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Strategic audit of any company and organization is a systematic activity that requires much concentration, focus towards the prime goal and a continuous critical evaluation free from external and internal pressures. Current performance of BMW is second to none as compared its previous fiscal and annual years. But last year the overall growth in all over the world is outstanding. Now at BMW, the growing glossary of organizational general and financial performance is full of such phrases as organizational activity-based costing, accountability, value-based management, boardroom performance, strategic audit, results-oriented performance management systems, and economic value added. For fiscal 2005 (ended 31 December 2005), BMW registered sales of EUR46,656m, up 5.2% over the previous fiscal year. This has been a new high for the group, which recorded a strong sales volume growth during 2005. However, currency exchange rate fluctuations had partially offset the group's sales for 2005. The group's profit before tax for fiscal 2005 stood at EUR3,287m, decreasing by 9.1% over the previous fiscal year. The group's higher car sales during 2005 and its efficiency improvement measures were offset by currency fluctuations, raw material price increases and also by the increased competition in the international car markets. The group recorded a net profit of EUR2,239m during the year, a marginal decline of 0.1% from fiscal 2005. (Fred David 2005)
In the past, making large numbers of a few models was the way to thrive. Now it is all about making a few copies of a lot of derivatives. Look at the dozens of model categories in today's Mercedes and BMW ranges--a few years ago they had just three each. Yet total sales of each brand are still only around 1m. Creating niches from common platforms is the new way to compete. BMW now sees strong competitive advantage in maintaining differences between all the cars it sells. It is investing in infrastructure so that customers can change the specification of their car as late as 100 hours before it is built. That encourages customers to spend more on optional equipment. For the carmaker it also means that every assembly plant has to be surrounded by its own suppliers. An engine cannot be shipped across continents within 100 hours of a request. Separate factories allow for more variation, but at the price of fewer economies of scale. However, the greater the specification by consumers, the higher the premium price the carmaker can command. In addition, there are more cost savings available from cutting warranty and recall costs than from maintaining a large degree of commonality among various models. And for many of the big groups--especially the Japanese--there are massive savings to be had from dealing with white-collar inefficiencies. All of these productivity gains can now be achieved without large scale or the headaches of an acquisition. The challenge has been to BMW is the arrival of Chrysler. The two biggest consolidation deals in the industry are also the most recent: the takeover of Chrysler by Daimler-Benz in 1998; and the alliance of Renault and Nissan the following year. DaimlerChrysler has been a flop so far. It has taken years to lick Chrysler into shape, slashing its surplus capacity and reviving the brand with new products good enough to drag it back into profit this year. Meanwhile, top management attention was diverted from growing problems at home as quality slid at Mercedes, which lost its long-standing dominance of the lucrative German market to its arch-rival BMW. The best justification for the Daimler-Chrysler deal, at the time the world's biggest industrial merger, was the growing cost of electronics systems in luxury cars. Mercedes was the world leader in such sophisticated electronics, but it was not a volume car producer, which meant it laboured with a higher cost base. Daimler's hope was that, by buying Chrysler, it could enter the volume end of the car market in one step, and so spread the costs of new technology over a much bigger output. German rigour was supposed to produce rewards in the world's biggest and (for good manufacturers such as Toyota, Nissan and Honda) most profitable market.
The Automobiles segment recorded sales of EUR45,861m in fiscal 2005, a growth of 7.8% over fiscal 2004. The growth in sales of the segment was mainly due to an improved product mix coupled with higher sales volume across the company's BMW, MINI and Rolls Royce brands. This segment's profit before tax had decreased by 5.9% from fiscal 2004 to EUR2,976m during 2005. However, there was a rise in the sales of its Motorcycles segment, which grew year-on-year by 18.9% to EUR1,223m in fiscal 2005. This segment recorded profit before tax of EUR60m during fiscal 2005, up 93.6% from 2004. This segment benefited from a product initiative that was launched in 2004. The Financial Services segment generated revenues of EUR9, 408m during fiscal 2005, an increase of 14.4% over fiscal 2004.
In the second quarter of fiscal 2006 (ended 30 June 2006), BMW Group posted sales of EUR13,193m, up 8.5% over the second quarter of 2005. The group's sales, which increased mainly due to the improved performance in its Automobiles and the Financial Services segments, was partially offset by the lower sales reported in the company's Motorcycles segment.
The company recorded a gross profit of EUR3,096m during the second quarter of 2006, a year-on-year increase of 8.6%. Profit before tax recorded by the company during the quarter was EUR1,232m, an increase of 32.9% over the second quarter of 2005. The company recorded a net profit of EUR787m during the second quarter of 2006, a year-on-year increase of 17.5%.
