Services 2,841 $8,226 $515 $7,711 N/A Source: BMW 2004 Annual Report (BMW, 2005e) Appendix 30: Lifecycle Analysis SAV Sales SUV Minivan Intro Growth Maturity Time Decline 119 Appendix 31: VRIO Analysis Resource Brand Is it valuable? Yes Is it rare? Yes. BMW has almost 100% brand recognition Is it costly to imitate? Yes. BMW is the third most recognized car brand in the world Is it exploited by the firm? Outcome Yes Sustainable competitive advantage Sustainable competitive advantage Parity Manufacturing capabilities at 24 locations in 13 countries Partnership with dealerships Yes. Allows them to keep 10day delivery standard Yes. Most companies Yes. Start-up costs and investment in Yes manufacturer cars in a handful of capital for manufacturing plants is locations large No Yes Yes. Part of overall great experience for customers Yes. Car production moved to less costly locations to take advantage of costs Yes. Adds service value for consumers Sequence centers Yes. Makes production of multiple cars possible Yes. Most facilities make one (or Yes. Centers require a great deal of few) cars at individual locations planning, R&D and capital requirements Sustainable competitive advantage World-wide connection of facilities Yes. Ability to manage supply and pool resources Yes. Most companies operate facilities individually Yes. Requires partnerships with other Yes. compnies such as Sprint and involves a good deal of capital expenditures Yes. It will be offered in all cars Yes. New cars with new features add to a cutting-edge, fresh image Sustainable competitive advantage Sustainable competitive advantage Sustainable competitive advantage Valuetronic valve Yes. Adds tork and power to control patent cars but reduces consumption and emissions Parterships with Apple, Sprint and SIRIUS Racing team Yes. Adds valuable new features for consumers Yes. It is patented Yes. These are exclusive partnerships Yes. Social complexity and legal agreements prohibit others from doing the same Yes. Adds to the visibiity of the No. Other automakers also have Yes. Sponsorship and team brand racing teams development is exspensive Yes. BMW uses every Parity opportunity to advertise Parity Life-long learning Yes. Keeps employees learning No. Other auto manufacturers program new tasks and motivated also employ a similar strategy Yes. Establishing these programs can Yes be costly in terms of lost productivity (time away from tasks) and resource allocation No Yes. It is offered to each BMW customer Drivers training course Yes. Adds to the custom experience BMW aims to provide Yes. First firm to provide this. Only a handful of firms provide the same service Parity Source: BMW 2004 Annual Report (BMW, 2005e) Appendix 32: BMW Weighted Average Cost of Capital Statistic Value Rf 3.32% Beta 1.138 Rm 10.15% Ke 11.09% t 38.90% Source Bloomberg information service Bloomberg information service Bloomberg information service Marginal Tax Rate (BMW, 2005e, p. 73) USD 10-year discount rate used by BMW to calculate NPV of longKd 4.7% term debt (BMW, 2005e, p. 95) Leverage 46.9% Debt 15,521 BMW Balance Sheet from FactSet information service Equity 17,552 BMW Balance Sheet from FactSet information service WACC 7.23% 120 Appendix 33: BMW Net Present Value Analysis Forecast (Millions) - Euros