A Company Analysis
Department of Business Administration
Autumn 2006
Authors: Hiba Larsson and Christian Falkemark
Thesis Adviser: Thomas Polesie
Master Thesis, 10 points
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A Company Analysis
Department of Business Administration Autumn 2006
Authors: Hiba Larsson and Christian Falkemark Thesis Adviser: Thomas Polesie Master Thesis, 10 points
Abstract
Master Thesis in Business Administration School of Economics and Commercial Law Gothenburg University Autumn 2006
Authors: Hiba Larsson and Christian Falkemark Thesis Adviser: Thomas Polesie Title: BMW – A Company Analysis Thesis Language: English
Background: The automotive industry is distinguished by a highly competitive market. Thus, the actors on the market struggle with increasing cost of production, development and mature markets. With the aim to increase profit margins and reduce costs, Volkswagen, GM and Ford are some companies, which use the same components in different car models and car brands. These companies have in other words succeeded in synergising research and development effects within the company despite car model and business area. By a contrast, BMW, an individual actor, has yearly shown strong financial results and has retained its market shares. This becomes of interest to study more profoundly, in order to find the factors behind a successful company and a strong brand.
Purpose: The purpose of this thesis is to analyse the development of BMW during the past five years. Not only are the financial statements taken into consideration. In addition, a comparison to competitors and the market situation is also made.
Delimitation and assumptions: This thesis is delimited to an analysis of BMW between the years 2001-2005. The thesis is based on the assumption that BMW is the most successful automotive manufacturer in the premium segment.
Methodology: In the study of BMW both primary and secondary data are used. The primary data consists of an interview and secondary data is collected from annual reports.
Results and Conclusion: BMW is a well known and highly valued brand and has high diversity in the product portfolio. BMW possesses high internal competence and the company develop a large part of the car by themselves. The emerging markets in South East Asia, Russia, Eastern Europe and South America have shown evident growth developments. Eminent production, transportation and raw material costs have both dampened margins and affected the buying power of consumers likewise as high oil prices.
Suggestions for further studies: What would be of interest are the services that the automobile manufacturers offer beside the cars, the after sales services, like financial services for example. In addition, future research could also include studies of customer loyalty in association to the after sales services.
- Introduction
- 1.1 Background
- 1.2 Purpose
- 1.3 Delimitation and Assumptions
- 1.5 Hypotheses
- 1.6 The General Outline of the Thesis
- Methodology
- 2.1. Choice of Study...............................................................................................................
- 2.2. Data Collection................................................................................................................
- 2.2.1. Primary Data
- 2.2.2. Respondents
- 2.2.3. Secondary Data
- 2.2.4. Criticism of the Sources
- 2.3. Practical Procedure........................................................................................................
- Theoretical Framework
- 3.1 The Square Model
- 3.2 The Assumptions of the Square Model
- 3.2.1 Type of Model.........................................................................................................
- 3.2.2 Simplicity
- 3.2.3 A Going Concern
- 3.2.4 The Elements...........................................................................................................
- 3.2.5 The Time Aspect
- 3.2.6 The Enumerates.......................................................................................................
- 3.2.7 The Information.......................................................................................................
- 3.3.1 The Assumptions of the Triangle Model.....................................................................
- 3.3.2 Type of Model.........................................................................................................
- 3.3.3 Simplicity
- 3.3.4 A Going Concern
- 3.3.5 The Elements...........................................................................................................
- 3.3.6 The Time Aspect
- 3.3.7 The Enumerates.......................................................................................................
- 3.3.8 The Information.......................................................................................................
- 3.4 SWOT-Analysis
- Company Description
- 4.1 The History of BMW
- 4.2 BMW Today...................................................................................................................
- 4.3 Corporate Strategy......................................................................................................
- 4.5 Collaborations
- The Triangle Analysis - Objects........................................................................................
- 5.1 The Products...............................................................................................................
- 5.2 The Markets................................................................................................................
- 5.3 Future
- The Triangle Analysis - Objects........................................................................................
- The Triangle Analysis - Subjects
- The Triangle Analysis – Financial Figures
- 7.1 Year
- 7.2 Year
- 7.3 Year
- 7.4 Year
- 7.5 Year
- Branch and Competitive Analysis
- 8.1 The Automotive Industry
- 8.2 New Markets
- 8.3.1 Audi.........................................................................................................................
