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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
BMWs Competitors............................................................................................................. 13
BMWs 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: Rumelts 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: BMWs 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),
BMWs 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.

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 Companys 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 BMWs 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 Companys 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 consumers 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 Groups 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 Companys 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 productsincluding the 3 Series, which was re-launched this springand 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 Companys 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 Companys 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, Id 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 its Somethingno matter the packagethat offers driving
pleasure (Thomas, 2005). BMWs 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.

External Analysis
Industry Definition
BMW competes in the auto manufacturing industry, however, this analysis will concentrate
on the introduction of BMWs 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
subsetsespecially when considering exit barriers and participant sizeare 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 automakers 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

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.

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.

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 Manufacturers 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.

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
cars 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 BMWs X3 (Wards 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.

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

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).

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 Fords 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 industrys 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 BMWs 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
BMWs 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 markets 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

BMWs 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, BMWs 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 BMWs 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
DaimlerChryslers 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.
DCXs 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
Toyotas 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. Toyotas 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.
Toyotas 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

GMs 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
corporations financing division. GMAC finances most of the vehicles sold by the
automotive business units, making it a vertically- integrated business.
Ford
Fords business level strategy mirrors DCX, as both are stuck in the middle. Although
five of the companys eight brands are listed in the focused differentiation category, the
remaining three are costs leaders and produce a majority of Fords overall total volume.
Fords 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
BMWs rivals DaimlerChrysler, Toyota, GM, and Fordhave 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 businessin fact it
averages the shortest warranty of the four rivalsit 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
BMWs 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 DCXs 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 industrys 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 BMWs 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; Fords total debt has only increased 5 percent per year, whereas BMWs 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 industrys 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, GMs 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; GMs 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
BMWs introduction of a minivan is an attempt to capitalize on the development a
completely new market. BMWs 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 Companys 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 markets 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 minivans quality be on par
with BMWs 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 BMWs 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 Oldsmobiles 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 OConnell 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 GMs
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 GMs 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, BMWs 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 BMWs
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.

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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
BMWs 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
BMWs 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, BMWs 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 brandsMINI, BMW, and Rolls-Royceto 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 BMWs
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).
BMWs 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 dont 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).
Pankes 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, BMWs 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 BMWs 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 Companys 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 BMWs 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 Companys 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 Groups corporate level strategy is that of single
business. According to Rumelts classificationand figures from BMWs 2004 Annual
Reportthe 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 BMWs introduction of the
minivan is an extension of its core business.
Recent Mergers, Acquisitions, & Divestments
BMW hasnt made any recent mergers, acquisitions, or divestments, as it has been a bit
hesitant to engage in such activity due to past performance. The Companys 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. Rovers culture appeared
to be of setting high abstract goals with the understanding that most will not be met,
whereas BMWs 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 companys intellectual property, allowing BMWone of Volkswagens 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 BMWs strategy.
BMW Groups 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 BMWs 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 BMWs 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 Groups 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 Groups 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 Groups corporate level strategy is that of a single business. Although it is
organized into three unitsAutomobile, Motorcycle, and Financial Servicesmost 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 BMWs 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 cant
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 Groups 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. BMWs 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 BMWs 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
BMWs 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 BMWs 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 BMWs 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
BMWs 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 BMWs
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. BMWs solid relationships with dealers
help it maintain the standards that BMW owners expect. Clean showrooms, an established
network of certified service providers, and a drivers 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. BMWs 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 BMWs ability to
design technologically advanced, flexible, and efficient facilities ahead of competitors.
Costs are driven down by BMWs 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 BMWs ability to consistently design automobiles that
are generally well regarded by consumers. BMWs 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
BMWs plans to release a new body style, which it did in April 2005.
Although the innovative design of both BMWs 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. BMWs
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 Companys 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). BMWs 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 BMWs internal analysis, automobiles, motorcycles, and
financial services compose BMWs 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). BMWs 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 Companys
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. BMWs
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 BMWs 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. BMWs 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
BMWs 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.
BMWs 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. BMWs 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 BMWs 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 Companys
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 BMWs 2004 Annual Report is titled Setting the Course,
Extending the Lead, a fitting tribute to its efforts of technological innovation. The
Companys 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 BMWs 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 customeran 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).

BMWs technology strategy expands beyond the production floor, as there are additional
examples of process innovation that involve the Companys 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 worlds 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 Companys 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, BMWs 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; BMWs 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 BMWs 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, BMWs 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 BMWs 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
BMWs 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
BMWs 2004 Annual Report and the cost of debt used came from BMWs 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 services 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, BMWs 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 automakers 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 BMWs brand. These same pundits claimed the

55

same thing about the X5, and again about the X3; however, these products have been huge
successes. BMWs 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 BMWs ability to sell the new
product.
In the past, BMWs 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
Companys 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 BMWs new product will
compete only in the United States, where competitors similar products are popular and where
infrastructure can handle such large vehicles. Although minivansand even a mini- minivan
conceptare 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 Companys 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 todays
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 GMs 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 Groups 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. BMWs
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 BMWs goal of a 10-day
turnaround period.
BMWs value and cost drivers are unlikely to change with this new product. BMWs 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.
BMWs 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, BMWs 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, BMWs 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 BMWs 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 BMWs 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. BMWs 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 (Wards 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 worlds largest truck
market. Despite all the necessary changes, BMWs 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 BMWs plan to
provide an auto solution for all stages of a consumers 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. The Soccer Moms, as pictured in Appendix 36, recommend the
purchase of BMW shares for a buy and hold strategy.

