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Case Study Bmw And Rover Essay, Research Paper
1. What were the reasons for the BMW/Rover acquisition?
The automotive industry in the early 1990’s when the acquisition took place was influenced by a growing trend towards consolidation. A report published by the Economist Intelligence Unit concluded that by the year 2000, the car industry would be dominated by a group of only five global manufacturers.
BMW was like Rover too small to survive on its own as a manufacturer. This situation forced the company to change their strategy towards extension. Having monitored Rover’s development very well, the BMW management came to the conclusion that the two companies were a perfect fit in terms of possible synergies. The take-over of Rover meant a chance to achieve economies of scale along the value chain in one go. The acquisition offered a row of advantages, especially for BMW, which are described below:
BMW being a niche manufacturer of high-performance luxury cars at that time, gained immediate entry to two important market segments, the small car market and the four-wheel-drive sports/utility market. As BMW has always been very concerned about its exclusive brand reputation, the company avoided entering the small car market although being aware of an increasing trend towards smaller cars. The take-over enabled them to enter this market segment under Rover’s brand name. Furthermore, the purchase of Land Rover placed BMW in the forefront of the fast-growing sector of four-wheel-drive sports/utility vehicles without losing time and money on internal development.
Although increasing market share was no major objective in BMW’s decision to purchase Rover, it should be mentioned that by means of this horizontal integration the European market share of the companies doubled to 6.4 %. For BMW, this meant being 3.5 % ahead of its arch rival Mercedes.
Reduction of competition
As BMW and Rover increasingly competed in certain market segments, for instance BMW’s 5-Series and Rover’s 800, competition amongst the companies was eliminated through the acquisition.
Concerning distribution channels, Rover took advantage of the much stronger BMW dealer network, especially in crucial markets such as Germany and North America.
As mentioned above, BMW gained immediate access to two new and important market segments (small car and sports/utility car) – the alternative would have been internal development which would have taken time and would have been expensive – likely even more expensive than the acquisition price BMW paid for Rover. BMW, being a niche manufacturer before, achieved access to a wide product range through the take-over as Rover’s product range was complementary to their own in most parts.
Many synergies were emanating in terms of technology. On the one hand, Rover gained access to BMW’s know-how in diesel engine expertise which Honda lacked. On the other hand, BMW gained access to front-wheel-drive and four-wheel-drive technology. Furthermore, access to a low-cost production base and control of a manufacturer that learned very much about Japanese production and engineering methods.
2. Why did the acquisition fail?
Although BMW did a lot of research into their target Rover, the company seemed to have underestimated the potential problems arising from Rover’s loss-making car operations. Even before the acquisition Rover did not achieve the volumes intended and did not break-even. In the long run, BMW intended to move the Rover brand up-market – this strategy implicated to replace big parts of the Rover model range. As BMW avoided a heavy-handed approach in order not to tarnish its image in Britain, the company missed to gain sufficient control over the development. In the late 1990’s it found itself in massive problems mainly occuring from an underinvestment in production plants plus a too low productivity. The company was forced to cut costs – this meant job cutting, the introduction of a completely new work culture to make full use of the equipment, price cuts by suppliers and the compression of dealer margins. BMW underrated the competition at the British market and made themselves to a target for their competitors.
In addition, the pound rose above DM 3 – BMW planned on a basis of an exchange rate of DM 2.65. As a consequence, costs which intended to be cut down increased while exports of Rover cars decreased.
Furthermore, the new Rover 75, being designed by BMW to lead the planned transformation of Rover into an upmarket brand and to enable BMW to reinvest in the loss-making parts of Rover, did not meet the sales expectations, although it received good reviews from several motoring journals. This circumstance was due to an unfavourable situation of the British market as British consumers anticipated cuts in car prices in the following year and were also tempted by attractive secondhand car prices. On the Continent, the Rover 75 lacked a strong image due to insufficient sales and marketing efforts. Besides that, it was handicapped by its pricing as some of the 75 variants were too close in price to Jaguar and Mercedes – brands that were preferred. In addition, BMW’s 5-series had taken sales from the 75, although the cars were styled with different characteristics – this meant producing a substitute within the own company.
To summarize, it can be said that there was a lack of research on the one hand which was additionally influenced by incidents that were not assumed to happen. BMW relied too strongly on their long-term strategy and had faith in increasing growth, a good market situation and stable exchange rates. On the other hand a lack of communication within the group can be seen insofar that BMW did not communicate its objectives to Rover and missed to gain control in the beginning and later on to adapt Rover employees to their corporate culture in terms of individual responsibility.
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