The Automobiles segment reported sales of EUR10,234m during the quarter, an increase of 5.5% over the second quarter of 2005. The Motorcycles segment reported sales of EUR413m during the second quarter of 2006, a year-on-year decline of 1.7%. The Financial Services segment reported revenues of EUR2,495m during the quarter, an increase of 24.1% over the second quarter of 2005. (Fred David 2005)
Key financial performance of BMW, 2001-2005
(In millions of EUR, unless otherwise indicated)
2001 2002 2003
Sales 38,463 42,411 41,525
Cost of sales 28,727 32,754 32,090
Gross profit 9,736 9,657 9,435
Profit before tax 3,242 3,297 3,205
Net profit 1,866 2,020 1,947
Capital expenditures 3,516 4,042 4,245
Cash and cash equivalents 2,437 2,333 1,659
Assets 15,465 16,854 19,482
Equity 4,913 5,196 5,254
Number of employees 97,275 101,395 104,342
Sales 44,335 46,656
Cost of sales 34,040 35,992
Gross profit 10,295 10,664
Profit before tax 3,583 3,287
Net profit 2,242 2,239
Capital expenditures 4,347 3,993
Cash and cash equivalents 2,128 1,621
Assets 19,803 19,802
Equity 5,609 5,108
Number of employees 105,972 105,798
Fiscal years ended 31 December
Activity-based costing, for example, gives BMW not only much better control over costs, but also better control over results. Auditing boardroom performance, yet another example, helps improve BMW’s operations, clarifies its roles, and holds its board members and CEO accountable to clearly defined performance expectations. Another, results-oriented performance management systems, enables federal agencies to demonstrate the real-world effects of their efforts and taxpayers to judge federal agencies' accomplishments and determine returns on their tax dollars.
All those concepts have a common ground: impact of BMW’s policies and actions on its productivity, profitability, and social responsibility. BMW corporate decisions are based on a systematic and an in-depth analysis of public opinion, in essence advocating the use of auditing to guide corporate cultures. The company acknowledged the synergy between social-scientific methods and the corporate resources practice, noting that the practice "will be closely affected by the progress of auditing. (Arnoldo C. Hax, Nicolas S. Majluf 2004).
In May 2000, Rover Group was sold to the Phoenix consortium for 10 [pounds sterling]. It was just the latest episode in a long-running saga that has seen this British car maker change name and ownership several times over the last 30 years. In that time, it has hardly made a profit. In this article, I will examine why BMW bought Rover in 1994, and why it came to decide that `the English patient' was no longer worth treating. I will also consider whether there is any future for Rover.
BMW bought Rover because it believed that by doing so it would guarantee its own independence and be secure against takeover by a larger company. In addition, BMW had a multi-brand strategy. It wanted to cover every size of car, from Mini to Rolls Royce, but believed that this could not be achieved with a single brand: `People want to be recognised as individuals--they don't want to be swallowed up into a standard-brand mass' (Joachim Milberg, executive chairman Rover/BMW, quoted in The Sunday Times, 2 January 2000).
The objective was to increase the volume of output for the BMW company by expanding Rover as a parallel premium brand in the smaller car segment. By doing so, BMW hoped to generate the cash it needed to invest in leading-edge technology and so sustain the integrity of the BMW brand. Initially, BMW used a hands-off approach to running Rover. When this did not work, it tried to integrate Rover fully into BMW. Money was poured into the subsidiary, with BMW pledging to invest 3bn [pounds sterling], including 1.5bn [pounds sterling] to rebuild Longbridge (the largest and oldest car plant in the UK). However, by the end of 1999 the losses from Rover were getting too big and denting BMW's share price. It has been estimated that BMW was losing over 2m [pounds sterling] a day running Longbridge, and that Rover's losses were heading for 1bn [pounds sterling] in 2000. There are various reasons why this situation arose. When BMW acquired Rover in 1994, the pound was worth DM2.48. In early 2000, the rate was nearer DM3.20. This 30% increase caused problems on two fronts. About 70% of the supply of components for Rover come from Britain. The prices of these components looked increasingly expensive compared to prices in the EU. Similarly, 70% of Rover's sales were for export, mainly to the EU, a market in which it became increasingly uncompetitive. Rover sales in 1999 were down by 26% in the UK and by 70% in Europe. At the same time, however, Land Rover was increasing profits and setting record sales. In July 1999, BMW launched the Rover 75 executive car to critical acclaim. A components supplier to Rover, taking his first drive in one, was quoted in The Sunday Times as saying, `The 75 is a really good car. Having driven it, I cannot understand why it is not selling better in Britain. It just seems Rover is not the car people wish to be seen in.' At the time of the launch, BMW itself also questioned the future of the marque, something hardly likely to encourage sales. The brand was being seen as old-fashioned and for older people.
The Rover 75's problems were not just about image. It was late being launched, and in a drive to re-establish Rover as a premium brand, the higher priced models were launched first rather than the entry-level 18,000 [pounds sterling] models. At 25,000 [pounds sterling], the price of the launch models was close to the price of the newly launched Jaguar S-type, a car people have greater aspirations for. A similar mistake had been made 13 years earlier by British Leyland when launching the original Rover 800.
Table 1 indicates problems for BMW in terms of Rover's productivity. Longbridge is Britain's oldest car factory. It straddles the A38 as it goes south out of Birmingham. A bridge linking the two parts of the factory was built about 20 years ago. There is no room for expansion, or for suppliers to build close by (a key to successful just-in-time production). BMW had recognised this problem, and was intending to rebuild the factory, raising productivity to the levels achieved by Japanese-owned plants (which are just not possible in an antiquated factory).