64

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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
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The education department can also be contacted on the following details:
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We hope this information is of use. If we can be of further assistance please do not hesitate
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78

Appendix 2 : BMW History


Year Event
Bayerische Flugzeug-Werke (BFW) was founded on 7 March and incorporates Otto-Werke. BMW acquires the

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

1917 small company grows quickly. With expansion in mind, the firm builds a spacious plant right next to the

1948

1959

1973

1990

2000-

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)

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 companys
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

Auto Industry
(general)

SUVs

Minivans

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.

Exit Barriers
Auto Industry
(general)

SUVs

Minivans

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.

Cost Conditions

Auto Industry
(general)
* includes SUVs &
Minivans

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

Rank

80

Product
Differentiation
Auto Industry
(general)

SUVs

Minivans

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.

Switching Costs

Auto Industry
(general)

SUVs

Minivans

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.

Industry Roughly
Equal in Size

Auto Industry
(general)

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
(Hoovers 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.

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).

Industry Structure

Auto Industry
(general)
* includes SUVs &
Minivans

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.

Overall Analysis
Factors Underlying
Threat of Entry
Economies of Scale

By All
Manufacturers

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

4
Effect on Industry

Strength

Rank

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.

Moderately Favorable: Manufacturers offer differences in


quality for which customers will pay a wide range of prices.

82

Cost Advantages
Independent of Scale
By New
Manufacturers

By All
Manufacturers

Moderately Favorable: Automobile dealers will often sell


more than one manufacturers 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.

51

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).

Capital Requirements

By All
Manufacturers

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).

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

Moderately Favorable: Companies not wanting to lose market


share will retaliate, especially since there is overcapacity
(Peter, 2004).

Switching Costs

By All
Manufacturers

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.

83

Government
Regulation

By All
Manufacturers

By Manufacturers
not already Selling
Autos in the U.S.
Market

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 (ODonnell, 2004).

Overall Analysis
Factors Underlying
Supplier Power
Concentration of
Suppliers or Supplier
Groups

Labor

Steel

Commodity
Components*
Model-Specific
Components
Electronics
Powertrain**
Contract
Manufacturers
Manufacturing
Tools
Buyer Profits
Labor

2
Effect on Industry

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 dont
have capacity for complete vertical integration.
Moderately Favorable: Smaller number of suppliers. Some
auto manufacturers produce own components, but dont 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.

Strength

Rank

84

Steel

Commodity
Components
Model-Specific
Components
Electronics
Powertrain**
Contract
Manufacturers
Manufacturing
Tools
Supplier Industry
Growth

Labor

Steel
Commodity
Components
Model-Specific
Components
Electronics
Powertrain**

Contract
Manufacturers

Manufacturing
Tools
Strategic Importance
of the Firm to the
Supplier
Labor

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.

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.

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.

85

Steel
Commodity
Components
Model-Specific
Components
Electronics
Powertrain**
Contract
Manufacturers
Manufacturing
Tools
Strategic Importance
of the Supplier to the
Firm
Labor

Steel
Commodity
Components
Model-Specific
Components

Electronics

Powertrain**
Contract
Manufacturers
Manufacturing
Tools
Percent Volume Sold
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 cars
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.

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 wont
generate a lot of sales (Siekman, 2005).
Unfavorable: Tools are made specifically for automobile
industry.

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).

86

Steel

Commodity
Components
Model-Specific
Components
Electronics
Powertrain**
Contract
Manufacturers
Manufacturing
Tools

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.

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 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.

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
suppliers business with a move to a competitor and therefore
can demand specific requirements.

87

Model-Specific
Components
Electronics
Powertrain**

Contract
Manufacturers
Manufacturing
Tools

Unfavorable: Parts are made for particular models.

Favorable: Auto manufacturers have purchasing power.

Favorable: Auto manufacturers have purchasing power.

Neutral: Win-win situation for both parties.

Favorable: Auto manufacturers have purchasing power.

10

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.

Suppliers Earn Low


Profits

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**

Contract
Manufacturers

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.

Unfavorable: Suppliers able to take advantage of industry


growth.
Not Applicable: Most are produced in-house.

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: Its a start to have all the parts, but automobile
industry is very labor and capital intense.
Favorable: Its 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. its easier to get the job
done. Downside would be lack of marketing know-how and
brand recognition.

88

Manufacturing
Tools
Overall Analysis

Favorable: Automobile industry is very labor and capital


intense.

* 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

Individual End
Consumers

New Car
Dealerships

Rental Car Agencies

Fleet Corporate
Leasing

Effect on Industry

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 buynot 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.

Buyer Earns Low


Profits

Individual End
Consumers

New Car
Dealerships

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).

Strength

Rank

89

Rental Car Agencies


Fleet Corporate
Leasing

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.

Products Strategic
Importance
Individual End
Consumers

New Car
Dealerships

Rental Car Agencies

Fleet Corporate
Leasing

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.

Products Portion of
Buyers Costs
Individual End
Consumers

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

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.

Strength

Rank

90

Rental Car Agencies

Fleet Corporate
Leasing

Buyers Strategic
Importance to Firm
Individual End
Consumers
New Car
Dealerships
Rental Car Agencies
Fleet Corporate
Leasing
Switching Costs
Individual End
Consumers

New Car
Dealerships

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.

Buyer Information
Individual End
Consumers
New Car
Dealerships
Rental Car Agencies
Fleet Corporate
Leasing

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.

10

91

Backward Integration
Threat

Individual End
Consumers

New Car
Dealerships
Rental Car Agencies

Fleet Corporate
Leasing

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.

Percent Volume Sold


to the Buyer
Individual End
Consumers
New Car
Dealerships
Rental Car Agencies
Fleet Corporate
Leasing
Market Growth

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.

11

Individual End
Consumers

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).

New Car
Dealerships

Moderately Favorable: Sales mirror the individual consumers.

Rental Car Agencies

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).

