International Distribution and Logistics, UV IMBADr. Marta Frasquet Del Toro

BMW’s Description and Evaluation

of the Distribution and Logistics Strategies

April 2011

Prepared by

Gubanov Andrey

Suslova Daria

Malikova Julia

Rodriguez Adrian

Table of ContentIntroduction 3

1. Industry overview 4

1.1 Automobile Industry Trends 4

1.2 Customer Habits 5

1.3 Competition 5

2. The BMW Company Portfolio 7

2.1 The Company Srtucture 7

2.2 BMW Overseas subsidiaries 7

2.3 BMW Positioning 8

2.4 Environmental record 9

2.5 BMW Strategies 9

2.6 Worldwide Sales 11

2.7 BMW’s line Up 11

3. Target Audience 13

3.1 Analysis of the Target Customer Segments 13

3.2 Service Outputs Demanded 13

4. Distribution 15

4.1 Distribution Channel Structure 15

4.2 Market Coverage 15

5. Channel Evaluation 16

5.1 Channel efficiency 16

5.2 Gap Analysis 17

5.2.1 Demand Gaps 17

5.2.2 Supply Gaps 17

5.2.3 Closing Gaps 17

6. Power imlementation 18

7. Conflict in distribution channel 19

8. Overview of logistics and supply chain management. 20

8.1 Logistics as a part of the Overall Strategy 20

8.2 Supply chain structure 20

8.3 Passing of Property 22

9. Competitive advantage 23

Conclusion 24

Appendixes 25

References 27

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Introduction

The automobile industry produces automobiles and other gasoline-powered vehicles, such as buses, trucks, and motorcycles. The automobile industry is one of the most important industries in the world, affecting not only the economy but also the cultures of the world. It provides jobs for millions of people, generates billions of dollars in worldwide revenues, and provides the basis for a multitude of related service and support industries. Automobiles revolutionized transportation in the 20th century, changing forever the way people live, travel, and do business. The automobile has enabled people to travel and transport goods farther and faster, and has opened wider market areas for business and commerce. The auto industry has also reduced the overall cost of transportation by using methods such as mass production which is making several products at once, rather than one at a time, mass marketing which is selling products nationally rather than locally, and globalization of production that pertains to assembling products with parts made worldwide.

As a result of easier and faster transportation, world economies have become dependent on the mobility that automobiles, trucks, and buses provide. This mobility allowed remote populations to interact with one another, which increased commerce. The transportation of goods to consumers and consumers to goods has become an industry in itself. The automobile has also brought related problems, such as air pollution, congested traffic, and highway fatalities. Nevertheless, the automobile industry continues to be an important source of employment and transportation for millions of people worldwide.

Alternative energy sources for cars, such as natural gas, electricity, ethanol, vegetable oil, sunlight, and water, will compete with the traditional energy sources in the future. Many large automakers are now adapting fuel cell technologies: fuel cells are cleaner, quieter, and more energy efficient than internal-combustion engines.

We have chosen the BMW company, because it is one of the World’s super brands in automobile production and as the years proved they are very efficient not only in it, but also in marketing, distribution and logistics. The company has a lot of competitive advantages, such as the high level of customization, broad line up, high level of after-sale service and a wide variety of highly trained official dealers. All these factors provide an outstanding image of the BMW Company and contribute to the strong brand loyalty among the customers.

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1. Industry Overview

1.1 Automobile industry trendsAfter the first practical automobile was built by Karl Benz in 1885

(Germany), the Automobile Industry has developed a lot. The automobile industry includes design, development, production, and selling motor vehicles, and is one of the world's most important economic sectors by revenue. Today’s automobile industry is characterized by several major trends, which we would like to list below:

After the II World War the companies all over the world started becoming global very intensively. The globalization didn’t pass the automobile industry over. Car and parts manufacturers are merging and take over their competitors; component design and manufacture are now frequently outsourced. Meanwhile, all biggest, most successful automobile producers have become totally global in nature.

Shifting to emerging markets, in particular to Asia and BRIC countries (which happens by 2 reasons: the production costs in these countries is significantly lower and, on the other hand, the demand on cars in not satisfied there – so there is a market in that countries is not occupied entirely). What is more, this enables leaders of the industry to compete with local auto manufacturers that were flourishing in absence of quality competition.1

The manufacturers tend to work together in joint ventures on designing platforms, engines, electronics (it could be everything except for exterior and interior design of the models). After the project is finished, companies continue working separately on the design of the models.

Automobile producers tend to work with exclusive dealers and service centers, which are authorized by the companies’ headquarters. It helps to control the quality of the entire distribution chain and of all contacts with consumers.

Being green, ecologically friendly is not just a trend - it is a lifestyle for a constantly growing number of people. So, automobile producers try to meet the needs of customers and produce eco-friendly cars.

Automobile producers tend to expand the customer segments (and consequently the product line). In particular, companies focus on production of low-priced cars.