- 8.3.2 Porsche
- 8.3.3 Mercedes-Benz........................................................................................................
- Future Performance Analysis
- Concluding Discussion
- Areas for Future Research....................................................................................................
- References
- Appendix
- Appendix
- Figure 1 The General Outline of the Thesis Table of Figures and Graphs
- Figure 2 The Square Model......................................................................................................
- Figure 3 The Triangle Model
- Figure 4 The SWOT-Analysis..................................................................................................
- Figure 5 BMW Group Deliveries of Automobiles...................................................................
- Figure 6 BMW Group Deliveries by Region and Market........................................................
- Figure 7 BMW Shareholder Structure
- Figure 8 BMW Brand Cars in
- Figure 9 Contract Portfolio of BMW Financial Services.........................................................
- Figure 10 BMW Group - Key Automobile Markets
- Figure 11 Metrics for Year 2001 in euro million
- Figure 12 Metrics for Year 2002 in euro million
- Figure 13 Metrics for Year 2003 in euro million
- Figure 14 Metrics for Year 2004 in euro million
- Figure 15 Metrics for Year 2005 in euro million
- Figure 16 Metrics for Year 2006 in euro million
1. Introduction
1.1 Background
The automotive industry is distinguished by a highly competitive market. Thus, the actors on the market struggle with increasing cost of production, development and mature markets. The mature markets are constituted by the Western countries such as the North American and European markets. Hence, the producers face challenges in decision-making to manage continuous business operation and profitability. Among the market leading companies one can recognize different strategies to maintain competitive positions; Toyota has concentrated on comparatively low-price cars, high quality and efficient production also known as Kaizen: continuous improvement of production. Toyota has in many ways been pointed out as a bench marker in the automotive industry and there are many other companies who try to imitate Toyota’s way of working. With the aim to increase profit margins and reduce costs, Volkswagen, GM and Ford are some companies, which use the same components in different car models and car brands. These companies have in other words succeeded in synergising research and development effects within the company despite car model and business area. A development that also can be seen is investments in the Asian markets as well as the East European markets. These markets are not considered as mature and many analysts predict that these markets will be in highly expansive states and significantly grand new segments are to be conquered. The development in these markets is also signified by new production allocation of the market leading companies in try to find low-price labour and manufacture costs 1. BMW, Bayerische Motoren Werke AG, is one of the leading manufacturers of premium cars in the automotive industry. The company is well known for its distinctive design, high quality and luxurious approach. Despite threats of low-price substitutes and other threats from competitors, BMW has yearly shown strong financial results and has retained its market shares. This becomes of interest to study more profoundly, in order to find the factors behind a successful company and a strong brand. Further, we will also study the future potentials and consistency.^2
(^1) World Automotive outlook: Pressures Remain, 2005, Economist Intelligence Unit, www.eiu.com (^2) Driven: Inside BMW, the Most Admired Car Company in the World, 2004, David Kiley
1.5 Hypotheses
- BMW is a successful company that has kept its market shares due to high quality, distinctive design and a luxurious approach.
- BMW has not adjusted their car models after different markets and has therefore obtained a legitimate and solid brand well recognised by the customers irrespective of nationality.
- BMW will continue its success due to unremitting innovation and segment differentiation concentrating on customers with a higher purchasing power.
- BMW will at intervals face difficulties due to a highly volatile raw material market contributing to high costs of production.
- BMW will face a higher competition in the automotive industry due to increased environment awareness among the customers requiring cars with low emissions.