Fleet Corporate
Leasing
Overall Analysis

92

Factors Underlying
Substitutes
Buyers High
Propensity to
Substitute
Vehicles in general
SUV Products

Minivan Products

Effect on Industry

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).

Price Performance of
Substitutes
Vehicles in general

SUV Products

Minivan Products

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).

Switching Costs
Vehicles in general
SUV Products
Minivan Products

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.

Overall Analysis

Factors
Underlying
Complements
Power
Relative
Concentration

Gasoline Refiners/
Distributors

Banks & Other


Lending Institutions

Strength

Rank

Effect on Industry

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 OPECs 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.

Strength

Rank

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.

Unfavorable: There are no switching costs to go from one


distributor of gasoline to another, however, the fact the
industrys 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 industrys 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.

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.

1.5

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

Gasoline Refiners/
Distributors

Banks & Other


Lending Institutions

Liability Insurance
Companies

After-Market
Accessories
Suppliers

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).

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.

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.

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.

Overall Analysis

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

ANOVA

R Square
2
Adjusted R
Standard Error
Observations

Regression
Residual
Total

Intercept
X Variable 1

0.98
0.98
332.86
32

Coefficients
(2,765.65)
0.03

df

Std.
Error
318.11
0.001

t Stat
(8.69)
42.52

1
30
31

SS
200,343,259.3
3,323,807.4
203,667,066.7

MS
200,343,259.3
110,793.6

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

RESIDUAL OUTPUT

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)

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)

F
1,808.3

Significance F
0.00

Upper 95.0%
(2,115.97)
0.03

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%

JPY
GBP

4.0%

CHF
3.0%

AUD

2.0%
1.0%

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

0.0%

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%

Source: US Census Bureau (U.S. Census Bureau, n.d)

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

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%

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, pp. 255-56)

Source: (Lazich, 2004, p. 255)

98

Market Share per Segment (Q1 2003)

GM
Ford
DaimlerChrysler
Toyota
Honda
Nissan
Others

Small
SUV
12.5%
15.4%
21.5%
7.4%
14.1%
5.9%
23.2%

Minivan
18.2%
13.9%
38.9%
7.0%
13.9%
0.8%
7.3%

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%

Source: Automotive Industries, 24 June 2003. p. 183 (6).

Appendix 9: Competitor Business Level Strategies


Overall

Low Cost

? General ? Toyota

Mass Market

Motors

? Daimler
Chrysler
&
Ford

Narrow
Segment
(Niche, Few
Market
Segments)
Daimler
Chrysler

Mass Market

Low Cost

Uniqueness
Perceived by
Customer

? Dodge

Toyota

? Jeep
?

Mercedes
Benz

? Smart
Low Cost

General
Motors

Mass Market

? Chrysler
Narrow
Segment
(Niche, Few
Market
Segments)

Uniqueness
Perceived
by
Customer

? Maybach
Uniqueness
Perceived by
Customer

Narrow
Segment
(Niche, Few
Market
Segments)

Ford

Low Cost

Uniqueness
Perceived by
Customer

? Saturn
? Chevrolet
? Saab
Pontiac
Buick
? Cadillac
GMC
Oldsmobile
? Hummer

Low Cost

Uniqueness
Perceived by
Customer

? Mazda
Mass Market

Narrow
Segment
(Niche, Few
Market
Segments)

Mass Market

? Toyota
? Lexus
? Scion

Narrow
Segment
(Niche, Few
Market
Segments)

? Ford
Mercury
? Lincoln
? Volvo
? Jaguar
? Land Rover
? Aston
Martin

99

Appendix 10: Competitor Products & Product Markets


DaimlerChrysler
Passenger
Cars
Compact

PT Cruiser
Dodge Neon

Midsize

Chrysler Sebring
Dodge Magnum,
Stratus
Mercury Sable

Sporty

Dodge SRT4

Toyota

Scion tC, xA, xB


Toyota Corolla,
Matrix, Prius
Toyota Avalon,
Camry, Solara

Luxury Cars
Near-Luxury Mercedes-Benz C230, Lexus ES300, IS300
C240, C320
Chrysler 300, 300c,
Crossfire

Mid-Luxury

UltraLuxury

SUVs
Compact

Midsize

Full-Size

Luxury

Trucks
Compact

Full-Size

General Motors

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

Ford Focus
Mazda 3

Buick Park Avenue


Cadillac CTS
Saab 9-2X, 9-3

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

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

RAV4

Chrysler Pacifica
Dodge Durango
Jeep Grand Cherokee

Toyota 4Runner,
Highlander

Chevrolet Equinox
Saturn Vue

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

Dodge Dakota

Toyota Tacoma

Dodge Ram 1500,


2500, 3500

Toyota Tundra

Ford

Chevrolet Colorado,
SSR
GMC Canyon
Chevrolet Silverado
1500, 1500HD,
2500HD, 3500
GMC Sierra 1500,
1500HD, 2500HD,
3500

Ford Crown Victoria, 500,


Taurus
Mazda 6

Ford Mustang, Thunderbird


Mazda Miata, RX8

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

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

Toyota

General Motors

Ford

Apparent high quality


for MB brand (though
there have been some
problems, not for other
brands

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

Value Drivers

Quality

Delivery
Service

Does Not Apply


Varies by brand, MB
has good service
reputation, other
brands average

Technology
Breadth of Line

Very well diversified

Customization

Mass customization for


Mercedes brand

Geography

Many suppliers are


geographically close.
(Walker, 30)

Risk Assumption

Warranty programs,
best 7/70 for MB
(Walker, 30)

Dont really need service


because its done right
the first t ime

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

Many suppliers are


geographically close.
(Walker, 30)
Warranties 4/50,
better than Toyota &
GM

Poor, frequent
recalls
Yes, largest
manufacturing
company in the
world, greatest
benefit

Poor, frequent recalls

Very much so, with


Lexus

Network
Externalities

MB able to take
advantage of
economies of scope

Yes, but not as much as


DCX

Organizational
Practices

Yes, second in this


group
Mass customization
to a greater extent
with premium brands

Warranties average
3/36, some have
5x60

Good for MB brand

Vertical Integration

Average service

Warranties, average 3/36


with higher levels for
powert rain.