This is not to say that Rover had not tried to improve its productivity. Just-in-time was introduced in 1989. Prior to this, robots had been introduced to assemble and weld the body panels, and yet more robots painted them. In conjunction with Honda, Rover had learnt about kaizen, kanban and lean production. A sophisticated computer system allowed each car to be tracked through each stage of production. An increasing number of cars were built to order on a flexible production line. Total quality management had been introduced, and BMW had put in place a quality audit whereby 10 cars a month were checked rigorously. Employee relations had improved enormously since the 1970s and 1980s, when Longbridge was never out of the news because of regular strikes. Now all who work at Rover are known as `associates', wear the same uniform, and can develop their skills in what ever way they wish.
Despite all of these initiatives, jobs were lost at Rover during the late 1990s ... and the company was still losing money. In April 2000, BMW announced that it had provisionally agreed to sell Rover to Alchemy, a venture capital group that wanted to turn it into the MG Sports Car Company and concentrate on making sports cars in a slimmed down operation. This deal was not popular with either the Longbridge workers, the government or the thousands of car component workers who feared for their jobs. Eventually, this deal floundered and the Phoenix Consortium was able to buy Longbridge. Land Rover had meanwhile been sold to Ford for 1.9bn [pounds sterling].
Phoenix--backed by Rover dealers, the Mayflower engineering group and Lola Racing Cars--bought the Longbridge car factory with the rights to make the Rover 25, 45, 75 (including the new estate version), the MGF and the old Mini. It also obtained the rights to use some old brand names, such as Austin Healey and Wolseley, which it may use instead of the now tarnished Rover name. It can also develop the R30 (the replacement for the 25 and 45), but this will cost around 1bn [pounds sterling]. It aims to build about 200,000 cars a year and to make only 1,000 workers redundant. Alchemy, on the other hand, would have made many more redundant, and estimates suggest that 19,000 jobs might have been lost in the area. Phoenix can also buy the gearbox operation at Longbridge and the Swindon pressings plant. The government agreed to pay 129m [pounds sterling] to help retrain redundant workers. BMW will still own the factory at Cowley, near Oxford, and will make the new Mini there.
The question now is whether Phoenix can make a success of running Longbridge. John Towers, chairman of Phoenix, has said that he will ensure a positive cash flow in 2 years so that he can sell Rover to another car company. Certainly it is unlikely that Rover can continue as an independent operation. Most car industry analysts consider that a firm can only survive as either a niche operator producing 50,000 cars a year, or as a mass producer of 4-5 million.
It can be argued that Longbridge should close. Free market economies are in a constant state of change. Jobs are being created and lost all the time. In the first 3 months of 2000, for example, 80,000 jobs were created in excess of those lost. Certainly the loss of Longbridge would have serious consequences for the West Midlands economy. But car production in the UK is as high now (1.79m) as in 1973, before the oil crisis that led to a fall in demand and output. There is excess capacity in the car industry in Europe, which inevitably leads to falling profit or even losses. In turn, losses are the market's way of indicating which resources need to be reallocated.
Longbridge was at the heart of the British car industry during the twentieth century. Whether it remains so during the twenty-first century will be a huge challenge to John Towers and his management team. This will continue to be an important business stow over the coming months.
Table 1 UK car output and labour productivity
Output Vehicles per employee
1998 1997 1998
Nissan 288,838 98 105
Toyota 172,342 58 72
Honda 112,313 62 64
Ford 250,351 62 61
Rover 281,855 34 30
Source: The Independent, 18 August 1999.
At BMW, the concept of corporate governance is quite similar to other Fortune 500 companies. Following is list of key position holders at BMW:
Board of Directors
EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS
A - Societal Environment
Since those pronouncements, BMWs in much of the industrial world have invariably embraced, at least in principle, the rigorous use of social-scientific methods, particularly in program planning and strategic audit. Ditto for professional-development programs, in which strategic auditors fine-tune their strategic audit skills, among many others.
When it comes to future news flow, the most interesting mid-term aspect of the BMW story is in BMW’s assessment the strategic review management indicated as being in process at the moment. Management hardly gave any details at all, but it has been mentioned that all aspects of the company, from structures via processes to product plans, were being X-rayed at the moment. During the analyst conference management repeatedly stated that their goal was to further improve efficiency for the sake of profitability and free cash flows. From that BMW deduces the expectation cost structures will be sifted through again. While in the past years BMW already reduced the degree of vertical integration quite substantially, the focus of reviewing could rest on the processes connected to cooperating with suppliers. So as a second stage after the reducing of vertical integration, the bundling of volumes on the supplier side could occur. That is, curtailing the number of suppliers is in BMW’s opinion one alternative to cut cost further. When steel prices had soared, AB Volvo defrayed volumes over a smaller number of suppliers than before, generating a win-win situation for both sides. As a result Volvo had been given better purchasing prices while its suppliers received higher capacity utilization and thus scale economies in exchange.