E-commerce has had a strong influence on the car industry. Before purchasing a car, consumers use the Internet to become better informed with the models and the services. Automobile manufacturers now use the most up-dated e-commerce methods to deal with their supply chains. Besides there are various online organizations that steer millions of car buyers toward specific dealers and

1 Article. Auto Industry Trends Economy. Watch - online economics community that publishes economy, investment & finance reports. http://www.economywatch.com/world-industries/automobile/auto-industry-trends.html

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even deliver competing bids for cars, offer insurance and financing in such a way that lowers costs and improves satisfaction among consumers.2

The franchisee type of contracts arise in many spheres in automobile industry: production of motor vehicle parts, supply stores, equipment rental and leasing, tire dealers and repair and also maintenance franchises. The automotive franchise industry (excluding dealers) generates around $25 billion in sales annually and employs over 175,000 people in 35,600 franchise establishments (according to the International Franchise Association sponsored study "Economic Impact of Franchised Businesses: Vol. 2" by PricewaterhouseCoopers, March 2008)3

In coming years, auto experts believe that among the following trends in the automotive industry the most significant is fuel efficiency from both ecological and economical sides.

1.2 Customer HabitsIn order to have the whole image of the trends in the industry, it is necessary

to have the understanding of consumer buying habits, which are as follows: Ecological issue: as the Planet is facing serious problems with the Global

Warming, Carbon Dioxide Emissions, Pollution and other environmental problems, it is becoming more and more popular to buy the products and use the services of green companies.

Price consciousness: many people are not in the race for expensive cars and there is a great demand on low-priced cars for everyday use (particularly of Asian automobile producers, like Kia, Hyundai, and Cherry).

Innovation: people enjoy it to use cutting-edge technologies in a car, such as Wi-Fi, TV connection, entertainment, autopilot system and so on.

Tendency to use small cars, because of their mobility, which is extremely relevant in big cities.

1.3 CompetitionHere are the main competitors of BMW according to their positioning on the

market4 :1) Mercedes-Benz competes with BMW in almost every single segment and

both try to catch up with each other, starting from designing and production and finishing with marketing and distribution. Nowadays, this tendency is changing, but not very fast. Russians consider Mercedes as a classy and stylish brand for

2hArticle. Overview of Plunkett's Automobile Industry Coverage. Plunkett Research, Ltd. – the organization that deals with industry statistics, trends and in-depth analysis of top companies. http://www.plunkettresearch.com/automobiles%20trucks%20market%20research/industry%20and%20business%20data3 Article. Automotive Industry Trends - Automotive Franchises. Franchise Direct web portal http://www.franchisedirect.com/automotivefranchises/automotiveindustrytrendsbusinessreportii/7/249 4 BMW goes ahead/together with Mercedes-Benz

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individuals who achieved everything, but the company doesn’t provide as many services as BMW. Another problem of Mercedes, is that they provide customers with cars within a long period of time (about 4 to 6 months) and prices for additional packages are very high. What is more, Mercedes doesn’t have the production in Russia, which is quite a relevant issue from the point of view of Russian economy.

2) Volkswagen Group in general, and Audi brand in particular, are considered by the Russian consumers as not very innovative and classy. Audi offers the same level of customization for the customers, but the Audi cars (along with Mercedes) are not produced in Russia. Besides, customers have to wait for the cars for quite a long period of time. In terms of brand image, Audi is considered to be not as good as Mercedes and BMW.

3) Jaguar brand competes with BMW in the segment of upper class of sporty and saloon cars. The fact that Jaguar is an exclusive brand, accounts for a number of problems. The cars are produced in the UK only, the costs of production are lower, thus the price is lower as well, but they are not able to offer that variety of services and additional packages for their cars that the competitors do. Sometimes a waiting list for a Jaguar car in Russia is a year, which is also very high in comparison with the competitors.

4) PSA (Peugeot and Citroen) just as Jaguar competes with BMW only partially - with BMW’s 5-series. The prices for PSA’s cars are low, the level of customization is the same, but again in terms of logistics they are not equal to Mercedes and BMW. Besides, customers still tend to think of Peugeot and Citroen as stylish cars, but not of the same high quality and class as BMW and Mercedes.5

5 according to numerous articles from the magazine AutoReview (http://www.autoreview.ru/), such as http://www.autoreview.ru/_archive/section/detail.php?ELEMENT_ID=71736&SECTION_ID=2048

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2. The BMW Company Portfolio

2.1 The Company Srtucture Bayerische Motoren Werke AG (BMW) is a German automobile, motorcycle and engine manufacturing company founded in 1916. BMW is among the most recognized automobile manufacturers in the world today. The company has established a reputation for quality, efficiency and prestige. It is Germany’s biggest multinational company that operates in different parts of the globe. BMW employs the strategies that help the company to gain competitive advantage and maintain its position in the market in spite of the increasing competition and other environmental challenges. The headquarters are situated in Munich, Germany. Besides the BMW brand it owns and produces the Mini brand, and is the parent company of Rolls-Royce Motor Cars. Also BMW produces motorcycles under BMW Motorrad and Husqvana brands. In our project we will focus on BMW Auto. («Appendix 1. The Company Structure»).

2.2 BMW Overseas subsidiaries In order to be efficient in overseas markets BMW has 6 subsidiaries, so as to

gain a foothold on different markets:

1) South AfricaBMWs have been assembled in South Africa since 1968, when Praetor

Monteerders' plant was opened in Rosslyn, near Pretoroa. BMW initially bought shares in the company, before fully acquiring it in 1975; the company became BMW South Africa, the first wholly owned subsidiary of BMW to be established outside Germany.6

Since 1997, BMW South Africa has produced vehicles in left hand drive for export to Taiwan, the United States and Iran, as well as South America.BMW's with a VIN number7 starting with "NC0" are manufactured in South Africa.