1.6 The General Outline of the Thesis
Accounting Analysis
SWOT-analysis of BMW
Introduction
Theory
Methodology
Subjects
Objects
Company Description
Branch and competitive Analysis
Results and Comments
Areas For Future Research
Accounting Analysis
SWOT-analysis of BMW
Introduction
Theory
Methodology
Subjects
Objects
Company Description
Branch and competitive Analysis
Results and Comments
Areas For Future Research
Accounting Analysis
SWOT-analysis of BMW
Introduction
Theory
Methodology
Subjects
Objects
Company Description
Branch and competitive Analysis
Results and Comments
Areas For Future Research
Introduction
Theory
Methodology
Subjects
Objects
Company Description
Branch and competitive Analysis
Results and Comments
Areas For Future Research Figure 1 The General Outline of the Thesis
2. Methodology
This chapter will outline the most important choices of methods for this study. This choice is often a critical factor in the case of writing a thesis. The approach of solving the problems of the thesis is of equal importance as the selection of the material used in aim to achieve a good result. 3
When the authors initially wrote this thesis, the intension was not to take the position of an expert in company valuation. Instead their aim was to investigate the development of a company based upon information and knowledge obtained from previous education and studies. Moreover the underlying company for this valuation is BMW, since the authors aim to analyse a well reputable company with a strong market brand in a highly competitive market. 4
2.1. Choice of Study
A company analysis could be formed as a case study which implies that the investigation is carried out for instance on a smaller group, on an individual or on a company. In a case study one examines a phenomenon in its real environment or in its context where the boundaries between phenomenon and context are not given. Because of this, case studies are often considered especially applicable in evaluations where the objectives often are very complex. In that way one tries to explain, understand or describe large phenomenon, organisations or systems that could not be investigated with another methodology.^5 It is especially appropriate to use case studies when one has the intention to study a process or a change. The purpose is to get a comprehensive picture of what one are studying, aiming at obtaining full information. 6
2.2. Data Collection
An investigation could be based on two types of data, primary and secondary data. The primary data is information that has to be collected. Secondary data is data that is already accessible. In the study of BMW both primary and secondary data are used. 7
(^3) Holme, Solvang (1991) (^4) Own reflections (^5) Backman, J. (1998) (^6) Holm, Jönsson, (2006), TOTAL – från olja till energi (^7) Wiedersheim-Paul & Eriksson (1991)
that the authors will value the information better and by this distinguish facts from subjective opinions. 10
2.3. Practical Procedure
Initially it is of importance to find information about the chosen company. This information is mainly collected from the annual reports given by BMW between the years 2001-2005. In addition, information is also obtained from the official website. This is also the case in the competitive analysis where the information is taken from the competitors’ websites and the annual reports. Summarizing, the internet is the main information source used in this thesis. When over viewing the current and future situation of BMW a SWOT-analysis was used as a base. To enable an analysis and finding a structure of the information in a proper way, supplementary literature and theory has also been studied. These have consisted in different theories both in the areas of finance, accounting and marketing to extend the foundation that the analysis is based upon. 11
(^10) Own reflections (^11) ibid
3. Theoretical Framework
In order to enable an analysis and a good structure of the thesis, different theories are used. In this chapter a presentation of the theories used are described.
3.1 The Square Model
Figure 2 The Square Model
The square model gives a simplified vision of a company. Furthermore the model illustrates a synthesis of the balance sheet and the income statement for a specific period of time. Thus, the influence of human factors and other potential important factors are not taken into consideration when using the square model. When creating a square model the borderlines of the model are formed proportionally after the numbers in the income statement and balance sheet. Hence the financial situation and the relations between the financial measures are visualised. The model is divided into different elements of accounting; assets, liability, equity, costs, income and profits or losses. Thus it enables an analysis of the relationship between the numbers. Moreover one can see whether the company is profitable or not, looking at the horizontal lines of the model. Coming across on the right side of the square model, one can see the relation between liabilities and equity. It becomes apparent how a firm finances their assets, whether the funds are generated through the shareholders or from external leverage. The square model is used when comparing a company’s development within a certain period. The model can also be used in a comparison between several companies. Due to the changes in the size of the squares, the visualisation of the square model facilitates an instant overview of the general statement of a company’s financial situation. Giving some examples, capital