M&A activity cannot be ruled out either, but in reality we think that chances for BMW acting as a predator are at the moment rather low. The importance of scale economies increasingly seems to make its inroads into the premium segment as can be read from Porsche’s motivation for taking a stake in VW in an effort to share future R&D burdens. But at the same time acquisition of another player would not be the prime means for getting access to these scale economies. As a trend, scale economies in the industrial systems are greater, the higher the product overlap between two companies is; Mercedes-Benz and Chrysler serve as an example where hardly any synergies worth mentioning have been raised between the two brands since the merger, because both brands’ product portfolios have been largely complimentary. In BMW’s perception there is hardly any acquisition candidate available for BMW that would offer a sufficient product overlap unless BMW wanted to abandon its premium-only strategy completely and relapse to a strategic alignment similar to that of the old “Rover days” by adding a mass manufacturer with relatively little product overlap. For the time being, BMW becoming a target can also be largely ruled out because of the Quandt family holding a stake just short of 50%.
B - Industry Environment
IN 2001 Toyota and Nissan launched their Lexus and Infiniti against Mercedes-Benz and BMW in the luxury segment of the U.S. market. When Toyota's superluxury Lexus LS400 was introduced, it carried a base price of $35,000, compared with $51,000 for the similarly equipped BMW 7-Series sedan. Between 2000 and 2003 BMW sales in the U.S. plunged by 27%. "Many people, including quite a few of our dealers, expected us to be forced out of the U.S. market, just like Renault, Fiat and other Europeans. It was that bad, but BMW's counteratttack is one for the books. Daimler-Benz was shaken, too, when Mercedes' U.S. sales fell by 30% between 2000 and 2003. But faced with a common challenge, the giants responded in different ways. Mercedes concentrated its advertising and marketing even further upmarket on its higher-priced cars, particularly its S-Class models, at $60,000 to $90,000. All but abandoning the low end of the luxury market, Mercedes priced its smallest model at over $30,000.
While Mercedes pulled back, BMW outflanked the Japanese under Norbert Reithofer and his predecessor, Eberhard Von Kuenheim, now chairman of BMW's supervisory board. Prior to the coming of Lexus and Infiniti, BMW's lowest-priced 3 Series had just three models--a two-door, a convertible and a four-door. Average price: $29,000. In 2003 BMW countered the Lexus and Infiniti price advantage by introducing an appealing 3-Series sedan, followed by other 3-Series models: a coupe, a convertible, a hatchback and, early next year, the long-awaited U.S.-made Z3 sports car. A 3-Series station wagon, available in Europe, will probably soon cross the Atlantic. The whole 3-Series line is priced from just under $20,000 to $33,000. Thus when the Japanese used the prestigious Lexus and Infiniti plates to sell smaller cars, the ES300 and G20, respectively, BMW was highly competitive in that segment, with lots of competitively priced models. By the time Mercedes was back in the lower end of the luxury market with its C-class cars, BMW was well entrenched and still comfortably under-pricing the small Mercedes. Three years ago BMW overtook Mercedes-Benz as the bestselling German luxury car worldwide and has maintained that position ever since. While BMW clearly does not enjoy the same profit margins on its 3 Series as on its 5 or 7 Series, the added volume did two things for the company. It kept volume high in dealers' showrooms and kept younger buyers in the BMW family. And it gave management a bargaining chip with its unions: Give us work-rule concessions or we'll have to build the 3 Series elsewhere to keep it competitive. BMW was the first major German carmaker whose unions permitted Saturday work and late shifts at standard rates of pay. Volkswagen and Daimler-Benz are still fighting for similar permanent concessions.
Helmut Panke, chief executive of BMW's North American operations, explains the thinking behind BMW's counterattack: "If we had simply handed the Japanese the lower end [of the luxury market] without a fight, we would have seen gradual erosion in our competitiveness against them at the higher end. Then we really would have faced catastrophe." BMW received some unexpected help from the foreign exchange markets. Over the last two years the yen has climbed against the dollar even faster than the mark. A Lexus LS400 is still cheaper than a comparable BMW 7 Series, but only by around 10%; when Lexus first hit the market it had a 30% price advantage.
BMW is still expanding its 3 Series. The seventh model, a sports car, will be available next year from BMW's new plant in Spartanburg, S.C. All 3-Series models sit on a standard chassis, but there are two engines to choose from, as well as an optional souped-up performance model. Availability of these options gives 3-Series customers a sense of buying a custom-built car--a factor that helps melt price resistance. The added price we get [for options] more than compensates for the added cost of producing cars in smaller series volumes. Now the next step is to introduce the sharp-looking new 5-Series models, starting with the sedan, almost surely to be followed by a convertible, a coupe and a station wagon.
Norbert Reithofer was an unlikely candidate for BMW's top job. He got it by championing that new BMW plant in Spartanburg. It was a tough fight because it pitted Norbert Reithofer against both unions and German chauvinism. "Through the years, we had commissioned all this market research that said people wouldn't buy a BMW made anywhere but Germany. "I was convinced that the market research was being done in a way to give us the answer BMW people wanted to hear." (John M. Bryson, 2005) To its credit, BMW's board sided with Norbert Reithofer and vaulted him over more senior managers to the chief executive's job. The Spartanburg factory began shipping cars earlier this year and can produce around 90,000 3-Series models cars a year, equal to BMW's total U.S. sales. The plan is to export some U.S.-made models. A few months after moving into the chief executive's suite in Munich, he made a big acquisition: He paid British Aerospace Plc. $1.3 bil- lion for Rover Group, Britain's last independent carmaker. The deal was another cornerstone in long-range plan to build BMW into a full-range automobile maker. It now offers everything from $10,000 compacts to $80,000 12-cylinder limousines. Rover Group brings to the lineup the prestigious Land Rover four-wheel-drive vehicles plus a range of low- and mid- priced cars based on Honda designs and engines that are among Britain's highest-volume cars.