2) United States (BMW Spartanburg factory)BMW Manufacturing Co has been manufacturing the X5 and, more recently,

the X6 in Greer near Spartanburg, South Carolina, USA. BMW's with a VIN number starting with "4US and 5US" are manufactured in Spartanburg.

In 2010 BMW announced that it would spend $750 million to expand operations at the Spartanburg plant, which will allow production of 240,000 vehicles a year and will make the plant the largest car factory in the United States by number of employees.8

6 Article. BMW South Africa websitehttp://www.bmwplant.co.za/Content/frame_content.jsp@content=http-3a-2f-2fhaf0gau02~5.htm7 Vehicle Identification Number8 Article. BMW to Expand Plant in South CarolinaThe Wall Street Journal: p.B5.

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3) IndiaBMW India was established in 2006 as a sales subsidiary in Gurgaon

(National Capital Region). An ultramodern assembly plant for BMW 3 and 5 Series started operation in early 2007 in Chennai. The plant started operation in the first quarter of 2007 and produces the different variants of BMW 3 Series and BMW 5 Series.9

4) ChinaIn 2003 the contract was signed on the production of sedans in China. May

2004 a factory in the North-eastern city of Shenyang was opened, where Brilliance Automotive produces BMW-branded automobiles in a joint venture with the German company.10

5) CanadaIn October 2008, BMW Group Canada was named one of Greater Toronto’s

Top Employers by Mediacorp Canada Inc., which was announced by the Toronto Star newspaper.11

6) EgyptBavarian Auto Group (BAG) is a multinational group of companies

established in March 2003 when it was appointed as the sole importer of BMW and Mini in Egypt, with exclusive rights for import, assembly, distribution, sales and after-sales support of BMW products in Egypt.12

2.3 BMW Positioning BMW is a “Nicher” - it does not go directly against with large automobile

manufacturers. Rather it focuses on niche markets. Through market niching, the company identifies its target markets and produce products that will satisfy their needs and wants. BMW focuses on the premium segments.

The company was able to establish a strong position as a premium car brand. BMW, employed niche marketing in order to fill in the void in the automobile industry. The company focused on small, market niches. The niche markets that BMW focused on developed into mainstream markets, propelling the growth of BMW.

9 International BMW websitehttp://www.bmw.com/10 Article. BMW opens China factory. TestDriven website

http://www.testdriven.co.uk/bmw-opens-china-factory/11 Article. BMW Canada Inc. http://www.eluta.ca/work-at-bmw-group-canada12 Bavarian Auto Group website http://www.bag-eg.com/

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BMW experienced a gradual change in position from a follower to a nicher. Today, it is one of the market leaders in its category, which is the high-performance and premium category.

The combination of a production system (which gives the company a particular advantage in its chosen market segment), a world-wide reputation (for product quality) and a brand (which immediately identifies the aims and aspirations of its customers) – continues to make BMW one of the most profitable automobile manufacturers in the world.13

2.4 Environmental recordThe company is a charter member of the U.S. Environmental Protection

Agency's (EPA) National Environmental Achievement Track, which recognizes companies for their environmental stewardship and performance. It is also a member of the South Carolina Environmental Excellence Program and is on the Dow Jones Sustainability Group Index, which rates environmentally friendly companies.

However, there have been some criticisms directed at BMW, and in particular, accusations of greenwash in reference to their BMW Hydrogen 7. Some critics claim that the emissions produced during hydrogen fuel production outweigh the reduction of tailpipe emissions, and that the Hydrogen 7 is a distraction from more immediate, practical solutions for car pollution.14

BMW has taken measures to reduce the impact the company has on the environment. It is trying to design less-polluting cars by making existing models more efficient, as well as developing environmentally friendly fuels for future vehicles. Possibilities include: electric power, hybrid power (combustion, engines and electric motors) hydrogen engines.15

2.5 BMW Strategies One of the main strategies employed by BMW is niche marketing. BMW

protects its niche position by engineering, manufacturing, and developing advertisement campaigns. BMW offers a distinctive product and service and it developed differentiation between its products and the competitors’.

BMW used frontal attacks in order to gain a competitive position in the automobile industry. The company employed a limited frontal attack, which focuses on specific customers. Another frontal attack that was employed by the company is through research and design. The company invested large amount of money in designing and differentiating its products and services. The company

13 according to numerous articles from the magazine AutoReview (http://www.autoreview.ru/)14 Article. BMW's Hydrogen 7: Not as Green as it Seems. Spiegel, online newspaperhttp://www.spiegel.de/international/spiegel/0,1518,448648,00.html15 Bird, J and Walker, M: “BMW A Sustainable Future? ”, page 11. Wild World 2005

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introduced improvements on the products and offered innovative features and designs in order to enhance the value of its products.

The detailed view on Strategies is as follows:

1) Well-Executed StrategiesBMW is a company with well-executed strategies. The company recognizes

its distinct capabilities and chooses the market and subsequently markets, which realized its full potential. Its dealings with its suppliers and distributors, its pricing approach, its branding and advertising strategies, are all built around that recognition and these choices. The company maintains a tight control over its distribution network. This control supports the brand image and aids market segmentation. BMW cars are positioned differently and priced very differently in the various national markets. The same tight control is reflected in BMW’s relationships with suppliers, who mostly have continuing long associations with the company. BMW’s activities are focused almost exclusively on two product ranges – high-performance saloon cars and motorbikes – which reflect its competitive strengths.