Income Statement Net Sales Cost of Goods Sold * Depreciation & Amortization Exp. Gross Income Selling, General & Administrative Exp. R&D Expense** Operating Income after Depreciation Interest Expense - Net Pretax Income Total Income Taxes Net Income EBIT Corporate Tax Rate (2004) Depreciation & Amortization Capital Expenditures (Change in PP&E) Incremental Working Capital FCF NPV CF Terminal Value Enterprise Value WACC Terminal Value Rate (Expected Inflation Rate) 2005 45,886.7 35,189.0 2,765.5 10,697.8 7,118.7 2,415.7 3,579.0 254.6 3,324.4 1,293.2 2,031.2 3,579.0 38.9% 2,765.5 2006 47,492.8 36,420.6 2,862.3 11,072.2 7,367.9 2,500.2 3,704.3 263.5 3,440.8 1,338.5 2,102.3 3,704.3 38.9% 2,862.3 2007 49,155.0 37,695.3 2,962.5 11,459.7 7,625.8 2,587.7 3,833.9 272.7 3,561.2 1,385.3 2,175.9 3,833.9 38.9% 2,962.5 2008 50,875.4 39,014.6 3,066.2 11,860.8 7,892.7 2,678.3 3,968.1 282.3 3,685.8 1,433.8 2,252.1 3,968.1 38.9% 3,066.2 2009 52,656.1 40,380.1 3,173.5 12,275.9 8,168.9 2,772.1 4,107.0 292.2 3,814.8 1,484.0 2,330.9 4,107.0 38.9% 3,173.5 2010 Assumptions Constant 3.5% annual 54,499.0 growth Constant % of sales at 41,793.5 2004 level of 76.7% Constant % of sales at 3,284.6 2004 level of 6.0% 12,705.6 Constant % of sales at 8,454.8 2004 level of 15.50% Constant % of sales at 2,869.1 2004 level of 5.3% 4,250.8 Constant % of sales at 302.4 2004 level of 0.6% 3,948.4 Tax at marginal rate 1,535.9 (conservative) of 38.9% 2,412.5 4,250.8 38.9% 3,284.6 Constant average % of 3,900.4 71.36 980.57 5,058 32,491 37,549 7.23% 3.5% 4,036.9 67.11 1,021.65 4,178.2 69.46 1,057.40 4,324.4 71.89 1,094.41 4,475.8 74.40 1,132.72 4,632.4 sales at of 8.5% 77.01 1,172.36 * Depreciation & Amortization Expense is included in Cost of Goods Sold ** Research & Development Expense is included in SG&A Source: FactSet online service Appendix 34: Demand Forecast Units Sales (In Thousands) X5 (Actual) Year 1999 2000 2001 2002 2003 2004 Units Sold ? 37 82 100 105 104 Change from Prev. Year ? 121.6% 22.0% 5.0% -1.0% Unit Sales Forecast for New SAV Price = Price = Price = $65,000 $60,000 $55,000 Year 1 5 10 15 Year 2 30 40 50 Year 3 66 89 111 Year 4 80 109 135 Year 5 84 114 142 Year 6 83 113 141 Source: BMW's Annual Reports, 1999 through 2004, via FactSet online service 121 Appendix 35: Scenario Analyses Scenario 1: Minivan Priced at $65,000 Forecast (1000's) - US Dollars Income Statement Units Sold Net Sales Cost of Goods Sold * Depreciation & Amortization Expense Gross Income Selling, General & Administrative Expense R&D Expense** Operating Inc. after Depreciation Interest Expense - Net Pretax Income Total Income Taxes Net Income EBIT Corporate Tax Rate (2004) Depreciation & Amortization Capital Expenditures (Change in PP&E) Incremental Working Capital FCF NPV CF Terminal Value Enterprise Value WACC Terminal Value Rate (Expected Inflation Rate) Year 1 5,000 325,000.0 249,231.4 19,587.2 75,768.6 81,250.0 17,109.5 (5,481.4) 1,803.3 (7,284.7) (2,833.8) (4,451.0) (5,481.4) 38.9% 19,587.2 Year 2 30,000 1,950,000.0 1,495,388.5 117,523.4 454,611.5 487,500.0 102,657.1 (32,888.5) 10,819.9 (43,708.4) (17,002.6) (26,705.8) (32,888.5) 38.9% 117,523.4 Year 3 66,000 4,290,000.0 3,289,854.7 258,551.5 1,000,145.3 665,537.8 225,845.5 334,607.4 23,803.8 310,803.7 120,902.6 