Brand/Reputation

Environmental
Policies
Complementary
Products
Cost Drivers
Scale Economies
Scope Economies
Learning Curve

Average service

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

Yes
Yes
Yes
Looser control over
supply base

Poor

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 (Hoovers
Automotive
Mercedes annually
Inc., 2005d).
Industry, becoming
(Hoovers Inc.,
Paired with GM for
first western car
2005d).
NUMMI in 1984
company to offer
auto loans to
Chinese consumers
(Hoovers 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 (Hoovers
world (Hoovers
more than 50
Inc., 2005d).
Inc., 2005d).
additional countries
(Hoovers 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.)
(Hoovers Inc.,
2005d).
Hybrid

Operates through
7,000 locations in
more than 140
countries
(Hoovers Inc.,
2005d).

Own 33% stake in


Mazda
Owns rental car
companies Hertz
and Budget.

102

Supplier Portal

% of Revenue
spent on R&D
Capabilities
Design-toMarket Cycle
Pooling

Market
Prediction

Forecasting
(days on lot
before being
sold)

Managing
Technology

A member of Covisint Geographic


(an internet-based
proximity to a
trading exchange)
majority of its
Also have own online
suppliers
procurement system

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)

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 (Wards
42 (Wards
77 (Wards
supply: 78
Automotive
Automotive
Automotive
(Wards
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

Total

BMW
SAV

3
0
0
0
6
0
9
8
8
2
0
6
9
8
7
7
8

7
6
6
6
6
6
8
8
9
5
6
6
8
8
7
8
9

8
6
6
6
6
6
6
8
7
2
6
0
5
6
6
9
8

7
6
0
4
6
6
7
7
2
2
6
0
2
5
6
8
3

8
6
6
4
6
6
7
7
8
5
6
4
7
7
6
8
7

900
0
0
0
1800
0
2700
2400
2400
600
0
1800
2700
2400
2100
2100
2400

2100
1800
1800
1800
1800
1800
2400
2400
2700
1500
1800
1800
2400
2400
2100
2400
2700

2400
1800
1200
1800
1800
1800
1200
2400
400
1200
600
0
1000
1200
1200
1800
2400

2100
1800
0
1200
1800
1800
1400
2100
1000
1200
600
0
400
1000
1200
1600
900

2400
1800
1200
1200
1800
1800
1400
2100
1600
1200
600
800
1400
1400
1200
1600
2100

8
8
7

9
6
7

9
3
6

9
7
8

8
7
6

2400
2400
2100

2700
1800
2100

2700
600
1200

2700
1400
1600

2400
1400
1200

4
6
6
4
0

4
6
6
4
4

4
6
6
4
0

4
6
6
4
4

4
6
6
4
6

1200
1800
1800
1200
0

1200
1800
1800
1200
1200

400
600
600
800
0

400
600
600
800
800

400
600
600
800
1200

3
6
6
8
0

5
6
6
8
6

8
6
6
8
4

6
6
6
2
4

7
6
6
7
6

900
1800
1800
2400
0

1500
1800
1800
2400
1800

1600
600
600
800
400

1200
600
600
200
400

1400
600
600
700
600

3
8
6

5
8
6

6
3
7

6
5
7

7
7
7

900
2400
1800

1500
2400
1800

1800
900
2100

1800
1500
2100

2100
2100
2100

Toyo
ta Sie
nna

BMW
X5

Chry
sler
Tow
n&C
ount
ry Lim
ited
Dodg
Editio
e Gr
n
and
Cara
van

BMW
SAV
Chry
sler
Tow
n&C
ount
Dodg
ry Lim
e Gr
ited
and
Editio
Cara
van
n
Toyo
ta Sie
nna

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

Points

BMW
X5

Rank and Rating*

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

Total
Adjusted Total**

Toyo
ta Se
quoia
- Lim
ited

Pacif
ica
Daim
ler-C
hrys
ler

GM E
nvoy
XL

Ford
Expe
ditio
n

Linc
oln N
aviga
tor Ultim
ate
Cadil
lac E
scala
de Plati
num
Chev
y Tah
oe - L
T