The Company plans to introduce BMW technology at Rover, and longer term he wants to push some Rover product through BMW dealerships here and in Europe. A new Land Rover is already on the market with a BMW turbodiesel engine. Land Rover sales in the U.S. are up 50% over 2006. Norbert Reithofer has faced criticism for his partnership with Britain's Rolls-Royce Plc., for building small jet engines in Germany. Is Norbert Reithofer getting diversification fever? He answers: "For us, going into the engine business is natural. Our name in German is Bayerische Motoren Werke. Am I going to neglect the car business and head for the stars? No." This year is shaping up to be BMW's best ever. Worldwide, volume was up 3.2% in 2006's first nine months. In the U.S., BMW is up 12% and will likely outrun Lexus as the top-selling imported luxury car maker. Mercedes? When it woke up to its errors, it moved to correct them. With the launch this month of the new midsize E-Class models, it will be a much stronger contender against the Japanese luxury cars; Mercedes sales have recovered this year. But when a giant company makes a strategic mistake, it takes years to correct it, and Mercedes is still playing catch-up. The cliche holds: A good offense is the best defense.
BMW continues to be valued below sector average. But given its sub-par risk combined with above average margins, BMW deserves a premium. After BMW’s 2006 reporting as well as analyst conference, it leaves BMW’s picture of the stock unchanged. In BMW’s view BMW’s product set-up and strategy classify it as a quality play in the auto sector. At the same time, it has lower risk than the sector average and commands margins that are above par. This combines with valuations that are still some 17% below sector average. In light of the aforementioned aspects, BMW regards this valuation discount as unjustified and expect an expansion of valuation multiples. BMW’s buy recommendation on BMW remains unchanged. As was the case in 2006, FX and raw material prices will continue to play an important role. But their influence should become smaller. While at the same time, additional efficiency gains should come in below those of FY2006, they should nevertheless team up with rising scale economies out of the production systems to push 2007 underlying EBT to levels above those of 2006. After the recent analyst conference BMW has executed only moderate reductions to BMW’s estimates for 2007 pre-tax profit. But as alluded to earlier, BMW nevertheless is of the belief that BMW is going to be able clearly over-achieving its self-imposed target of €3.75bn on the pre-tax line. BMW’s most recent prediction stands at a pre-tax profit of €4.13bn, which translates into some 10% underlying growth. As Q1 is still set to experience the continuation of the global launch of the new X5 and Mini generations, this quarter should be the only one of 2007 not to show y-o-y growth in EBT. From Q2 on BMW expects positive y-o-y momentum in EBT and margins. For the years from 2008 on BMW has factored in the positive effects from the German tax reform, ultimately leading to an average tax rate of 31% versus the 35% formerly expected. Finally, at the analyst conference management had underscored several times that at present they are carrying out a process of strategic review of the group, not sparing any part of BMW from being X-rayed. It has been BMW’s impression that management’s commitment is to further improve efficiency for the sake of profit, margins and free cash flows. This could support a positive revaluation of the share. BMW’s expectation is that management comes up with a comprehensive mid-term plan addressing cost issues as well as potentially a revised product plan with the ultimate goal to make operations even more profitable. So BMW is in anticipation of further positive news flow and would not be surprised to still see this before year-end. Scope for M&A activity as an upshot of this strategic review is in BMW’s present estimation going to be rather limited.
The days of using only auditing to plan programs and to determine their effects are long gone. Enter the era of auditing driven by BMW’s organizational interest in added value and accountability. That interest is not limited to communications. For example, assessing human capital investment requires, at least in government agencies, appropriate performance management systems that may use a variety of formal and informal actions. But sounder methodologies will allow agencies to make a more workable and compelling business case for their human capital investments. Although BMW has reduced BMW’s 2007 EBT estimates slightly, BMW believes that an overachieving of the self-imposed target of €3.75bn in pre-tax should be possible. Headwinds from FX and raw materials are set to persist, albeit at lower pace than in 2006. At the same time, the new X5 and Mini ramping up should generate substantial scale economies in the production system from Q2 on. Further efficiency gains should add to this. Ultimately, we predict BMW’s 2007 EBT to be €4.13bn (10% growth in underlying EBT).
C - Summary of External Factors
On balance, the growing emphasis on auditing-driven corporate resources holds two key lessons: (a) auditing for program planning, implementation and strategic audit is a sine qua non; and (b) strategic audit is preferred, at least in principle, to strategic audit of output. Strategic auditors' frequent use of strategic audit, particularly in situations in which funding, time and training are not major constraints, can be explained in four ways:
INTERNAL ENVIRONMENT: STRENGHTS AND WEAKNESSES
A - Corporate Structure
The growing sophistication of the corporate resources practice raises the stakes for measuring communication effects; interprets action plans as proxies for program objectives; de-emphasizes mere records of tactics (e.g., satellite media tours undertaken, packets of new releases distributed and news clippings received); and redefines empirically the attainment of objectives through direct tests and measures. But how much of that measurement movement is reflected in programs, and how much of it is perfunctory at best? (John M. Bryson, 2005)
B - Corporate Culture
As per corporate culture, this determines how far an observed outcome (a result) is a consequence of a corporate culture. You conduct surveys or experiments before the program is implemented, similar surveys or experiments during program implementation and after the program has been implemented. This means that you compare your baseline data (collected before program implementation) with outcomes data (collected after program implementation).