189,901.0 334,607.4 38.9% 258,551.5 Year 4 80,000 5,200,000.0 3,987,702.7 313,395.7 1,212,297.3 806,712.5 273,752.1 405,584.8 28,853.1 376,731.7 146,548.6 230,183.1 405,584.8 38.9% 313,395.7 Year 5 84,000 5,460,000.0 4,187,087.9 329,065.5 1,272,912.1 847,048.2 287,439.7 425,864.0 30,295.7 395,568.3 153,876.1 241,692.2 425,864.0 38.9% 329,065.5 Year 6 Assumptions Percent of sales are constant 83,000 from 2004 5,395,000.0 Units sold times 55,000 4,137,241.6 76.7% of sales 325,148.1 6.0% of sales 1,257,758.4 15.50% of sales, except the 836,964.2 first 2 years which are 25% 5.3% of sales 284,017.8 420,794.2 29,935.0 0.6% of sales 390,859.1 152,044.2 Marginal Tax Rate 238,814.9 420,794.2 38.9% 325,148.1 NPV Analysis 27,625.0 11,734.01 (23,120.93) 85,606 3,507,188 3,592,794 7.23% 3.5% 165,750.0 67,900.06 (136,221.54) 364,650.0 97,776.09 570.53 442,000.0 38,024.03 81,183.99 464,100.0 10,864.01 114,304.41 Avg. expense over six years ending in 2004, % of sales 458,575.0 (BMW, 2005e, pp. 118-119) (2,716.00) 126,394.32 * Depreciation & Amortization Expense is included in Cost of Goods Sold ** Research & Development Expense is included in SG&A Scenario 2: Minivan Priced at $60,000 Forecast (1000's) - US Dollars Income Statement Units Sold Net Sales Cost of Goods Sold * Depreciation & Amortization Expense Gross Income Selling, General & Administrative Expense R&D Expense** Operating Inc. after Depreciation Interest Expense - Net Pretax Income Total Income Taxes Net Income EBIT Corporate Tax Rate (2004) Depreciation & Amortization Capital Expenditures (Change in PP&E) Incremental Working Capital FCF NPV CF Terminal Value Enterprise Value WACC Terminal Value Rate (Expected Inflation Rate) Year 1 10,000 600,000.0 460,119.5 36,161.0 139,880.5 150,000.0 31,586.8 (10,119.5) 3,329.2 (13,448.7) (5,231.6) (8,217.2) (10,119.5) 0.389 36,161.0 Year 2 Year 3 Year 4 109,000 6,540,000.0 5,015,303.0 394,155.4 1,524,697.0 1,014,596.1 344,296.0 510,100.8 36,288.3 473,812.6 184,313.1 289,499.5 510,100.8 0.389 394,155.4 Year 5 114,000 6,840,000.0 5,245,362.8 412,235.9 1,594,637.2 1,061,137.3 360,089.4 533,499.9 37,952.9 495,547.1 192,767.8 302,779.3 533,499.9 0.389 412,235.9 Year 6 Assumptions 40,000 89,000 2,400,000.0 5,340,000.0 1,840,478.2 4,095,063.9 144,644.2 321,833.3 559,521.8 1,244,936.1 600,000.0 126,347.1 (40,478.2) 13,316.8 (53,795.0) (20,926.2) (32,868.7) (40,478.2) 0.389 144,644.2 Percent of sales are constant 113,000 from 2004 6,780,000.0 Units sold times 55,000 5,199,350.9 76.7% of sales 408,619.8 6.0% of sales 1,580,649.1 15.50% of sales, except the 1,051,829.0 first 2 years which are 25% 356,930.7 5.3% of sales 528,820.1 37,619.9 0.6% of sales 491,200.2 191,076.9 Marginal Tax Rate 300,123.3 528,820.1 0.389 408,619.8 828,431.7 281,122.4 416,504.3 29,629.9 386,874.5 150,494.2 236,380.3 416,504.3 0.389 321,833.3 NPV Analysis 51,000.0 23,224.79 (44,246.79) 100,976 4,382,406 4,483,382 7.23% 3.5% 204,000.0 75,212.37 (159,300.35) 453,900.0 122,846.88 (429.41) 555,900.0 50,141.58 99,785.43 581,400.0 12,535.40 144,269.00 Avg. expense over six years ending in 2004, % of sales 576,300.0 (BMW, 2005e, pp. 118-119) (2,507.08) 157,936.00 * Depreciation & Amortization Expense is included in Cost of Goods Sold ** Research & Development Expense is included in SG&A 