470

Medium SUV

9
9
8
7
7
8
8
7
5

7
7
7
8
7
8
9
8
3

7
6
6
7
7
8
8
6
3

6
5
5
7
8
7
6
9
3

3
3
6
8
8
7
6
8
1

7
8
6
8
8
7
7
6
1

6
3
8
7
7
7
6
7
2

3
8
7
6
3
7
7
7
3

5
3
8
6
7
8
9
6
3

7
6
7
8
3
7
8
7
2

2400
2400
2400
900
2100
1600
1600
2400
400

2700
2700
2400
2100
2100
1600
1600
2100
1000

2100
2100
2100
2400
2100
1600
1800
2400
600

2100
1800
1800
2100
2100
1600
1600
1800
600

1800
1500
1500
2100
2400
1400
1200
2700
600

900
900
1800
2400
2400
1400
1200
2400
200

2100
2400
1800
2400
2400
1400
1400
1800
200

1800
900
2400
2100
2100
1400
1200
2100
400

900
2400
2100
1800
900
1400
1400
2100
600

1500
900
2400
1800
2100
1600
1800
1800
600

2100
1800
2100
2400
900
1400
1600
2100
400

2
1
2
2
2
1
2

7
8
7
7
7
6
0

7
9
6
6
7
0
6

6
7
7
7
7
6
0

7
8
7
6
6
6
0

7
7
7
7
7
6
0

3
6
6
8
7
6
0

3
8
6
7
7
6
0

6
7
0
6
7
6
0

7
9
3
3
6
0
6

6
7
6
8
5
0
6

6
9
6
6
7
6
0

1400
2400
1400
1400
1400
1800
0

1400
2700
1200
1200
1400
0
1200

1200
2100
1400
1400
1400
1800
0

1400
2400
1400
1200
1200
1800
0

1400
2100
1400
1400
1400
1800
0

600
1800
1200
1600
1400
1800
0

600
2400
1200
1400
1400
1800
0

1200
2100
0
1200
1400
1800
0

1400
2700
600
600
1200
0
1200

1200
2100
1200
1600
1000
0
1200

1200
2700
1200
1200
1400
1800
0

3
2
2
2
3

6
4
4
7
6

4
4
4
7
6

6
4
4
7
6

6
6
4
7
6

6
4
4
6
6

6
4
4
5
4

6
4
4
6
4

6
4
4
5
6

6
4
4
5
6

6
4
4
6
6

6
4
4
5
6

600
800
800
1400
600

400
800
800
1400
600

600
800
800
1400
600

600
1200
800
1400
600

600
800
800
1200
600

600
800
800
1000
400

600
800
800
1200
400

600
800
800
1000
600

600
800
800
1000
600

600
800
800
1200
600

600
800
800
1000
600

3
3

6
6

6
6

6
6

6
6

6
6

6
6

6
6

6
6

4
6

6
6

6
6

600
600

600
600

600
600

600
600

600
600

600
600

600
600

600
600

400
600

600
600

600
600

3
1
1
2

8
8
3
6

8
8
5
6

8
7
8
7

8
5
2
7

7
7
6
6

7
3
6
6

7
2
2
6

8
6
3
6

7
6
6
6

7
6
2
7

8
6
7
7

800
2400
900
1200

800
2400
1500
1200

800
2100
2400
1400

800
1500
600
1400

700
2100
1800
1200

700
900
1800
1200

700
600
600
1200

800
1800
900
1200

700
1800
1800
1200

700
1800
600
1400

800
1800
2100
1400

Luxury SUV

Large SUV

Volv
o XC
90

Large SUV

8
8
8
3
7
8
8
8
2

Lexu
s LX

Luxury SUV
1
1
1
1
1
2
2
1
2

Rank

BMW
-SAV

Lexu
s LX

Toyo
ta Se
quoia
- Lim
ited
BMW
- X5

BMW
-SAV

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

BMW
- X5
4.8

Feature

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

Rank and Rating*

Medium SUV

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

105

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%

Toyo
ta Se
quoia
- Lim
ited

Volv
o XC
90

Chry
sler
Pacif
ica L
imite
d

GM E
nvoy
XL

Ford
Expe
ditio
n Kin
g Ra
nch

Chev
y Ta
hoe
- LT

Cadil
lac E
scala
de Platin
um

Linc
oln N
avig
ator
- Ultim
ate

470
Lexu
s LX

Toyo
ta Sie
nna

Dodg
e Gra
nd C
arav
an

Chry
sler
Tow
Limit n & Coun
ed E
ditio try n

BMW
- SA
V

BMW
- X5
4.8

Price

$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%

BMW

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

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

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%

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%

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

Source: Financial Statements

20,598.24
Toyota
GM
DCX

0.16
0.12
0.12

107

Appendix 14: Profitability Ratio Analysis

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%

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%

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%

Return on Equity
2001
2002
2003
17%
15%
12%
-2%
14%
-1%
9%
12%
13%
3%
25%
11%
-68%
-17%
4%
-8%
10%
8%

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%

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%

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

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

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%

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%

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%

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
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

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%

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

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%

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%

2004
15.2%
12.3%
15.8%
4.8%
4.5%
10.5%

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%

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%

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%

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%

2000
-7.0%
23.0%
-16.7%
10.0%
8.9%
3.6%

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%

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%

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%

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%

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%

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%

2004
19.8%
9.2%
17.9%
10.5%
-3.8%
10.7%

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%

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%

Avg
8.8%
4.2%
10.3%
3.2%
3.1%
5.9%

Avg
22.2%
14.6%
16.9%
17.7%
4.8%
15.2%

2001
34.2%
-1.0%
7.0%
4.7%
-3.7%
8.2%

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%

Source: FactSet online service

109

Appendix 16: Solvency Analysis

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%

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%

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%

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

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

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

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%

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%

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%

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

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

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

2003
0.15
0.20
0.30
0.34
0.36
0.27

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

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

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

Quick Ratio
2002
0.73
0.72
1.32
0.89
1.09
0.9

2001
1.15
0.85
1.45
0.79
1.05
1.1

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

Source: FactSet online service


Day Sales in Inventory

Days in Accounts Payable

Company

1999

2000

2001

2002

2003

2004

Avg.

1999

2000

2001

2002

2003

2004

Avg.

BMW AG

56

45

49

52

57

63

54

48

51

43

31

31

32

39

DaimlerChrysler AG

56

50

48

45

47

50

49

46

45

43

36

36

37

41

Toyota Motor Corp.

26

27

31

31

28

26

28

39

43

48

45

41

40

43

General Motors Corp.

37

43

48

58

72

82

57

52

61

66

68

66

70

64

Ford Motor Co.

15

17

16

16

19

23

18

44

46

45

42

39

40

43

Group Average

38

36

38

40

45

49

41

46

49

49

44

43

44

46

Company

1999

2000

2001

2002

2003

2004

Avg.

