History and strategic management of BMW

Bayerische Motoren Werke AG (BMW) is a German manufacturer of passenger cars, motorcycles and engines, as well as a provider of financial services. The company was founded in 1916 under the name of Bayerische Flugzeugwerke AG (BFW) with the purpose of manufacturing airplanes, but later changed its business focus towards car production. BMW’s stock is listed on the Frankfurt Stock Exchange and has been included in the German blue chip stock market index DAX since its first composition in 1988. Today, BMW counts 96,230 employees worldwide. While its revenues amounted to EUR 50.68 billion in 2009, its net income reached EUR 210 million. Appendices 1 and 2 provide further details about the company’s financial situation. BMW is one of the ten biggest car manufacturers on global scale. Its brands BMW, Mini and Rolls Royce are found among the strongest premium brands in the automotive industry. Car models range from small-sized cars up to high-end luxurious limousines. In 2009, BMW sold more than one million passenger cars worldwide. In total, 16 manufacturing plants have been established in Germany, Austria, United Kingdom, South Africa, USA and China. These are rounded up by assembling plants in Russia, Egypt, India, Thailand and Indonesia. Only 47% of automobile sales can be attributed to Europe, USA and Japan, demonstrating BMW’s worldwide strong presence.

Company History

Until 19451, [4] 

Soon after the end of World War I in 1919, certain regulations of the Versailles Armistice Treaty forced BMW to bring its aircraft and aircraft engine production to a halt. As a consequence, BMW started motorcycle production in 1923, seconded by production of cars in 1928. As soon as Germany began rearmament in the 1930s, manufacturing of aircraft engines was once again started. This led to significant expansion of the company’s size and a revenue proportion of 90% of its aircraft and aircraft engine businesses. However, the company experienced substantial asset losses during World War II. More than 5,000 employees were drafted by the German military, which led to a sensitive loss in production knowledge. Additionally, several production sites were destroyed by air strikes of the allied forces.

1945 to 1958 [5] , [6] 

Due to the annexation of BMW’s only automobile production site in the Soviet zone of occupation in East Germany and destruction of the Munich production site, BMW needed several years to ramp-up its manufacturing activities again. In 1948, production of the first post-war motorcycle started, followed by the first post-war passenger car in 1952 – the high-end limousine BMW 501. However, BMW incurred losses of about DEM 4,000 for every car manufactured due to the underlying complex production processes. Unfortunately, even production under license of an Italian small car named BMW Isetta could not avoid BMW running into increasing financial turmoil.

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1959 to 19695,6

After facing high financial losses during the years 1958 and 1959, main shareholders proposed selling the company to Daimler-Benz AG, a rivaling German car manufacturer. However, other share- and stakeholders successfully fought off this proposal by appealing against BMW’s inaccurate financial statement. As a result, the company remained independent, but was still in need of new investors in order to obtain the necessary financial funds to develop a new medium-sized car model. Salvation was found in Herbert Quandt, a well-known German industrialist. A significant capital increase and the sell-off of one aircraft engine plant provided the company with enough financial strength to introduce its new model BMW 1500 in 1961. Financial results started taking off again, fostered by the introduction of further models and the positive effect on brand and reputation by several trophies in motor sports.

1970 to 1993 [7] , [8] 

The new company CEO Eberhard von Kuenheim (1970-1993) managed to increase BMW’s revenues from car production up to DEM 28 billion in 1993, which marked an 18-fold multiplication in comparison to 1970. Two new production sites were set up in Germany, as well as new plants in Austria, South Africa and the United States. During the same time, the number of employees increased from 23,000 to 71,000. In 1973, the company opened its prestigious new administration building Vierzylinder in the heart of Munich, as well as its geographically very close new think-tank and R&D center Forschungs- und Innovationszentrum (FIZ) in 1990. Furthermore, BMW successfully shaped its reputation as a manufacturer of innovative, sporty and comfortable vehicles, underlined by the introduction of the three main product lines Series 5 in 1972, Series 3 in 1975 and Series 7 in 1977, as well as an additional line for niche sports coupés (Series 6). During the 1980s, BMW transformed its production and organizational structures towards an orientation of flexible and lean production, even though Japanese production principles could not be considered as well-known in Europe at this time.

