The car that lost its way

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BMW has a chequered history, and if the current management had learned lessons from the past they would never have purchased Rover.

The history of BMW is as chequered as its blue and white badge. Blue and white are the colours of the state of Bavaria, where the company was founded over 80 years ago. For the first half of its life, BMW was mainly a manufacturer of aircraft engines. Its powerful motor bikes were also sought after, and it ventured into automobiles by manufacturing Austin Sevens under licence.

To be Germany’s leading aero-engine manufacturer in 1945 was about as unfavourable a strategic position as any company has ever enjoyed. BMW’s plight was still worse since its main production facility, at Eisenach, was located just across the border in the Soviet occupation zone.

The post-war recovery of German industry from the desolation of 1945 is still termed an economic miracle. There was no miracle for BMW, however. The company drifted, producing bubble cars (the BMW Gogomobile) that were not as much fun as those of its Italian rivals, and limousines that were not as stylish as those of its German competitors.

In 1959 BMW was on the edge of bankruptcy, and seemed certain to be absorbed by Mercedes. But after one of the longest and most extraordinary annual general meetings in the history of any company, Herbert Quandt emerged as BMW’s dominant shareholder. The Quandt family still own half the company’s stock today.

BMW was already planning its 1500 model when Quandt took control. Launched in 1962, the 1500 established a new segment in the car market: the quality production saloon. It occupied a position between the ubiquitous mass production car and the craftsman built output of the luxury producers. It was a niche which BMW was almost uniquely placed to fill. It drew on its ability to develop and use. sophisticated technical skills in a production line workforce. This has been the source of competitive advantage for so many German companies and for the German economy as a whole.

Over the next two decades, BMW developed this market positioning. As they did so, they established the BMW brand with all the associations it retains today. BMW exemplifies two characteristics of powerful brands: quality certification and signalling. BMW cars have, of course, a reputation for build, reliability and low depreciation. And ownership of a BMW is a personal statement – more stylish than a Volkswagen, more raffish than a Mercedes.

In common with a generation of German business men, Herbert Quandt did not seek to appear on the front cover of Fortune magazine. His public relations advisers were as much concerned to keep news out of the papers as to get it in. We will never know the balance of deliberation and luck in the determination of BMW’s strategy. What we do know is that it is one of the great success stories in modern business history. And what we learn from it is the foundation of all successful corporate strategy – the match between the distinctive capabilities of the organisation and the market opportunities which it faces. That was what BMW, after many false starts in the twenty years after the war, finally achieved.

Now BMW’s competitive advantage was bound to come under pressure. The quality of its production line engineering ceased to be such a distinctive capability. Not because it declined, but because other producers were better placed to emulate it. An element of BMW’s success – and another common characteristic of successful strategy – was the development of a more enduring source of competitive advantage, the brand, in the window of opportunity created by a more transitory source of competitive advantage, its engineering quality.

So what should BMW have done? Strategy means understanding your distinctive capabilities and identifying markets where they can be turned into competitive advantages. The company was right to consider a move back into aero-engines, which reflected its – German – engineering capabilities and to a limited degree, exploited its brand. It was right to plan its American production facility in South Carolina, because that developed the brand in the American market. While it is still too early to judge the success of these ventures, they have strategic coherence. And perhaps BMW should use its domestic production capabilities, though not necessarily its brand, in other segments of the car market.

But instead of pursuing the logic of BMW’s historic success – match market to competitive advantage – the company became a victim of the bland clichés of management jargon. It announced it was a supplier of mobility, rather than a manufacturer of cars, bikes and aero engines. There is a profound misunderstanding here. The relevant links between these products are not that cars bikes and aero engines are all means of getting around but that they all use BMW’s engineering skills and brand.

But more seriously, it fell for conventional, but loose ideas on the importance of size and scale “BMW was too large to be a niche manufacturer, too small to be a volume producer” – as if failure to fit into the boxes of a consultant’s slide presentation was evidence of a strategic problem. “BMW needed to achieve critical mass to be one of a handful of global players” – as if Rover itself had not demonstrated that size is no competitive advantage. And Pischetsrieder’s plan for positioning Rover was to move it up market into a competitor for BMW itself. One way or another, this strategy was doomed to fail.

The question which a thoughtful student of Herbert Quandt’s success would have asked is how BMW’s competitive advantages – the quality of the workforce in its production facilities (in Germany), the power of its brand – were to be effectively deployed in the management of Rover. He would have concluded that they were not relevant if Rover was to continue to produce in the UK and trade under its own marque. And by pointing that out, saved his teacher’s family several billion marks.

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