Costs Profit
Revenue (Loss)
Liabilities
Equity
Assets
3.2.5 The Time Aspect In aim to allow a comparison between different periods, the same time period has to be used. Generally a 12 months period is applied. Given that normally the time stated and used in the financial reports is 12 months. Indeed, quarterly reports, for instance, could also be applied in comparison of the first quarter. As seen from without the time aspect the square model is both static and dynamic. Static in terms of describing a company’s state in a certain moment of time and dynamic when describing the development of the company over time. 18
3.2.6 The Enumerates The enumerates used in the square model have to be consistent. All the numbers used are established by monetary measurements. This assumption is attributable to enabling a comparison for a certain company over time or between a company and another. Hence if the figures stated were to be in different currencies, the shape of the squares would be misleading. 19
3.2.7 The Information The only information used in the model is the financial reports published by the company. Neither human recourses, information of other potential important factors nor details of what occurs within the company are taken into consideration. Hence an outside perspective is held. The financial reports used are not adjusted. This elevates the importance of the belief that the numbers stated in the reports are accurate and that they reflect the company’s state. Otherwise the analysis of the square model becomes futile. Furthermore, the assumption that the company does not present any problem with the generation of cash flow is made. Thus the square model does not take the cash flow into consideration. 20
(^17) Polesie, T. (1995), Drift & Finans – aspekter på ett företags ekonomi and Polesie, T (1989), Att beskriva företags ekonomi 18 19 ibid 20 ibid ibid
The Triangle Model
Figure 3 The Triangle Model
The square model only provides the user with the economic terms. The triangle model, on the other hand, also analyses the influence of the human resources and other important factors. The triangle model is divided in to three dimensions, all contributing to an overview of a company.^21 The money numbers describe revenues, incomes/expenditures, costs, accounts, economical instruments, liabilities and sales. The topic subjects in the triangle are invisible subjects related to human resources like number of employees, motivation, relations between employees creativity etc. All the things in a company that we can touch, such as products, commodities, goods, plants and equipment are explained out of the object within the triangle model. 22 It is most appropriate to set up the triangle model with the objects as a starting point. Thus the objects in a company always stand in focus, regardless of the size of a company or the branch which the company operates in. The object is to be seen as the foundation enabling the operations of a company. Nonetheless the object of a company is not to be regarded more important than the subjects or the money numbers. The subjects are adjusted to the operation
(^21) Polesie, T. (1995), Drift & Finans – aspekter på ett företags ekonomi and Polesie, T (1989), Att beskriva företags ekonomi 22 ibid
Subjects
Money Numbers
Object
3.3.8 The Information The information used in the triangle model is financial reports, human recourses, information of other potential important factors and details of what occurs within the company. Hence an internal and in some way an external perspective is held. The information used is selected based on subjective judgements of what is vital and not for the analysis. Focus can also differ between the different elements due to the chosen perspective. 30
3.4 SWOT-Analysis
Figure 4 The SWOT-Analysis
The name SWOT-analysis derives from the abbreviation of Strengths, Weaknesses, Opportunities and Threats. The SWOT-analysis is a tool that identifies these subjects within a company. The purpose with the model is to assess what a company can and cannot do as well as its potential opportunities and threats. The method of the analysis is to divide the information used into internal and external elements.^31 Strengths are the advantages that a company has. The strengths are both analysed from an internal and an external perspective. For example when setting up the strengths, it could be from the market and the customers’ view. In addition, competitors on the market could be used for comparison in sorting out the strengths. Factors that could be determinative are innovative products, location of the business, product differentiation or access to specific recourses, to mention a few.^32 Weaknesses are issues that a company can improve. Also, the weaknesses are analysed both from an internal and an external perspective. The weaknesses sorted out should be used
(^30) Polesie, T. (1995), Drift & Finans – aspekter på ett företags ekonomi and Polesie, T (1989), Att beskriva företags ekonomi 31 32 Doole, I, Lowe, R. (1999), International Marketing Strategy ibid
Strengths Weaknesses
Opportunities Threats
as a foundation for future enhancement. When setting up the weaknesses the competitors can be used as a benchmark within areas they perform things better. 33
Opportunities are external factors that a company can take advantage of. When finding opportunities a valuable approach is to analyse and elaborate with the strengths and weaknesses to see whether these open up any opportunities. Opportunities could be subjects linked to new trends in population profiles, changes in government policy or changes in technology.^34