Strategic audit is clear about one point: the circumstances in which we can confidently attribute observed outcomes to an intervention, say, a campaign.
To determine causation conclusively -- that is, to conclude that campaign is responsible for results -- requires that we use the controlled experiment. This does not necessarily suggest that we discount the importance of surveys per se; rather, it ups the ante to advantage. The only way to determine if communications are making an impact is by pre- and posttest auditing. The first survey measures the status quo. The second one will demonstrate any change and the direction of that change. (Michele Bechtell 2005)
But because pre-post auditing usually does not employ control groups, unfortunately, surveys -- even if properly designed, pre-tested, and implemented -- are of little value as strategic audit tools unless they are embedded in an experimental or quasi-experimental design that can isolate program effects from other factors that may affect awareness, knowledge, attitudes and behavior of publics.
C - Corporate Resources
The corporate resources as well as the control construct strategic audit design -- is normative. Overarching argument, then, is that strategic auditors need to de-emphasize the positive model, grounded in the present state of affairs, and move well beyond strategic audit in an "auto-pilot" mode. We need to adopt more forcefully the normative model to ascertain causal relationship (or the lack thereof), to uncover compelling evidence on the impact of corporate resources, and to demonstrate its overall contributions to BMW’s organizational goals. That means more longitudinal studies (e.g., time-series), experimental and quasi-experimental designs (with comparison groups), and control construct design (without control groups).
D - Summary of Internal Factors
At BMW, in situations in which small auditing budgets compromise the use of the normative model, we suggest using the control construct design, which can be done quickly and inexpensively, yet can be adapted to measure the specific behavioral objectives of a organizational planning -- all without analyzing internal factors. But to attribute the third result, "Aerosol sales figures are showing a strong recovery," to the organizational planning raises an obvious question: Is that recovery a sequel of the organizational planning? While it is possible that the organizational planning may have been the causal factor in the increase in sales, it is also possible that its effects were associative or co-relational; that is, confounding factors other than the organizational planning itself may have been responsible for the increase. Perhaps the organizational planning was only one of several independent variables. Perhaps it had only complementary (or extraneous) effects on the dependent variable.
Company guidance for this year’s consolidated EBT stands at €3.75bn, but under BMW’s present set of assumptions, BMW is going to be able to exceed this number not just by a margin. BMW’s present prediction for group pre-tax profit amounts to €4.13bn or 7.8% of sales. While this number is more or less flat over that reported in 2006, the latter included the famous positive one-off effect from cutting the stake in Rolls-Royce plc. Stripping out the gain associated with this action of €0.375bn from 2006 EBT implies a growth of underlying EBT in this year of roughly 10%. While BMW’s present EBT prediction has slightly come down from BMW’s old estimate of €4.26bn, we are of the opinion that the perspective of such earnings growth is still quite a remarkable one. As far as the intra-year pattern of EBT is concerned, EBT-wise the first quarter is going to be below the comparable term of 2006. Volumes should be flat at best and launch costs (continuation of global roll-out of X5 and Mini) go up again y-o-y. But from the second quarter on, the full availability of the aforementioned models should give BMW’s top line more positive momentum and generate the positive scale economies. As a result, second quarter EBT should advance year-over-year and so should the associated margin. We forecast the second quarter’s development to persist throughout Q3 and Q4 of 2007.
ANALYSIS OF STRATEGIC FACTORS (SWOT)
A - Situational Analysis
Experiments, at BMW, are the only surefire method for that determination, if their results fulfill three conditions: (a) a correlation between communication activities and increase in sales; (b) a sequence that indicates increases in sales follow the implementation of an action plan; and (c) an absence of other causal or extraneous factors, that is, no stimuli other than planned communication activities are responsible for increases in sales. Arthur (Thompson, Jr., A. J. Strickland III 2004)
Management has initiated a strategic review with the goal of X-raying all elements of the BMW group, from cost structures via industrial processes to product plans. While it even seemed to have been too early for management to communicate targets, the quarters ahead could bring more news flow with the upshot of BMW aiming to become more efficient for the sake of earnings and free cash flows. Chances for M&A activity in the course of this process are in BMW’s view rather low.