1994 to Present [9] , [10] , [11] , [12] 

Soon after von Kuenheim stepped down as CEO, the company believed that it could only survive on the world market if positioned as a producer of large volumes of passenger cars. This goal should be achieved by the takeover of the British car manufacturer Rover Group in 1994. However, Rover’s difficulties to reach satisfying build quality, its outdated product portfolio, as well as its low brand image and bad customer reception of design rendered obtainment of projected sales numbers impossible. Furthermore, internal organizational problems arose from bad collaboration between Rover and BMW, and appreciation of the British Pound in the years 1994 to 2000 by the factor 1.3 multiplied Rover’s losses incurred. As a consequence, BMW sold off its Rover division in 2000 to British investors for a symbolic price. Only remaining part with BMW was the car brand Mini. At this point, this failed takeover had cost BMW DEM 9 billion. After acquiring the brand name Rolls Royce in 2003, BMW was able to launch the already developed high-end car model Phantom.

After the Rover disaster, BMW focused once again on premium models and turned from a regionally manufacturing exporter of three main series into a truly global producer of a broad range of premium series as well as niche models, and can be seen as the first German car producer offering models from compact cars up to high end luxury cars. Its product portfolio now encompasses the Mini, Series 1, 3, 5 and 7 as well as Series Z sports cars and Series X sports activity vehicles. One important factor in achieving the underlying fast-paced development and introduction of new models was the establishment of close cooperation between suppliers and BMW’s interdisciplinary R&D teams, supported by a substantial improvement of knowledge transfer from and to its R&D center FIZ – constituting a comparative advantage over many other carmakers. New customers could be captivated by a well-elaborated combination of volume-oriented series with specialized niche models under simultaneous retention of high quality and technological standards. BMW has now evolved from a regional carmaker to a truly global organization with 47% of total sales and 39% of total unit production abroad.

Industry Overview and Market Trends

3.1 Industry Overview [13] 

After experiencing several years of constant growth, the automobiles and components industry experienced a strong sales decline in the years of 2008 and 2009. In 2010, recovery at a limited rate is expected, succeeded by stronger growth towards 2014. In total, an average compound annual growth rate (CAGR) of 9.2% is expected for the period of 2009 to 2014. Looking at the sub-segment of automobiles, total revenues of USD 1,469 billion could be achieved in 2009. Most revenues are incurred in the automobiles sub-industry (72.6%), leaving a share of 27.4% for automobile components. From a geographical perspective, most sales can be counted in Europe, followed by North America and Asia-Pacific. When looking at revenue shares of automobile companies, it can be seen that no player achieves a share higher than 10%. Industry fragmentation can be regarded as medium to high. The following figures show an overview of the industry’s value and provide several segmentations from different perspectives.

Figure 1: Automobile and Components Industry Value (2005-2014e)

Source: Datamonitor 2010

Figure 2: Industry Segmentations

Source: Datamonitor 2010

3.2 Competitive Landscape [14] , [15] 

In order to assess the competitive landscape, the framework of Porter’s Five Forces (as shown in Figure 3) will be applied to the automobiles and components industry, while focus will lie on the automobiles industry. Manufacturers are seen as producers in the areas of passenger cars, light trucks, motorcycles, automobile aftermarket parts and equipment including tires. Key buyers include independent dealers and distributors, warehouses and distribution centers, new vehicle manufacturers and service departments and retail stores. Manufacturers of raw materials, assembled and semi-assembled components and providers of energy, freight and transportation represent key suppliers.

Figure 3: Porter’s Five Forces

Source: Porter 2008

3.2.1 Bargaining Power of Buyers [16] 

In this industry, buyers often reveal great financial strength enabling them to execute purchases of large quantities as well as entering into long term contracts in order to negotiate price reductions. However, the large amount of buyers in the market weakens the resulting power. Furthermore, the presence of highly recognized brands pushes many big buyers towards entering contracts with reputable producers in order to enhance their sales margins by offering exactly the products demanded by end customers. Additionally, many dealerships are selling only one manufacturer’s products, and therefore face significantly lower buyer power due to their dependence. Overall, buyer power in this industry can be considered to be moderate.

3.2.2 Bargaining Power of Suppliers16

Various inputs such as raw materials, components, freight and transportation and energy are demanded by the automobiles and components industry. Raw materials are usually provided by large companies delivering to many different markets and sectors. Their dependency on the automobile industry is therefore limited and puts them in a comparatively strong position. Recently, raw material costs in general have been on the increase, impacting both car and component manufacturers, which are now evaluating the use of cheaper alternative materials. However, car producers often use a range of supplies for most of their inputs, thus limiting dependencies on individual suppliers. In sum, supplier power is seen as moderate.