2) Image of PrestigePart of the company’s overall strategy is to market its products as

‘prestigious’. The company was able to develop an image of quality, reliability and consumer aspiration. Advertising images can create strong differentiation in the customer’s eyes. BMW has spent millions of dollars on advertising to create an image of performance and prestige for the automobile buyer.

3) BrandingBranding is also an important strategy of BMW. BMW was able to develop

premium brands. In the development of premium brands, BMW subjects its products in a process of continuous evolution and development. The company established a Brand Academy.

4) Flexibility for the CustomerThe BMW Group has optimized its internal processes to such extent that

wishes expressed by the customer to modify the power unit, the color, upholstery and special equipment of the car he has ordered may be taken into account just six days prior to the start of assembly – without any affection on the delivery date of the car.

5) DifferentiationDifferentiation is the act of designing a set of meaningful differences to

distinguish the company’s offering from competitor’s offerings. The five dimensions of Differentiation are:1.Product – physical products vary in their potential for differentiation.

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2.Services – when the physical product cannot be differentiated easily, the key to competitive success nay lie in adding valued services and improving quality.3.Personnel – companies can gain a strong competitive advantage through having better-trained people.4.Channel – companies can achieve competitive advantage through the way they design their distribution channels’ coverage, expertise, and performance.5.Image – buyers respond differently to company and brand images. Identity comprises the ways that a company aims to identify or position itself or its products, whereas image is the way the public perceives the company or its products.

The automobile manufacturer uses differentiation strategies to differentiate its products from its competitors’. By introducing innovations in engineering and design, the products of BMW gained an image of prestige. This image is strengthened by the company’ advertisement campaigns.

2.6 Worldwide SalesBMW is known for its performance and luxury vehicles, and is a global

leader in premium car sales. In 2009, it manufactured 1,224,280 four-wheeled vehicles and 98,047 motorcycles. These figures for the year 2010 are lower than in 2007, which happened due to the recent World Financial Crisis. For more detailed information, see please «Appendix 2. Worldwide Sales».

2.7 BMW’s Line Up

1, 3, 5, 6 and 7 models (first column in the table): saloons, coupes, sedans and cabrios with different types of engine (diesel or gasoline + hybrid engine choice for 7-series model), size and package.

X1, X3, X5 and X6 models (second column in the table): crossovers, usually four-wheel drive, also of a different size, with different types of package and engine (diesel or gasoline).

5 GT model (third column in the table): 5 GT is a step of BMW in the new niche of car production segment: saloons plus crossovers of a big size, like 7-series model, also with different types of package and engine (diesel or gasoline).

Z4 models (fourth column in the table), which are classic roadster, cabrios and coupe cars: very powerful, with limited types of package, wider variety of exterior and interior customization and different gasoline engines.

Table 1

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M-series models (fifth column in the table): based on the 3 Series, the M3 defined an entirely new market for BMW: a race-ready production vehicle. Since its debut, the M3 is heralded in enthusiast circles, in large part due to its unique geometry and award winning engines. The newest V8-powered platform became available the autumn of 2007 in Europe, and second quarter of 2008 for the U.S. in coupe (E92), and later the cabriolet (E93), and sedan (E90) variants. Based on the 5 Series, the M5 is the M division's V10-powered version of the E60 5 Series. The M6 is the M division's version of the 6 Series, and shares its drive-train with the M5. The Z4 M, or M Couple/M Roadster, is the M division's version of the Z4. The X5M is the M division's version of the X5, and the X6M is the M division's version of the X6. Both the X5M and X6M share the same V8 twin scroll twin turbo.

Hybrid series models (sixth column in the table): the same cars as 7 and X6-series models, but with a hybrid engine. These cars have the same packages.

All series (except M) can have 4 types of package: Basic, Comfort, Exclusive, and Individual.

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3. Market Segments

3.1 Analysis of the Target Customer SegmentsAfter a careful investigation of Russian market we have divided BMW

customers into 3 major segments: Individuals, Businesses and Government (which includes Police, Administration and Army).16 For clarity have a look at «Appendix 3. Types of Customers»

Individuals, amount for almost half of all customers (45%), are businesspeople of medium+ and high income (starting from 2,500 Euros). These are people, who work for large companies or businesses’ owners. These are middle-age people, living in big cities, of high-status, open-minded, adventurous and young in spirit. These people usually have at least two cars in the family. Their cars are usually of such models, as 5, 6, X3, X5, X6 and Z4 (usually as the second or the third car in the family).

Businesses amount for 20% of BMW’s clients. These are medium- and high-sized businesses with a year’s revenue of more than 2,000,000 Euros. They prefer to use the cars in a leasing form (and then lease new ones). Their cars are 5 and 7 models.

Government: administration amount for 27% of the clients. All governmental staff that have cars with drivers (BMW 7-series); and governmental staff of middle level which use 5-series.

Government: army amount for 1%. These are generals who have cars (7-series) with drivers.

Government: police amount for 7% of the customers: Special Forces of police, who work in order to perform high-speed pursuits and catch very fast criminals. Their cars are BMW 5-series, preferably starting with 3.5-liter gasoline engines.