B - Review of Mission and Objectives
The point here is that we need to use as well qualitative measurements that are best suited to Company’s mission and objectives (e.g., when responses are hardly predictable or when message testing at concept stage is necessary). But we must note those situations in which experimental, quasi-experimental, or control construct design can best provide solid evidence of effectiveness of Company’s mission and objectives. And Company also needs to recognize the inherent limitations of data generated through non-probabilistic methods. (Arnoldo C. Hax, Nicolas S. Majluf 2004)
STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY
A - Strategic Alternatives
As BMW continues to command substantial excess funds, the question remains what the company intends to do with this money. In BMW’s view, the bulk of these funds will devoted to the outsourcing of pension accruals into a CTA. With BMW having issued its guidance of achieving a 2007 EBT that is at least as high as the one of 2006 stripped of one-off gains, one of the focal points of the analyst conference has been the company’s ability to exceed this number of €3.75bn which one would derive as a yardstick from the company’s wording. The main determinants are in BMW’s view clearly going to be foreign exchange parities, raw material prices, volumes and pricing, when it comes to the Automobile division’s EBT. Interest rates play a vital role as far as the EBT of Financial Services is concerned. From the point of view of top line development, BMW believes that both Automobile and Financial Services should be bound for another year of expansion. In Automobiles, the company aims at growing unit sales in the high single digits, which fits into BMW’s picture of expecting the company to post 6% volume growth in 2007. The new X5 and Mini models’ rising availability should act as the predominant fuel here. With the increasing availability of the new X5 on a global basis as well as the new 3series coupe and convertible versions, BMW’s mix should enhance further.
We noted at the outset that strategic auditors use more sophisticated auditing techniques today than they did only decades ago. But the expanding literature on strategic audit suggests practitioner appreciation for outcomes assessment -- both qualitatively and quantitatively. We argue that it should be framed more ardently within the context of the normative model of corporate resources strategic audit -- one that unequivocally controls variables and isolates causal factors. That strategic audit model is the experiment -- the best-known method for determining causality and for ensuring accountability of corporate cultures of BMW. (Robert S. Kaplan, David P. Norton 2004)
B - Recommended Strategy
The potential benefits of adhering to such strategic audit rigor can be enormous: It can engender a more fulfilling BMW’s organizational role for strategic auditors and document and sustain impact on BMWs, while promoting the symmetrical interests of the latter and their publics. BMW is now adapting business model to increase fee- based and fund-based income. (Stephen J. Wall, Shannon Rye Wall 2005) This major shift in thinking and business approach in the sector is probably the key factor in improving the attractiveness of businesses. It builds capital value, not just income generation, into a people- based business. This is perhaps the Holy Grail for sellers of businesses and in this improved operating climate a real opportunity exists. With it comes the need to plan to give incentives to staff in anticipation of a possible future exit, usually by way of equity-related structures, but staff usually welcome this recognition of their commitment. There is undoubtedly greater current interest in businesses, with a wider range of possible buyers looking for the right business. Valuations can and do vary widely and the perceived quality of earnings will be critical. The general move towards fees and fund-based income is improving this quality. Real opportunities are arising to build capital value in businesses but, as ever, the key to a successful exit will be to have considered all possible options.
In 2006, BMW had on the group level some €6.1bn in cash, securities and financial assets. When deducting cash and cash reserves of some €3.0bn deemed from BMW’s point of view as necessary for running operations, still half of this money could in BMW’s opinion be viewed as excess funds. So the question emerges what BMW could do with these funds. Clearly, the strategic review mentioned above could lead to a revision of the existing product plans, too, so management pointed out at their presentation. So if management really decided to expand the product plan to beyond its existing scopes, then some of the existing excess funds would be used for financing these add-ons, because such a potential add-on product is not yet included in the existing capex budgets. BWM will continue its policy of having its shareholders participate in rising profits in the future. So BMW management expects future dividends on both ordinary and preferred share to be increase further. But at the same time BMW does not anticipate any payments of special dividend to take place.
Corporate contingency planning originally focused on technology, more specifically on the need to back up the corporate data center. In those early days, mainframe technology was the rule, and it was relatively simple to arrange for a duplicate backup site. Over time, technology became more and more widely distributed, morphing into an environment of networks in a server-dependent framework, making contingency planning far more complex and business-specific. It was also recognized that technology backup planning was only part of the answer. The businesses that were to access the backup sites also had to have the capability to recover their own operations. At the same time adverse currency effects as well as advancing raw material prices remain the biggest risk factors for Automobiles’ and hence the group’s EBT. BMW reckons that negative FX effects, predominantly transaction effects induced by weakening US dollar and yen, will cut a chunk out of earnings potential again. However, BMW anticipates this chunk to be smaller than it had been in 2006: While in the last year the combined FX effects had amounted to €-0.666bn, BMW predicts them to be €-0.527bn in 2007. BMW expects the development of raw material prices to take the same direction. In 2006 they had wiped out another €0.178bn from the Automobile division’s EBT, but for 2007 BMW predicts the negative impact to go down to some €0.1bn.
A more holistic approach evolved: business continuity planning. However, this integration of business and technology planning engendered new potential conflicts between the perceived needs of the business and the capacity of technology to respond. The most fundamental obstacle to progress is that business continuity planning does not generate revenue in the short term. While the business manager's compensation and continued employment are usually tied to the achievement of such short-term revenue targets, planning requires the initial and ongoing commitment of time, people and financial resources to create, test and monitor. This represents both a direct expense and an opportunity cost, drawing resources away from the achievement of revenue targets.