3.2.3 Threat of New Entrants16

As automobiles and car components are mostly produced in large quantities, large investments in fixed assets need to be taken by new entrants. Furthermore, intellectual property and technical expertise are requirements necessary for achieving competitive advantages over competitors. Furthermore, environmental regulations and government specifications in regard to products have to be met and therefore represent additional entry barriers. Also, strong brands of incumbents render market entries difficult. In summary, threat of new entrants is moderate.

3.2.4 Threat of Substitutes [17] 

While auto components cannot be substituted, main substitution threat to the car industry arises from used cars. During the recent economic crisis, used car sales accelerated as potential customers of new cars were simply unable to afford these anymore. However, scrappage bonuses paid to consumers replacing their old cars were implemented by numerous governments and rendered new cars more affordable again. Importantly, new cars subject to recent regulations are more economically friendly and also more reliable than used cars. Overall, threat of substitutes is moderate in the automobile industry.

3.2.5 Rivalry among Existing Competitors17

Numerous multinational companies exist within the global automobiles and components industry, making competition considerably tough. The once dominating brands from the United States are pushed aside by globally present Japanese manufacturers. As an effect of the economic crisis, worldwide car production slowed down and led to manufacturers attempting to sell off their surplus stock. Production costs rise due to increasing raw material prices, and companies are under strengthening pressure to fulfill global environmental standards while trying to achieve competitive advantages. Competition concerns the areas of performance, product design, price, reputation and customer service. Although industry value has been declining recently, the resulting effect on rivalry is marginal. As a conclusion, it can be stated that rivalry among existing competitors is strong.

3.3 Leading Competitors

Due to the large number of multinational automobile manufacturers, only a short overview can be provided in this paper. Biggest company in terms of both revenues and units produced is the Japanese corporation Toyota, followed by German Volkswagen and American General Motors. These companies focus mainly on high-volume cars with relatively low presence in the premium segment. As can be seen from Figure 4, BMW finds itself at the lower end of the top 10 car producers. Regarding the premium segment, however, only the German manufacturer Daimler is bigger in size.

Figure 4: Revenues and production volumes of leading automobile companies

Source: Annual Reports of the Respective Companies

3.4 Market Trends [18] 

During the recent years, several market trends can be observed. First of all, customers of today can choose between large varieties of car models within a certain market segment. 20 years ago, only a handful of models were offered in each segment, while today usually several dozens of alternatives are available. Additionally, customers’ willingness to pay decreases constantly. Underlying factors are the presence of new competitors and a price sensitization of customers due to aggressive marketing campaigns. As a consequence, customers are often not willing to reward innovative products, especially not in lower market segments. It can also be shown that inflation-adjusted price levels of automobiles have remained stable during the last years. For example, the inflation-adjusted price for a volume car like the Volkswagen Golf stayed almost unchanged during the years 1990 to 2002, although new technologies like the antiblocking system (ABS) and the electronic stability program (ESP) have been implemented.

Consequences of the observed trends are tightening competition leading to increased cost pressures on producers. In order to defend market shares, car manufacturers need to offer highly innovative and differentiating products. Seen in combination with cost pressures, the necessary R&D efforts can only be financed by achieving process optimizations in different elements of the value chain.

Worldwide R&D Sites [19] 

BMW currently counts 8,900 employees in its global R&D network and spent EUR 2,488 million on R&D in 2009, representing a current R&D ratio of 4.8%. At this moment, about 60,000 design utilities and protective rights have been developed. Thereof, 13,000 are patents.

Figure 5: R&D Expenses and Headcount

Source: BMW Group 2009

BMW Group maintains eleven R&D sites in five countries. The R&D center FIZ in Munich is supported by R&D units in Germany, Austria, United States, China and Japan. Main facilities will be analyzed in the following.

R&D Center FIZ in Munich, Germany [20] 

In the FIZ, all activities necessary to develop a new car model can be conducted. These include engineering, prototype workshops, research, design, as well as a pilot plant for practicing launches of new car models. In this location, 8,500 people are employed. Usually, interdisciplinary teams consisting of members with engineering, marketing, production and designing backgrounds conduct their work while intensively cooperating with respective competence centers. In 2002, the innovation management process applied in FIZ was awarded by the Product Development and Management Association (PDMA).