1999

2000

2001

2002

2003

2004

Avg.

BMW AG

78

86

95

96

109

123

98

86

80

100

117

136

154

112

DaimlerChrysler AG

79

79

77

78

92

100

84

89

84

82

87

103

113

93

Toyota Motor Corp.

53

73

90

96

95

90

83

40

57

73

81

82

76

68

General Motors Corp.

178

205

232

279

315

343

259

163

187

214

269

321

355

251

Ford Motor Co.

337

320

337

349

327

319

331

308

290

308

323

306

301

306

Group Average

145

153

166

180

188

195

171

137

140

155

176

190

200

166

Day in Accounts Receiveables

Cash Conversion Cycle (Days)

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%

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%

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%

1999
-22.1%
-21.4%
-14.8%
-21.5%
-23.1%
-20.6%

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%

Avg
-20.6%
-13.8%
-12.6%
-22.1%
-10.0%
-15.8%

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

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%

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%

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%

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%

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

3 Series

Z4

5 Series

6 Series

7 Series

Motorcycles

MINI

Rolls-Royce

116i

Sedan

Roadster 2.0i

Sedan

Convertible

730i

X3

M3 coupe

Enduro

One

Phantom

118i

316i

Roadster 2.2i

525i

630i

750i

2.5i

M3 convertible

F 650 GS

One D

645Ci

120i

318i

Roadster 2.5i

530i

130i

320i

Roadster 3.0i

545i

118cd

325i

525d

120d

330i

530d

318d

535d

760i

3.0i

M5

F 650 GS Dakar

Cooper

730Li

2.0d

M6

R1150 GS Adventure

Cooper S

Convertible

740Li

3.0d

630i

750Li

645Ci

760Li

X5

F 650 CS

Cooper Convertible

730d

3.0i

R 850 R

Cooper S Convertible

4.4i

R 850 R Comfort

320d

745d

R1200 GS

Convertible

Roadster

One Convertible

330d

Touring

New Sedan

523i

4.8is

R 1150 R

320i

525i

3.0d

R 1150 R Rockstar

325i

530i

330i

545i

Cruiser

320d

525d

R1200 C Classic

Coupe

530d

R1200 C Independent

318Ci

535d

R1200 C Montauk

K 1200 R

320Ci

R1200 CL

330Ci

Sports Bikes

320Cd

K1200 S

330Cd

Sports Tourer

Touring

R1100 S

316i

R1100 ST

318i

R1100 RS

320i

Tourer & Luxury Tourer

325i-

R1200 RT

330i-

K1200 GT

318d-

K1200 LT

Convertible
318ci
320Ci
325Ci
330Ci
320Cd
330Cd

Source: BMW 2004 Annual Report (BMW, 2005e)

Appendix 24: Rumelts Category Scheme for Multi-Business Firms


Ratio
Definition

BMW

Specialization Ratio

Related Ratio

Vertical Ratio

The proportion of a firms


revenues that can be attributed to
its largest single business in a
given year.

The proportion of a firms


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

The proportion of a firms


revenues that arise from byproducts, intermediate
products, and end products of a
vertically-integrated sequence
of processing activities.

Automotive + Motorcycles /
All BMW Groups 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

Market
Growth
Rate

Low

Automobile
Brands

Relative Market Share


High
Low
? Autos

? Motorcycles
Financial
Services

Relative Market Share


High
Low

High
? 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: BMWs 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

(+) BMW ownership of a bank

(+) World-wide connection of facilities via Sprint partnership


Distribution

Operations

Service

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

BMW
Banking
Services

Classy
Dealerships

Merchandising

Brand

High Returns
on Financing
High Quality

Consistent
Marketing
Hydrogen Car
Development

Effective
Management
Implementation

High Service
Standards for Dealers

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

Autos
99,043

Motorcycles
2,918

Financial
Services
2,841

Revenue

$42,544

$1,029

$8,226

Profit

$3,159

$31

$515

Costs

$39,385

$998

$7,711

Revenue by Region

Germany
Europe
North
America

Germany
USA
Italy

N/A

*all numbers in
thousands

Source: BMW 2004 Annual Report (BMW, 2005e)

Appendix 30: Lifecycle Analysis

SAV
Sales

SUV
Minivan

Intro

Growth

Maturity

Decline

Time

119

Appendix 31: VRIO Analysis


Is it exploited by the
firm?
Outcome

Resource

Is it valuable?

Is it rare?

Is it costly to imitate?

Brand

Yes

Yes. BMW has almost 100%


brand recognition

Yes. BMW is the third most


recognized car brand in the world

Yes

Sustainable
competitive
advantage

Manufacturing
capabilities at 24
locations in 13
countries

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

Sustainable
competitive
advantage

Partnership with
dealerships

Yes. Adds service value for


consumers

No

Yes. Part of overall


great experience for
customers

Parity

Yes. Car production


moved to less costly
locations to take
advantage of costs

Sustainable
competitive
advantage

Yes

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

World-wide
connection of
facilities

Yes. Most companies operate


facilities individually

Yes. Ability to manage supply


and pool resources

Yes. Requires partnerships with other Yes.


compnies such as Sprint and involves
a good deal of capital expenditures

Valuetronic valve Yes. Adds tork and power to


control patent
cars but reduces consumption
and emissions

Yes. It is patented

Parterships with
Apple, Sprint and
SIRIUS

Yes. Adds valuable new


features for consumers

Yes. These are exclusive


partnerships

Racing team

Yes. Adds to the visibiity of the No. Other automakers also have Yes. Sponsorship and team
brand
racing teams
development is exspensive