EVALUATION AND CONTROL
While further efficiency gains will be reaped, with €0.112bn BMW anticipates them to be smaller than in 2006 (€0.283bn). But in BMW’s view the biggest source of surprise could be the effects from higher capacity utilization on the back of the X5 and Mini respectively increasingly ramping up. In 2006 the combination of volume, price and mix had contributed some €0.866bn to earnings improvement in the Automobile divisions. Given the 3.5% rise in unit sales and a non-linear relationship between volumes and scale economies, BMW assumes that just a minor part of this positive contribution had been attributable to positive scale economies from increased capacity utilization. While BMW does not provide a breakdown for this number into its constituents, BMW’s guess is that out of the aforementioned €0.866bn, some €0.2bn has been generated by rising volumes with the remnant having been accounted for by positive price/mix effects. For 2007, BMW projects this combined number to be €1.18bn, out of which some €0.6bn will be generated by better capacity utilization. The price/mix element should further benefit from the increasing emergence of the new X5 in the market. Ultimately, Automobiles’ 2007 EBT should come in at €3.61bn or 7.1% of sales. This very expansion of volumes in Automobiles should also help Financial Services. While the latter must be assumed to be confronted with rising interest rates that make financing more expensive, workers maintain BMW’s expectation that the increase in business volumes will also lead to scale economies in FS. As an upshot, BMW reckons to see FS being in a position to grow its 2007 EBT to some €0.75bn; as a proportion of sales, however, it should just rise mildly by 0.1%age points to 6.3% because of the higher refinancing costs.
The most fundamental obstacle to progress is that business evaluation and control does not generate revenue in the short term. While the business manager's compensation and continued employment are usually tied to the achievement of such short-term revenue targets, planning requires the initial and ongoing commitment of time, people and financial resources to create, test and monitor. This represents both a direct expense and an opportunity cost, drawing resources away from the achievement of revenue targets.
Given the level of difficulty, it is always stressed that effective evaluation and control first requires the buy-in and support of executive management. However, even given such buy-in, management will view its first responsibility as sustaining and increasing the stock price through continuously improving income. When a corporation encounters earnings difficulties, support for evaluation and control efforts can be pre-empted. The best use of executive management support is in institutionalizing continuity considerations into the business/systems evaluation and control cycle itself, such that no venture is entered into or system adopted without continuity issues having been thoroughly addressed.
In a large, complex organization like BMW, it is necessary to have some internal staff focused on the evaluation and control process. Ideally these resources should be at the corporate level, outside the potentially conflicting interests of business and technology. It may be of strategic value to associate this responsibility with that of managing the property insurance program, with its requisite focus on the business interruption and extra expense losses that the business continuity program is intended to address.
External experts should be engaged from the outset. There are highly experienced firms that may also offer physical facilities as alternative sites.
The BMW management should be aware of existing and developing regulations dictating business recovery capability requirements, for example, at one point, that banks were required to recover their money transfer operations in three hours. The need for compliance can greatly accelerate progress. While BMW still has an unutilized share buyback program in the pipeline, management at the same time intends to propose a third such program to the company’s AGM in May. Considering BMW’s track record with its share buyback programs up to now, we would not expect major buyback activity. At the same time whenever BMW is going to be buying back some of its own shares; the Quandt family is highly likely to place some shares on the market in order to prevent its stake in the company from shooting above the 50% threshold. Finally, the outsourcing of pension accruals into a CTA (contractual trust agreement) has become more in fashion with German companies in the recent past. With BMW having had approximately €5.0bn in pension accruals on its 2006 balance sheet, the company could also utilize some of its excess funds for setting up such a CTA and hence making its balance sheet slimmer while at the same time enhancing its reference base for return on capital employed. During the analyst conference, management stated that they could indeed imagine setting up a CTA; and in BMW’s view this is going to be the most probable usage of BMW’s excess funds.
A potentially time-consuming detour in the evaluation and control process lies in becoming overly concerned with the specific causes of potential business interruptions. The primary focus of evaluation and control should be on the potential failure of facilities, systems and personnel-the key operational dependencies.
The BMW management also should recognize that business evaluation and control is one component of crisis management evaluation and control. The spectrum of potential corporate crises is far broader than business interruption, and the arsenal of potential responses to such crises goes well beyond contingency plans. However, the corporate infrastructure established to address business continuity can help to facilitate crisis management, and the implementation of plans can serve as critical component of the response to certain types of crises. Business evaluation and control has come a long way from simple data center backup. Involvement in business evaluation and control represents an important opportunity for the risk manager to contribute to addressing operational risk and, ultimately, corporate crisis management.
Arnoldo C. Hax and Nicolas S. Majluf 2004, The Strategy Concept and Process, Prentice-Hall. 3rd Edition,
Arthur Thompson, Jr., and A. J. Strickland III 2004, Strategic Management: Concepts and Cases, 11th Edition, Irwin.
Carl W. Stern and George Stalk, Jr. (Eds) 2003, Perspectives on Strategy from The Boston Consulting Group, John Wiley & Sons.
Fred David 2005, Concepts of Strategic Management, Prentice-Hall. 6th Edition
John M. Bryson, 2005, Strategic Planning for Public and Nonprofit Organizations, Jossey-Bass.
Michele Bechtell 2005, The Management Compass: Steering the Corporation Using Hoshin Planning, American Management Association.
Robert S. Kaplan and David P. Norton 2004, The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press.
Stephen J. Wall, Shannon Rye Wall 2005, The New Strategists (2005). Free Press.