Palo Alto, U.S.A. [21] 

In 1998, BMW established a R&D site in Palo Alto, California. 16 researchers (8 locally hired, 8 relocated from Germany) skilled in different technological areas tap into Silicon Valley’s innovation and knowledge cluster by staying in close contact with local institutions and companies. Informal and formal meetings with external scientists and engineers, as well as with BMW employees from Germany are frequently scheduled and allow the company to experience all benefits provided by face-to-face meetings. Originally established as a listening post, the Palo Alto office screens and monitors potentially relevant trends as well as new technologies, and sends selected innovation concepts to BMW Germany. Additionally, hardware prototypes are developed. Interestingly, technologies in this context may also be found in the areas of software or electronics. Innovation concepts are developed and tested on-site by cross-functional teams and subsequently sent to Germany if evaluated as promising.

Tokyo, Japan21

BMW’s Tokyo office was established in 1981. By then, the company opened this subsidiary in order to obtain access to the Japanese market by the sale of a limited amount of models. However, market demand increased so quickly that BMW decided to give its Tokyo office responsibility for technology monitoring and contact facilitation, as well as testing and validation of technical developments. Out of the 26 employees in the office, three members work in technology monitoring and development. Their tasks are to collect application knowledge and provide BMW Germany with promising contacts to Japanese institutions and companies. Each R&D employee is specialized on a certain technology area and engages in extensive networking activities with persons external to the company. Therefore, strong communication and networking skills as wells as comprehensive understanding of the Japanese language and culture are the prerequisites needed.

Beijing, China [22] 

BMW’s technology office in China is situated within the national sales company and fulfills several duties connected with car distribution described in the following. During the homologation process, cars and components are tested and evaluated during a period of up to 9 months in order to be approved by the government for the use in traffic. Further testing activities are required due to challenging environmental conditions specific to China, such as high pollution, humidity and temperature levels. Due to the ever-increasing importance of the Chinese market, the technology office is also responsible for market research activities assessing specific needs of local customers. Furthermore, links with local suppliers are established by the technology office. Important to note is that due to an unsecure environment of intellectual property protection, no core R&D activities are conducted in China.

R&D Strategy and Management

Innovation Management Process22, [23] 

The innovation management process implemented at BMW considers three main issues. First of all, innovations need to be aligned with strategic goals of the company. In order to ensure this, several topic clusters (e.g. driving experience) were identified to which new innovations need to adhere to. Furthermore, innovation projects need to apply for funding then allocated by special interdisciplinary teams. These teams determine each projects priority taking into consideration strategic alignment and allowing competition between global inputs, internal and supplier innovation. Importantly, a project champion from top-management supports these teams by acting as innovation promoter. Additionally, innovation transfer management is used to gain understanding about which innovation can be used for which car models and to permit unproblematic innovation transfer to the series development, therefore taking care about an innovation process with a clear goal at sight. The use of promotors in this context can only be recommended. However, BMW needs to make use of several promotor types in order to overcome unwillingness and technical ignorance, and to achieve optimal process coordination. Therefore, technology, power and process promotors should be assigned to projects revealing certain types of organizational resistance. Empirical studies showed that existence of promotors and division of labor between them leads to a positive effect on innovation.

Organizational Concept [24] 

Researchers suggest that different organizational concepts can be applied depending on localization need, need for knowledge tapping, cost pressure or synergy potential between R&D sites. Well-known concepts are ethnocentric centralized R&D, geocentric centralized R&D, R&D hub model, polycentric decentralized R&D and integrated R&D network. Quite often, one certain organizational concept is appropriate for a whole company’s R&D organization. In the case of BMW, we can observe a R&D hub model. Central R&D sites are located in Germany and Austria, while listening posts have been established in the United States, Japan and China. The FIZ in Munich takes technological lead and exercises tight control over the R&D sites located abroad. This setup allows for high efficiency due to good R&D coordination and avoidance of redundant R&D activities. Synergies can well be exploited. However, coordination mechanisms lead to high costs and consumption of time, and creativity and flexibility of research might be suppressed by central directives.

Network Archetypes [25] 

When looking at BMW’s product portfolio, it quickly becomes clear that the R&D hub model as organizational concept might not necessarily represent the optimal environment for all technology modules built into the company’s cars. For example, the development of a Rolls Royce car obviously requires a very different approach than the development of an Apple iPod integration solution. In order to flexibly adapt to the development needs of each technology module, BMW assesses all development projects by their underlying market complexity and technology complexity and then chooses a specific network archetype as depicted in Figure 6.