Threats are both external and internal future factors disadvantageous for the company. Finding the threats reveals what needs to be done, and puts problems into perspective. Threats could also, as in the case of opportunities, be subjects of population profiles, changes in government policy or changes in technology. It could for an example also be future competitors or financial problems. 35
(^33) Doole, I, Lowe, R. (1999), International Marketing Strategy (^34) ibid (^35) ibid
programme the company launched a large luxury sedan called the 7-series. All the terms of the series and the sizes of the cars are the same today as the ones used in the 1970´s. Thus, one could argue that it was in the 1970´s that the foundation of the BMW model programme was made. 39 In the 1980´s BMW started producing stations wagons of the five- and three series. These station wagon models were called Touring. BMW also started the production of the 3-series which was the model manufactured in the new plant in Regensburg. In 1985 the high performance car M5 was introduced. Due to high performance, the model became very important for the image of BMW, and still remains to be. It was also in the 1985 that BMW started with four wheel drive system models and these cars got the designation iX, which is the same on today’s cars. This was also important to the future trademark. At the same time BMW started the development of new diesel engines which got the designation tds. 40 BMW launched the new 7-series in 1986 and the new 5-series in 1988. The 7-series got very high attention from the customers of large luxury cars and the cars won several road tests in car magazines over its biggest rival Mercedes-Benz S-class.^41 During the 1980´s BMW invested large funds on research- and design centres. BMW Technik GmbH centres were founded to create future BMW’s. BMW M1 was created here and begun to be produced in 1989. This was a little sports car with very futuristic design. The successes of this car never occurred and the productions stopped in 1991. Nevertheless this car was the foundation of the famous Z3, a little roadster and a large success for BMW, introduced some years later, in 1995. This car got large attention when James Bond drove it in the Golden Eye movie. 42 The 1990´s begun with a lot of new directions for BMW. The globalisation that started in 1970´s was more evident during the 1990´s, especially with a lot of investments in the UK. BMW started the planning of production in the US to meet the large demand in the North American market. In 1992 the building of a new factory plant in Spartanburg in South Carolina started and the first produced car leaved the plant in 1994. 1994 became an historical year. This was the year when BMW’s total production was bigger than that of the competitor
(^39) Kiley, D, (2004), Driven; Inside BMW, the Most Admired Car Company in the World (^40) ibid (^41) ibid (^42) ibid
Mercedes-Benz. It was also the year when BMW bought the British car manufacturer Rover. This turned out to be a great loss. BMW sold the company in 2000.^43 To enhance the production BMW started to seek new segments. In the end of 1990´s there was a great demand of large so called Sports Utility Vehicle (SUV). Mercedes-Benz was already established on the market with its ML-series. To compete in this market, BMW introduced the X5-series, in 1999, that at initially was thought to satisfy the demand on the North American market. But this American produced SUV had also a lot of success on the European market. Some years later the X5 came out in a smaller version called X3 which was based on the 3-series.^44 In 2001 BMW inaugurated the new plant in Hams Hall in the UK. This plant stood for a large part of the engine production. The same year BMW introduced the new exclusive handmade roadster called Z8. This car was famous from the James Bond movie “Tomorrow Never Dies” and became a classic. BMW also started its participation in the formula one series and had cooperation with the Williams Team where BMW made the engines. 45 During 2002 a lot of large changes could be denoted in the design of BMW. The new 7- series was launched. This car was designed by the new chief designer Chris Bangle. His design would be implemented in all new cars that would be presented during the coming years. Chris Bangle made a new interpretation of the classic BMW look and got a lot of critique. Some traditional BMW owners were upset and demanded resignation of the new designer. Today this design is fully applied on all the BMWs. The new 7-series had a lot of new techniques that had never been observed before in a common vehicle, like the I-drive, an onboard computer. Four years after the introduction all the models in the BMW programme now have this new technique and a lot of the competitors have adapted common systems. 46 In 2003 the first BMW produced Rolls-Royce was presented to the market. During 2004 and in 2005 the new 5-series and the 3-series were also introduced. To widen the model programme further BMW developed a smaller car called 1-series which was introduced during 2004. Even these cars had the new design and a lot of the new techniques that was presented in the new 7-series. The large luxury coupe and convertible called 6-series had première during 2004.^47
(^43) Kiley, D, (2004), Driven; Inside BMW, the Most Admired Car Company in the World (^44) ibid (^45) ibid (^46) ibid (^47) ibid