BMW Five forces analysis : Introduction
BMW is one of the leading brands of luxury cars, headquartered in Munich, Germany. Apart from the BMW brand, the BMW group also owns Mini Cooper and RollsRoyce, both of which are premium car brands. The company is known for making stylish cars and its focus upon innovation. Worldwide, BMW, RollsRoyce and Mini cars enjoy high popularity as well as brand loyalty. In 2018 and 2019, the global automobile industry has entered a difficult phase and several leading brands have experienced a decline in vehicle sales in key markets including China and the United States. However, due to its focus upon innovation and its investment in research and development, the company has maintained its sales and revenue. It has also entered into a partnership with the Chinese car maker GWM for production of electric mini vehicles. Globally, changing consumer and technology trends have led to heavier focus on digitalization and customer experience. However, BMW has several sources of competitive advantage which include brand equity, research and development, global sales and distribution network as well as a strong production network. However, the competitive position of businesses is also affected by several more forces. This is a five forces analysis of BMW, based upon the Five Forces model given by Michael E Porter. At the core of this model are five forces that affect the intensity of competition as well as the profitability of any industry. In the case of BMW as well as the entire automobile industry, these forces have a special relevance. Read how these forces affect BMW and its global business.
Bargaining power of suppliers:
The bargaining power of suppliers is affected by several factors including the size of the firm, concentration of suppliers in the industry as well as their ability of forward integration. In the automobile industry, the concentration of suppliers is higher compared to the concentration of buyers. BMW works with around 12,000 suppliers located in 70 countries. Several of its supply chain partners are themselves auto firms and the main aim of these partnerships is to produce BMW cars locally in the markets where BMW operates. For example, the company has established BMW Brilliance in China which is a joint venture between BMW and Brilliance Automotives of China to produce and sell BMW cars locally. Additionally, it partnered with the Great Wall Motor of China to produce Electric Mini cars locally. The partnership between Great Wall Motors and BMW is a 50-50 joint venture. In India also, the company has several local supply chain partners that help it produce BMW cars locally for the Indian market. Its supply chain partners in India include Force Motors, ZF Hero Chassis, Draexlmaier India, Tenneco Automotive India as well as Valeo India, Mahle Behr and Lear India. While some of the BMW suppliers are big and influential names in their local markets, their bargaining power gets moderated by several factors including BMW’s size and financial strength. BMW is a leading brand with a global market presence and partnering it is highly profitable for any of the suppliers. BMW sets the rules of the game and the code of conduct for its suppliers. The suppliers are required to adhere to the code of conduct as well as follow ethical and sustainable business practices to remain BMW suppliers. The overall bargaining power of BMW supply chain partners in this way gets to become moderately low. BMW enjoys strong brand equity globally and moreover, working in partnership with BMW is an attractive proposition for its suppliers. All these factors offer BMW higher clout in the global automobile industry. However, BMW invests in the education and training of its suppliers and also works to manage its supplier relationships well.
Bargaining power of customers:
Bargaining power of the customers is an important factor affecting the sales and profitability of any large and global business. There are several factors that affect the bargaining power of customers. In the 21st century, the bargaining power of customers has grown a lot which is due to increased competition as well as higher regulation, changing consumer trends and low switching costs. Now, the customers are well informed and conduct research before making the final purchase. Moreover, the government has grown the level of regulation favouring the customers and this has led to higher focus upon product quality as well as passenger safety. Higher competition has also added to the bargaining power of customers. Every brand is competing to grow its market share and customer base. Most of the leading brands including the closest rivals of BMW are investing heavily in research and development as well as marketing. The focus is now on entire customer experience and not just quality products. Marketing as well as after sales service have also become a core focus for luxury automobile brands. In the case of BMW, some of the leading factors that moderate the bargaining power of customers are brand equity, product quality, technological innovation and customer experience. Overall, the bargaining power of BMW customers is moderately high.