3.2 Service Outputs DemandedDifferent customers have different needs, as it is impossible for a product or

brand to be everything to all customers. So any company should matching target its segments with specific core competencies. (“Appendix 4. SOD”)

Bulk Breaking. Most of the potential customers of BMW can buy any models in any amounts desired. Businesses usually buy from three to five cars; the Government Structures tend to buy quite a big amount of cars, about 5-7 units.As for the Individuals, the bulk breaking is higher; as for them it is more important to buy one car instead of three.

Spatial Convinience. In big cities the distance between dealers is not more than 30 kilometers; so that every dealer covers radius of 15 kilometers. What is more BMW can transport the cars wherever the client wants.

16 according to numerous articles from the magazine AutoReview (http://www.autoreview.ru/)

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Businesses and Government Structures are not so interested in spatial convenience as Individuals are.

Waiting time. Intensity of demand differs for: Original equipment (→ low) Postsaleservice and parts (→ high)There is often a correlation between bulk-breaking, spatial convenience and

waiting-time.Businesses, Government Administration and Police the supply is equal to

demand, as these segments need cars asap, and the delovery time is frome 1 to 3 months which is much less then competitors' delivery time (of 6 months in VolksWagen, Mercedes, Jaguar and PSA group).

As for the Individuals and Army, the supply is much higher then the demand as these segments are used to wait for a longer time, and a couple of moths is seen as a very short period.

Depth of Assortment / Variety. As Individuals tent to differ in their preferences, they need a multiple option. As for the rest, Businesses and Government Structures, they are quite aware of the models they are intended to buy and they choose particularly what they need.

Customer Service.Individuals and Police use service centers, as they don’t want to deal with repairing themselves. Besides, Police orders 5 series models, but they also have a privilege to choose specific power engine.Other segments, Businesses, Government Administration and Army, have special services of their own within their structure, so they don’t need any BMW service facilities.

Information provision: education of buyer about product, attributes, usage, services, etc.

As individuals don’t sometimes know about the BMW cars they need to be educated – so BMW dealers provide full high-quality consultation to customers if needed.

Other segments tend to be familiarized with the car option and various packaging so they don’t need any information provision.

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4. Distribution

4.1 Distribution Channel Structure

Table 2. Distribution Channel Structure

according to the BMW official web site

After the cars are manufactured, the Logwin company transported them to BMW Ruland Trading and dealers (more detailed information in “Supply chain structure”). Besides, BMW Ruβland Trading also provide dealers with accessories and parts. End-users can purchase the cars from both dealers and BMW Ruβland Trading.

Major Channel for segments. In order to satisfy various customers needs, BMW uses the following channels. Individuals make orders through the web site and in dealer offices. Businesses as well make their orders in dealers but they also can order the cars directly from BMW Ruβland Trading. Government Structures, obviously, order cars from BMW Ruβland Trading.

4.2 Market CoverageOn the Russian market BMW uses only exclusive distribution. This type of

distribution is usually seen with high end and luxury products, which is absolutely suitable for BMW cars.

The structure of an exclusive distribution favors both the manufacturer and the distributor: All dealers receive cars and auto accessories without mark up, they have unlimited dealer agreement and are provided with all necessary corporate identity elements. The headquarters on the other hand have complete market coverage and a total control over the quality of front office, which is especially important for luxury products.

All Customer Segments are covered: those customers who are aware of the BMW products are able to buy very easily what they are intended to buy; those who don’t know what they need but want to buy some BMW car, receive high quality consultancy so that they can make a decision whether to buy a car and choose the specific package that absolutely suits the customers’ needs.

In order to communicate to those potential customers who don’t have the intention of purchasing BMW, the company uses TV, wire advertising, product placement and screening short films dedicated to BMW cars, so that potential customers become interested in this brand.

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5. Channel Evaluation There are different types of performance measurement and we have chosen

Fairness, Economic Measurement, Channel Efficiency and Gap Analysis:- Fairness: the business is very socially responsible and all business processes are transparent, thus the company realizes its responsibility in the whole distribution chain, from subsidiaries to dealers and service centers. - From the Economic point of view, the whole business is very feasible and in 2010 won a lot of awards, including those about business feasibility.

5.1 Channel efficiencyIn order to analyze the channel efficiency and performance different tools can

be used. We have chosen the Coughan’s Efficiency Template, which helps to answer the following questions:a) Who is doing what flows in the channel?b) How much of the cost/ value added each member is responsible for?c) Whether each channel member is being fairly compensated?

Table 3. Efficiency Template

Weight for flowsMajor Costs are among Physical possession, Ownership, Promotion,

Financing as these are the most expensive business processes in car manufacturing. In 2010 there was a situation that Beneficial Potential influenced the Final

Weight as follows: - Physical possession appered to be higher as the company didn't manage to sell targeted amount of cars. - Ownership, Promotion, and Payment were in result a bit higher as in these processes there is always room for improvement but the company manages with them quite sucsessfully. - As for the rest, Negotiation, Financing, Risking, and Ordering the Beneficial Potential is Low as there absolutely no problems with these.

Proportional flow performance of channel member:Manufacturer performs mostly in Promotion, Negotiation, Financing, and

Risking, and Payment - as these are the most important parts of the business.Logwin (outsourcing) most performance is in Physical possession,

Negotiation, Risking as it deals with warehousing and transporting the cars. Dealer is mostly involved in Negotiation, Risking, and Ordering, as it needs

to deal with customers directly.