Figure 6: Complexity and Corresponding Network Archetypes

Source: Stahl and Bergfeld 2008

An integrated knowledge and technology network is used when products need to use many modularized components and still have to be adaptive to several market requirements. This network type can provide the right knowledge for early research steering while using international R&D sites to enhance market responsiveness by locally developing certain parts. The global-to-center knowledge network is used when products are developed in the R&D center and inbound knowledge networks are used to ensure effectiveness. A center-to-global technology network is most appropriate when products can be developed in peripheral sites. Outbound technology networks provide for adaptability to markets. When products are developed by peripheral sites for all other network participants, a periphery-to-global technology network is present. It can be concluded that the flexible selection of a certain network archetype for every technology module represents a good way to meet each module’s requirements. However, it needs to be assured that module categorization does not turn into a playing field for political games among managers. Important to note is that the functioning of different network archetypes is highly dependent on efficient and effective composition of teams equipped with the skills to develop the technological modules assigned. In the following, it will be analyzed if virtual R&D teams can fulfill this requirement.

Virtual R&D Teams [26] 

Virtual teams are spread over a number of locations, and their boundaries are adjusted depending on their tasks. They substantially rely on the use of modern communication and information technologies. R&D activities at BMW are organized in matrix form with one axis for functional capabilities (e.g. car body, chassis, engines) and one axis for the car series (e.g. series 3, 5, 7). A supervisory project team is responsible for organization of the projects and coordinates integration and module teams. Each car part is handled by module teams specifically staffed for a certain purpose (e.g. engine for a 320d model), while R&D employees can be staffed in several teams. Development projects are split into different phases from project definition to line maintenance. Depending on the phase, module teams are very flexible and constantly change their size and member composition except for module and project managers. Simultaneous engineering teams (SE teams) are set up when development occurs in cooperation with external partners such as for example technology suppliers, whose experts then become members of the team. Communication between BMW and suppliers is carried out by extensive use of internet, while quality of knowledge transfer depends on development skills and autonomy of the supplies involved. In summary, the core team represents a physically collocated steering team assuming the role of a system architect and as a central node being responsible among others for product architecture, coordination and control of decentralized activities, and system integration. Local teams take on module development and place their team leaders in the core team. Depending on the situation, specialists take care of functional problems in virtual teams. Local line managers are supervised by a steering committee guaranteeing alignment with relevant project interests. The overall setup is shown in Figure 7 and can be described as an organization of transnational R&D teams by the use of a core team as system architect.

As a conclusion, it can be stated that virtual teams significantly reduce the need to collocate team activities and therefore allow for cost reductions in expenses for e.g. office space. However, they are not able to resolve issues connected with trust-building, team spirit and transfer of tacit knowledge, so that travel between sites in order to allow for face-to-face meetings still remains a necessity. Also, high demands rest on the project managers, which need to deal with differing cultural backgrounds of the employees involved.

Figure 7: Team organization at BMW car development

Source: Boutellier et al. 2007

A recommendation in this context can be to pursue an on-site policy, as for example exercised by the company Hitachi. This policy determines that managers are expected to visit R&D sites and communicate with their team members face to face instead of researchers asking for appointments with their supervisors in distant locations or only delivering electronic reports. In summary, BMW found an appropriate organizational form to minimize the disadvantages of virtual R&D teams while at the same time leveraging its global engineering and innovation capabilities.

Organizational Inertia [27] , [28] 

Growing importance of foreign markets and resulting need for more local responsiveness as well as increasing cost pressures might render it necessary for BMW to locate an increasing share of research activities abroad. This process will eventually have consequences on overall R&D organization and makes it necessary for the company to be well prepared for changes in its organizational concept. Once the company needs to transform its global R&D activities, it will eventually have to adapt or change its organizational concept from a R&D hub model to an increasingly more adequate integrated R&D network. In order to be prepared for this, awareness has to be raised about organizational inertia usually arising from such an adjustment. In order to overcome organizational inertia, formal and informal meetings between BMW’s as well as its suppliers’ researchers need to occur on frequent basis. This serves as a socialization mechanism leading to creation of higher trust levels and social ties, which are essential for taking full advantage of the company’s R&D capabilities.

Conclusion

Taking all performed analysis into consideration, it seems that BMW has deliberately set up a well-elaborated R&D organization and management. The establishment of a R&D hub model combined with the possibility to select a specific network archetype on project basis, as well as frequent use of modern R&D forms like virtual teams, can be seen as a proof. However, the performed industry analysis revealed increasing competitive pressures within the automobile industry, which might make it nec