Threat of substitutes :
The threat of substitutes is an important factor that affects demand and profitability of any automobile brand including BMW. The higher the number of substitutes, the higher is the threat to consumer demand and profitability of any brand. While the threat of substitute products for BMW arises from several sources, there are several factors which moderate the threat as well. Main substitutes of BMW include the rival brands in the industry as well as the alternative sources of transportation. There are several rival brands in the market including Volkswagen, Audi, Land Rover, Toyota, Ford, Mercedes, Aston Martin and Lexus. Alternative sources of transportation like cars, buses, taxis and flights also pose a threat before BMW. However, these threats get moderated by the following factors. BMW makes stylish cars and owning one is a matter of class, luxury and prestige for most BMW car owners. Moreover, having your own luxury car means higher convenience in personal life. BMW offers a comparatively better customer experience than most substitutes. The passenger safety and convenience as well as luxury which BMW car offers is matched by very few rival brands in the market. The overall threat of substitutes for BMW is moderate. Higher popularity and customer loyalty also act to moderate the threat from substitute products.
Threat of new entrants:
The threat of new entrants in the automobile industry is very low which is because of the higher entry and exit barriers. On the one hand while the entry barriers have continued to grow bigger with time, exit barriers are also higher now. Several of the leading brands have formed partnerships to survive the growing number of challenges in the international automobile market. Some of the main barriers that prevent new players from entering the market include fierce competition, large capital investment, need for skilled human resources, technological barriers and brand equity. Any new brand would have to make a considerable capital investment to build a strong source of competitive advantage. Competition in the automobile industry is already quite fierce and the incumbent players make huge investments into research and development as well as marketing to retain their market shares. Apart from that, any new player entering the market will need time and money to build brand recognition and gain market share. None of these things is possible overnight. Except Tesla, there is hardly any new brand that has been able to build a remarkable presence globally in the automobile industry during the recent years. Growing legal regulation of the automobile industry has also made it difficult for new players to enter the market. Not just product quality but passenger safety and sustainability have also become major concerns for auto firms. All these factors discourage new players from entering the automobile industry. The overall industry environment has also become highly challenging. New businesses would also need to invest a lot in building production, supply and distribution networks which works as a barrier to entry.
Intensity of Rivalry
Competition is quite fierce in the automobile industry. There are several rivals of BMW in the market like Audi, Mercedez, Skoda, FCA, Ford, Toyota, Tesla and Land Rover. Even if new players cannot enter the market or become a threat overnight, the existing players are quite aggressively investing in marketing as well as research and development to produce innovative vehicle models and grow their market share. Luxury car brands like Audi, Mercedes or Tesla are highly cautious regarding customer experience and passenger safety. These brands focus upon customer experience and technological innovation. They are investing in digitalization and production of environmentally safe car models. Moreover, with growing competition, companies are forming partnerships to strengthen their competitive advantage and produce cars locally for sales in local markets. BMW has also entered into partnerships with other car businesses like Daimler Chrysler and Great Wall Motors of China. While these strategic partnerships are helping the existing brands strengthen their competitive position and customer loyalty, they are also helping them penetrate new markets. Given the intensity of rivalry, BMW has grown its focus upon sustainability, vehicle design, customer experience as well as research and development. There are more factors that help BMW moderate the competitive pressure and include brand equity, supply chain, international manufacturing network as well as marketing. All these factors have helped the BMW group retain its leading position and market share in the automobile industry. However, reducing its focus upon innovation or product quality will lead to loss of market share. So, continuous focus upon R&D as well as customer satisfaction is essential to beat the competitive pressure. The overall intensity of rivalry in the industry is very high.
Based upon the Porter’s Five Forces Analysis, BMW’s competitive position in the global automobile industry is strong. Apart from its strong bargaining power against the suppliers, it has more sources of competitive advantage like technological innovation, better customer experience and a global supply chain and manufacturing network. Competition in the automobile industry has continued to grow intense. However, despite intensifying competition, BMW has retained its leadership position by focusing upon innovation and product quality. Porter’s five forces analysis shows that BMW is in a strong position in the industry and will continue to enjoy superior growth in the near future.
Additional Sources: BMW Annual Report 2018.