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End-user's performane is in Physical possession, Ownership, Promotion. Financing, and Payment, as it is the customer who makes the whole system working.

The cost added by each member is as follows:Dealers 7-10%Logwin 5%BMW 82-85%

So it is obvious that each channel member is being compensated absolutely fairly.

5.2 Gap Analysis

5.2.1 Demand-side GapsFrom the side of Russian market, the supply of BMW exceeds the demand

of Russian customers in most cases. This happens due to the fact that Russian market is historically not as used to such a high level of service as in European and US markets. The BMW Company uses the strategy of offering only the best quality products and services in all markets, so only time can help to close these gaps.

5.2.2 Supply -side Gaps Firstly, we would like to start from the sources of the gaps and they are as

follows:Dealer Offices: - Managerial bounds: the service in dealers’ offices exceeds hugely the

demand, so that customers feel uncomfortable  (which goes together with specifity of Russian market, and makes this gap to be solved with time only).

- Environmental bounds: more involvement in introducing new programs of customer service techniques (e.g. neiro marketing, playing on the five senses in dealer offices).

Manufacturer:Environmental bounds: even more involvement in high technologies and

techniques.Secondly, we would like to talk about the supply-side gaps, which in our

case is promotion and negotiation, which you can see from our Appendix concerning Supply-side gaps.

5.2.3 Closing GapsPlanned techniques for closing gaps are the following:

Dealer Offices - Environmental bounds: Negotiation: Better usage of new technologies, improvement of web-site

Manufacturer - Environmental bounds: Promotion: constant search for new techniques and new high-technologies.

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6. Power imlementation

BMW has the power to influence its dealers’ decisions. The headquarters put a lot of attention to the relations with dealers and comes up with different programs and bonuses or penalties. Because of its commanding brand image and well recognized automobiles after so many years in the industry BMW has the power to implement different strategies over the dealers to assert their power.

Strategies used by BMW are as follows: Reward power (Promise Strategy) It’s an often used friendly strategy to reward the dealership if they do follow

BMW’s rules. This also serves as great motivation for the dealers. BMW monitors the operations of its dealers and to those that have best performance the company provides certain rewards, such as discounts, free staff training and even free accessories.

Coercive power (Threat Strategy)This is more of an old fashion strategy still used today to get things done.If

the dealers don’t adhere the terms of contract, the company can punish them in several ways: call off the delivery, write articles on the official club website (which is under the BMW headquarters) unflattering references, which would damage the dealer’s image completely.

Legitimate power (Legalistic Strategy)The legalistic strategy where the dealership agreed beforehand to follow

BMW’s guidelines accordingly, BMW has the right to make their own rules and the dealership have to follow them because they agreed beforehand making them dependable of the manufacturer.

Expert, reward power (Recommendation Strategy)As the BMW has enormously big experience in automobile industry in

general and in co-operation with dealers in particular, obviously the company has know-how in this area, which it shares with the dealers. There is a so-called concept of three “S”: Service-dealership center. The BMW provides standard Schematic Designs for dealer centers (of different sizes) according to the architectural and engineering standards of BMW, as well as furniture and elements of corporate identity. Servicing depot also must be designed and equiped according to the BMW standarts. Spare parts stock, in which there must be a certain amount of different parts and accessories.

Dealers treat all these as both an obligation and at the same time as the right, as it helps a lot for the new dealer to start its operations.

Most of the strategies that BMW implements in its relationships with dealers refer to High Pressure Strategies, which generally results in resentment and potential conflicts. However, in our case it is not so due to the specifics of Russian culture and mentality.

As a luxury vehicle manufacturer BMW has the power necessary to apply any of these strategies depending on the scenario must be aware that there is many ways to assert their power dominance however they understand how to use it and when is the most adequate time to do so.

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7. Conflict in distribution channel

The only conflict in the BMW’s logistic channel is the existence of gray dealers all over the Russia. The amount of gray dealers is huge despite the constant growth of the number of authorized dealers. This happens due to the fact that in Russia it is absolutely legal to run such gray business. According to the experts’ opinion, gray dealers in Russia account for 20% of the whole market (not only BMW). Gray dealers appear not only on Russian market, but also in many countries all over the world.

In order to survive on the market, gray dealers are very flexible and prompt; they eager to satisfy the needs of customers as soon as they appear. And often the new models appear on the Russian market before the official release date.

From the side of the manufacturer, this conflict is perceived, as BMW, off course, is against unauthorized centers, but the perception of this situation is cognitive, emotionless, dui to the fact that this problem is impossible to solve. From the side of dealers, however, the conflict is affective, as they lose their potential customers and as a result have less profit. But still, the conflict is not expressed, as it is absolutely legal.

Gray dealers offer wide variety of services and can lower their prices, thus having lots of customers. They even have their segmentation:

Those who don’t want to wait for the car being delivered in 3 months, and able to pay more in order not to wait.

Those who would like to spare money as the cars shipped from the US are cheaper up to 20%. The paradox is that shipping the car from America is much cheaper than from Europe. This happens because the tax on cars in the US is very low, and the cars mostly are bought from the US leasing companies and get customs clearance on Russian buyers, which also results in lowering of prices.