Yes. Social complexity and legal


agreements prohibit others from
doing the same

Sustainable
competitive
advantage

Yes. It will be offered


in all cars

Sustainable
competitive
advantage

Yes. New cars with


new features add to a
cutting-edge, fresh
image

Sustainable
competitive
advantage

Yes. BMW uses every Parity


opportunity to
advertise

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

Parity

Drivers training
course

No

Parity

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

Yes. It is offered to
each BMW customer

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

2005

2006

2007

2008

2009

45,886.7

47,492.8

49,155.0

50,875.4

52,656.1

35,189.0

36,420.6

37,695.3

39,014.6

40,380.1

2,765.5
10,697.8

2,862.3
11,072.2

2,962.5
11,459.7

3,066.2
11,860.8

3,173.5
12,275.9

7,118.7

7,367.9

7,625.8

7,892.7

8,168.9

2,415.7

2,500.2

2,587.7

2,678.3

2,772.1

3,579.0

3,704.3

3,833.9

3,968.1

4,107.0

254.6
3,324.4

263.5
3,440.8

272.7
3,561.2

282.3
3,685.8

292.2
3,814.8

1,293.2
2,031.2

1,338.5
2,102.3

1,385.3
2,175.9

1,433.8
2,252.1

1,484.0
2,330.9

3,579.0

3,704.3

3,833.9

3,968.1

4,107.0

Net Income
EBIT
Corporate
Tax Rate (2004)
Depreciation &
Amortization

38.9%

Capital
Expenditures
(Change in PP&E)
Incremental
Working Capital

38.9%

38.9%

38.9%

38.9%

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%

2,765.5

2,862.3

2,962.5

3,066.2

3,173.5

3,284.6

3,900.4

4,036.9

4,178.2

4,324.4

4,475.8

4,632.4 sales at of 8.5%

71.36
980.57

67.11
1,021.65

69.46
1,057.40

71.89
1,094.41

74.40
1,132.72

Constant average % of

FCF

77.01
1,172.36

NPV
CF

5,058

Terminal Value

32,491

Enterprise Value

37,549

WACC
Terminal Value Rate
(Expected Inflation Rate)

* Depreciation & Amortization Expense is included in Cost of Goods Sold


** Research & Development Expense is included in SG&A

7.23%
3.5%

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

Year 1

Year 6

Assumptions

Year 2

Year 3

Year 4

Year 5

5,000
325,000.0

30,000
1,950,000.0

66,000
4,290,000.0

80,000
5,200,000.0

84,000
5,460,000.0

83,000 from 2004


5,395,000.0 Units sold times 55,000

249,231.4

1,495,388.5

3,289,854.7

3,987,702.7

4,187,087.9

4,137,241.6 76.7% of sales

19,587.2
75,768.6

117,523.4
454,611.5

258,551.5
1,000,145.3

313,395.7
1,212,297.3

329,065.5
1,272,912.1

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

Percent of sales are constant

Units Sold
Net Sales
Cost of Goods Sold *
Depreciation &
Amortization Expense
Gross Income
Selling, General &
Administrative Expense

81,250.0

487,500.0

665,537.8

806,712.5

847,048.2

17,109.5

102,657.1

225,845.5

273,752.1

287,439.7

Operating Inc. after Depreciation


Interest Expense - Net

(5,481.4)
1,803.3

(32,888.5)
10,819.9

334,607.4
23,803.8

405,584.8
28,853.1

425,864.0
30,295.7

420,794.2
29,935.0 0.6% of sales

Pretax Income

(7,284.7)

(43,708.4)

310,803.7

376,731.7

395,568.3

390,859.1

Total Income Taxes


Net Income

(2,833.8)
(4,451.0)

(17,002.6)
(26,705.8)

120,902.6
189,901.0

146,548.6
230,183.1

153,876.1
241,692.2

152,044.2 Marginal Tax Rate


238,814.9

EBIT

(5,481.4)

(32,888.5)

334,607.4

405,584.8

425,864.0

38.9%

38.9%

38.9%

38.9%

38.9%

38.9%

19,587.2

117,523.4

258,551.5

313,395.7

329,065.5

325,148.1

R&D Expense**

NPV Analysis
Corporate Tax Rate (2004)
Depreciation & Amortization
Capital Expenditures
(Change in PP&E)
Incremental Working Capital
FCF

27,625.0
11,734.01

165,750.0
67,900.06

(23,120.93)

(136,221.54)

364,650.0
97,776.09

442,000.0
38,024.03

464,100.0
10,864.01

570.53

81,183.99

114,304.41

420,794.2

Avg. expense over six years


ending in 2004, % of sales
458,575.0 (BMW, 2005e, pp. 118-119)
(2,716.00)
126,394.32

NPV
CF
Terminal Value

85,606
3,507,188

Enterprise Value

3,592,794

WACC
Terminal Value Rate
(Expected Inflation Rate)

* Depreciation & Amortization Expense is included in Cost of Goods Sold


** Research & Development Expense is included in SG&A

7.23%
3.5%

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

Year 1

Year 2

Year 3

Year 4

Year 5

10,000
600,000.0
460,119.5

40,000
89,000
2,400,000.0 5,340,000.0
1,840,478.2 4,095,063.9

109,000
6,540,000.0
5,015,303.0

114,000
6,840,000.0
5,245,362.8

36,161.0
139,880.5

144,644.2
321,833.3
559,521.8 1,244,936.1

394,155.4
1,524,697.0

412,235.9
1,594,637.2

150,000.0
31,586.8
(10,119.5)
3,329.2
(13,448.7)
(5,231.6)
(8,217.2)

600,000.0
126,347.1
(40,478.2)
13,316.8
(53,795.0)
(20,926.2)
(32,868.7)