122 Scenario 3: Minivan Priced at $55,000 Income Statement Units Sold Net Sales Cost of Goods Sold * Depreciation & Amortization Expense Gross Income Selling, General & Administrative Expense R&D Expense** Operating Inc. after Depreciation Interest Expense - Net Pretax Income Total Income Taxes Net Income EBIT Corporate Tax Rate (2004) Depreciation & Amortization Capital Expenditures (Change in PP&E) Incremental Working Capital FCF NPV CF Terminal Value Enterprise Value WACC Terminal Value Rate (Expected Inflation Rate) 109,107 4,996,818 5,105,926 7.23% 3.5% * Depreciation & Amortization Expense is included in Cost of Goods Sold ** Research & Development Expense is included in SG&A Year 1 15,000 825,000.0 632,664.4 49,721.4 192,335.6 206,250.0 43,431.8 (13,914.4) 4,577.6 (18,492.0) (7,193.4) (11,298.6) (13,914.4) 0.389 49,721.4 Year 2 50,000 2,750,000.0 2,108,881.2 165,738.1 641,118.8 687,500.0 144,772.8 (46,381.2) 15,258.8 (61,640.1) (23,978.0) (37,662.1) (46,381.2) 0.389 165,738.1 Year 3 111,000 6,105,000.0 4,681,716.4 367,938.6 1,423,283.6 947,111.5 321,395.5 476,172.1 33,874.6 442,297.5 172,053.7 270,243.8 476,172.1 0.389 367,938.6 Year 4 135,000 7,425,000.0 5,693,979.4 447,493.0 1,731,020.6 1,151,892.4 390,886.5 579,128.2 41,198.8 537,929.4 209,254.5 328,674.9 579,128.2 0.389 447,493.0 Year 5 142,000 7,810,000.0 5,989,222.7 470,696.3 1,820,777.3 1,211,620.2 411,154.7 609,157.1 43,335.1 565,822.0 220,104.8 345,717.3 609,157.1 0.389 470,696.3 Year 6 Assumptions Percent of sales are constant 141,000 from 2004 7,755,000.0 Units sold times 55,000 5,947,045.1 76.7% of sales 467,381.5 6.0% of sales 1,807,954.9 15.50% of sales, except the 1,203,087.6 first 2 years which are 25% 408,259.2 5.3% of sales 604,867.3 43,029.9 0.6% of sales 561,837.4 218,554.7 Marginal Tax Rate 343,282.6 604,867.3 0.389 467,381.5 Avg. expense over six years ending in 2004, % of sales 659,175.0 (BMW, 2005e, pp. 118-119) (2,298.16) 180,078.58 NPV Analysis 70,125.0 32,626.34 (61,531.58) 233,750.0 80,435.46 (176,786.27) 518,925.0 140,187.51 (232.71) 631,125.0 55,155.74 115,059.56 663,850.0 16,087.09 162,954.19 123 Sensitivity Analyses Sensitivity Analysis: Sales (1,000's) 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Year 1 Scenario 1 Scenario 2 Scenario 3 325,000 600,000 825,000 Year 2 1,950,000 2,400,000 2,750,000 Year 3 4,290,000 5,340,000 6,105,000 Year 4 5,200,000 6,540,000 7,425,000 Year 5 5,460,000 6,840,000 7,810,000 Year 6 5,395,000 6,780,000 7,755,000 Sensitivity Analysis: Net Income (1000's) 600,000 500,000 400,000 300,000 200,000 100,000 (100,000) Scenario 1 Scenario 2 Scenario 3 Year 1 (4,451) (8,217) (18,492) Year 2 (26,706) (32,869) (61,640) Year 3 189,901 236,380 442,298 Year 4 230,183 289,499 537,929 Year 5 241,692 302,779 565,822 Year 6 238,815 300,123 561,837 Sensitivity Analysis: EBIT (1000's) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 (100,000) Scenario 1 Scenario 2 Scenario 3 Year 1 (5,481) (10,120) (13,914) Year 2 (32,889) (40,478) (46,381) Year 3 334,607 416,504 476,172 Year 4 405,585 510,101 579,128 Year 5 425,864 533,500 609,157 Year 6 420,794 528,820 604,867 124 Appendix 36: The Soccer Moms Team Photo Photos courtesy of Kasey Howe Lisa Eskey Michelle Ronco John Brandes Benny Hidalgo Fernando Villegas Rick Upton 125