There are certain negative sides for the customers: dealers offer the cars with poorer accessories and without any guarantee (even those which is provided by manufacturer). Still, official dealers take such cars for repair and maintenance, which is a chargeable service.

Nevertheless, from the marketing point of view, BMW takes advantage from gray dealers, as they satisfy the need of those customers who cannot offer to buy cars from official dealers, which maintains the interest in the brand and the offtake level. 17 18

17 Article. Gray Dealers. Auto Expert, web portal

http://www.autoexpert77.ru/seryie-dileryi.html18 Articles. Za Rulem – russian magazine dedicatet to the automobile industry

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8. Overview of logistics and supply chain management.

8.1 Logistics as a part of the Overall StrategyIn order to remain competitive and to protect its niche market, BMW opened

manufacturing plants in South Africa, the United States, and China. This strategy was implemented as part of the overall strategy of the company and in order to make the transportation of materials and products (logistics) more effective and efficient. Logistics play an important role in the production and manufacturing of the company’s products. The BMW products are created by very flexible and highly efficient production network with mature job processes and the most advanced plants and facilities. As a global player, the BMW Group is represented through its premium products of the BMW, MINI and Rolls-Royce brands in more than 140 countries. A flexible network of production plants in 12 countries ensures that each customer receives exactly the car he has ordered tailored to his specific wishes and preferences.

Flexible and efficient assembly at BMW is guaranteed by sophisticated logistics for a smooth flow of materials and efficient production. Efficient logistics ensures precise delivery of the parts required exactly on time, with a smooth and efficient flow of parts from BMW Group components plats or supplier companies.

8.2 Supply chain structure Suppliers («Appendix 5. Supply Chain Structure»)Communications with suppliers are in the responsibility of BMW Group

partners from Purchasing, Development, Logistics, and Quality Management (the so-called “Clover Leaf”).

The overall responsibility for the purchase and procurement of production material lies within the Division ”Purchasing and Supplier Network” of the BMW Group. During the process of selection, potential suppliers have to prove that they meet the demanding requirements of BMW Group.19

The biggest supplier is Saudi Basic Industries Corp. (SABIC), which provides 16% of BMW’s raw materials.20 Other big suppliers are Lilliput Electronics Co., Ltd (China), Guangzhou AutoMile Co.,Ltd (Hongkong), Auka Industrial Ltd (China), Jeasun Technology Co., Ltd (China)21

ManufacturerUnder the Bayerische Motoren Werke AG (BMW), there are about 30

BMW’s plants all over the world. In our case, the manufacturer develops

19 Article. Supply Chain Management of BMW. Management Paradise, online communityhttp://www.managementparadise.com/forums/elements-logistics/211402-supply-chain-management-bmw.html 20 Article. SABIC. Mubasher, exchange trading analysis tool.http://www.mubasher.info/portal/CASE/getDetailsStory.html?storyId=1813751&goToHomePageParam=true&siteLanguage=en21 Article. Bmw Dash Suppliers. TradeFord, web marketplace platform http://www.tradeford.com/suppliers/bmw-dash_7

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corporative brand in order to make all the products known among the end-users. The cars that go to the Russian Market are assembled on 4 factories:

1) USA, South Carolina, Greer (the production of X5, X6 models)2) Austria, Graz (the production of X3models)3) Germany, Munich (the production of all BMW Auto models, some of

which partially), which produces cars together with 4) the plant in Russia, Königsberg (the production of X5, X6, 5 models).For more information look «Appendix 6. Production by Country»

Transportation and WharehousingCars assembled in these factories (except for the plant in Russia, Königsberg

– the cars go directy to BMW Ruβland Trading) are transported to the warehouse: for more than 30 years the motor manufacturer BMW has outsourced the management of vehicle exports to the logistics service provider Logwin (formerly Thiel Logistik).

These long-term relationships are very strong due to the fact that the majority shareholder in Logwin’s parent, Delton, is also the largest single shareholder in BMW. However, as Dr Stephan Freichel, Managing Director of Logwin’s Solution business sector points out, Logwin has regularly and successfully won repeat and additional business in open BMW’s tender against the offerings of port operators and other logistics companies.

BMW Ruβland Trading, DealersThe cars than are transported to BMW Ruβland Trading, which is located

in Russia and includes BMW Finance Services (that provides the credits and insurance for cars and auto accessories) that in its turn includes Leasing mostly for serving the Businesses Customer Segment.

1) Then the cars go directly to customers: Businesses and Governmental Structures.

2) Another direction is to Dealers. There are 37 Dealers, some of which have affiliates, so the overall number of Dealer Offices is 57. The future plan of the company is to have about 70 dealers in Russia in a couple of. Every Dealer has a Service Center and a Finance Service office (which has the Leasing section).

So there are 57 Service Centers (that are located together with the Dealers) and also 2 separate Service Centers, both situated in Moscow. Besides there is very many non-official service centers in Russia that offer repair for BMW cars. But the company wants to offer its clients only the best quality service, so non official service centers, which show high level of performance, have the chance to participate in the BMW's programme, which is called “Partner in Quality”. Within this program, BMW offers non-official service centers to become BMW authorized official ones, therefore BMW provides them with high-quality staff training and official accessories without any mark-ups and even an ability to become BMW Dealer.