828,431.7
281,122.4
416,504.3
29,629.9
386,874.5
150,494.2
236,380.3

1,014,596.1
344,296.0
510,100.8
36,288.3
473,812.6
184,313.1
289,499.5

1,061,137.3
360,089.4
533,499.9
37,952.9
495,547.1
192,767.8
302,779.3

(10,119.5)

(40,478.2)

416,504.3

0.389

0.389

0.389

Year 6

Assumptions

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

NPV Analysis
EBIT
Corporate Tax Rate (2004)
Depreciation & Amortization
Capital Expenditures
(Change in PP&E)
Incremental Working Capital
FCF

36,161.0

144,644.2

321,833.3

510,100.8
0.389
394,155.4

533,499.9
0.389

528,820.1
0.389

412,235.9

408,619.8

Avg. expense over six years


ending in 2004, % of sales
576,300.0 (BMW, 2005e, pp. 118-119)

51,000.0

204,000.0

453,900.0

555,900.0

581,400.0

23,224.79

75,212.37

122,846.88

50,141.58

12,535.40

(44,246.79)

(159,300.35)

(429.41)

99,785.43

144,269.00

(2,507.08)
157,936.00

NPV
CF

100,976

Terminal Value

4,382,406

Enterprise Value

4,483,382

WACC
Terminal Value Rate
(Expected Inflation Rate)

* Depreciation & Amortization Expense is included in Cost of Goods Sold


** Research & Development Expense is included in SG&A

7.23%
3.5%

122

Scenario 3: Minivan Priced at $55,000


Income Statement

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Assumptions
Percent of sales are constant
141,000 from 2004

Units Sold

15,000

50,000

111,000

135,000

142,000

Net Sales

825,000.0

2,750,000.0

6,105,000.0

7,425,000.0

7,810,000.0

7,755,000.0 Units sold times 55,000

Cost of Goods Sold *


Depreciation &
Amortization Expense

632,664.4

2,108,881.2

4,681,716.4

5,693,979.4

5,989,222.7

5,947,045.1 76.7% of sales

49,721.4

165,738.1

367,938.6

447,493.0

470,696.3

Gross Income
Selling, General &
Administrative Expense

192,335.6

641,118.8

1,423,283.6

1,731,020.6

1,820,777.3

1,807,954.9

206,250.0

687,500.0

947,111.5

1,151,892.4

1,211,620.2

15.50% of sales, except the


1,203,087.6 first 2 years which are 25%

43,431.8

144,772.8

321,395.5

390,886.5

411,154.7

408,259.2 5.3% of sales

(13,914.4)

(46,381.2)

476,172.1

579,128.2

609,157.1

604,867.3

R&D Expense**
Operating Inc. after Depreciation
Interest Expense - Net
Pretax Income
Total Income Taxes

4,577.6

15,258.8

33,874.6

41,198.8

43,335.1

(18,492.0)

(61,640.1)

442,297.5

537,929.4

565,822.0

467,381.5 6.0% of sales

43,029.9 0.6% of sales


561,837.4

(7,193.4)

(23,978.0)

172,053.7

209,254.5

220,104.8

218,554.7 Marginal Tax Rate

Net Income

(11,298.6)

(37,662.1)

270,243.8

328,674.9

345,717.3

343,282.6

EBIT

(13,914.4)

(46,381.2)

476,172.1

609,157.1

604,867.3

0.389

0.389

NPV Analysis
Corporate Tax Rate (2004)
Depreciation & Amortization
Capital Expenditures
(Change in PP&E)
Incremental Working Capital
FCF

49,721.4

165,738.1

0.389
367,938.6

579,128.2
0.389
447,493.0

0.389

0.389

470,696.3

467,381.5
Avg. expense over six years
ending in 2004, % of sales
659,175.0 (BMW, 2005e, pp. 118-119)

70,125.0

233,750.0

518,925.0

631,125.0

663,850.0

32,626.34

80,435.46

140,187.51

55,155.74

16,087.09

(2,298.16)

(61,531.58)

(176,786.27)

(232.71)

115,059.56

162,954.19

180,078.58

NPV
CF

109,107

Terminal Value

4,996,818

Enterprise Value

5,105,926

WACC
Terminal Value Rate
(Expected Inflation Rate)

* Depreciation & Amortization Expense is included in Cost of Goods Sold


** Research & Development Expense is included in SG&A

7.23%
3.5%

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

Year 2

Year 3

Year 4

Year 5

Year 6

Scenario 1

325,000

1,950,000

4,290,000

5,200,000

5,460,000

5,395,000

Scenario 2

600,000

2,400,000

5,340,000

6,540,000

6,840,000

6,780,000

Scenario 3

825,000

2,750,000

6,105,000

7,425,000

7,810,000

7,755,000

Sensitivity Analysis: Net Income (1000's)


600,000
500,000
400,000
300,000
200,000
100,000
(100,000)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Scenario 1

(4,451)

(26,706)

189,901

230,183

241,692

238,815

Scenario 2

(8,217)

(32,869)

236,380

289,499

302,779

300,123

Scenario 3

(18,492)

(61,640)

442,298

537,929

565,822

561,837

Sensitivity Analysis: EBIT (1000's)


700,000
600,000
500,000
400,000
300,000
200,000
100,000
(100,000)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Scenario 1

(5,481)

(32,889)

334,607

405,585

425,864

420,794

Scenario 2

(10,120)

(40,478)

416,504

510,101

533,500

528,820

Scenario 3

(13,914)

(46,381)

476,172

579,128

609,157

604,867

124

Appendix 36: The Soccer Moms Team Photo

Photos courtesy of Kasey Howe

Michelle
Ronco

Lisa
Eskey

John
Brandes

Benny
Hidalgo

Fernando
Villegas

Rick
Upton
125

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