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There is one more direct channel which is fictional: customers can make the offer (purchase a car) via Internet on the BMW Ruβland Trading web site. It is fictional because all the documents must be signed physically. («Appendix 7. Order Flow»)

8.3 Passing of PropertyThe moment of passing of property (signing the documents) happens directly

when the customer comes to the dealer to pick up the car or when car is transported to the customer’s place. (Still the potential customer, who ordered a car even with specific package, can refuse to buy it even after the car is transported to the dealer or the customer’s place.) The same happens with Leasing: right of use is passed in the moment when customer physically takes the car.

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9. Competitive advantage

The most notional competitive advantage that BMW gets through its distribution and logistic strategies is that the delivery time in not more than 3 months, whereas the main competitors such as Mercedes, Volkswagen and Jaguar deliver cars in 6-10 months. This advantage is achieved through several ways:- Localized Production: BMW sets up the plants in strategic geographical points in order to minimize the delivery time. - The high speed of order acceptance due to the well-formed and frictionless structure of client service and drawing up of an order.- Outsourcing the transportation to Logwin, which is an international company from Luxembourg that provides comprehensive logistics and transportation solutions. Logwin has expertise in how to deliver the products within the minimum time needed.

Other advantage is that customers have a possibility to choose from various accessories for any BMW model. BMW is the only producer that offers this in the premium segment.

Besides, the service of delivering the car the customer’s place, which is provided for more than 5 years (whereas Mercedes for example has offered such service for only half a year)

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Conclusion

BMW is a company with a well-planned and well-executed strategy. It is a company, which managed to recognize its distinctive capabilities and chose the market, which realized its full potential. Its dealings with its suppliers and distributors, its pricing approach, its branding and advertising strategies, are all built around that recognition and these choices.  It continues to dominate the industry it belongs in. BMW is constantly improving its product line. It is finding new ways to give their product a more unique identity and provide to clients products that gives them satisfaction.

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.

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References

1. Kotler, P. Marketing Management Millennium Edition, 10th edn., Upper Saddle River, New Jersey: Prentice Hall., 2000.

2. Article. BMW to Expand Plant in South CarolinaThe Wall Street Journal: p.B5.

3. AutoReview, The magazine http://www.autoreview.ru/

4. International BMW websitehttp://www.bmw.com/

5. Bavarian Auto Group websitehttp://www.bag-eg.com/

6. Annual Report. BMW Group - 2005. Retrieved on 16 June 2008 http://www.bmwgroup.com/e/0_0_www_bmwgroup_com/investor_relations/finanzberichte/geschaeftsberichte/2005/_pdf/gb2005_gesamt.pdf

7. Annual Report. BMW Group - 2007. Retrieved on 16 June 2008http://www.bmwgroup.com/annualreport2007/_downloads/BMW_Group_2007.pdf.

8. Article. The Fascination Production. BMW Group, 2007.http://www.bmwgroup.com/bmwgroup_prod/common/include/teaser/e/pdf/fasz_produktion.pdf.

9. Article. It - BMW and Logwin. Finished Vehicle Logistics, magazine. http://www.fvlmagazine.com/Article.aspx?aid=83

10.Article. BMW's Logistics as a part of the Overall Strategy.Thinking Made Easy, online management library. http://ivythesis.typepad.com/term_paper_topics/2010/07/bmws-logistics-as-a-part-of-the-overall-strategy.html

11.Article. Auto Industry Trends Economy. Watch - online economics community that publishes economy, investment & finance reports. http://www.economywatch.com/world-industries/automobile/auto-industry-trends.html

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12.Article. Overview of Plunkett's Automobile Industry Coverage. Plunkett Research, Ltd. – the organization that deals with industry statistics, trends and in-depth analysis of top companies. http://www.plunkettresearch.com/automobiles%20trucks%20market%20research/industry%20and%20business%20data

13. Article. BMW opens China factory. TestDriven websitehttp://www.testdriven.co.uk/bmw-opens-china-factory/

14. Article. BMW Canada Inc. http://www.eluta.ca/work-at-bmw-group-canada

15. Article. BMW South Africa websitehttp://www.bmwplant.co.za/Content/frame_content.jsp@content=http-3a-2f-2fhaf0gau02~5.htm

16. Article. Automotive Industry Trends - Automotive Franchises. Franchise Direct web portal http://www.franchisedirect.com/automotivefranchises/automotiveindustrytrendsbusinessreportii/7/249

17.Article. Gray Dealers. Auto Expert, web portalhttp://www.autoexpert77.ru/seryie-dileryi.html

18.Articles. Za Rulem – russian magazine dedicatet to the automobile industry

19.Article. Supply Chain Management of BMW. Management Paradise, online communityhttp://www.managementparadise.com/forums/elements-logistics/211402-supply-chain-management-bmw.html

20.Article. Bmw Dash Suppliers. TradeFord, web marketplace platform http://www.tradeford.com/suppliers/bmw-dash_7

21.Article. SABIC. Mubasher, exchange trading analysis tool.http://www.mubasher.info/portal/CASE/getDetailsStory.html?storyId=1813751&goToHomePageParam=true&siteLanguage=en

22.Article. BMW's Hydrogen 7: Not as Green as it Seems. Spiegel, online newspaperhttp://www.spiegel.de/international/spiegel/0,1518,448648,00.html

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Appendixes

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