Concepts of International Business Affect Transactions
In this paper, I will attempt to illustrate how a number of international equines concepts played a significant role In my ability to purchase my BMW eight years ago, and how my choice may differ considerably today. I will venture to carry out this analysis based on some of the issues we have covered in the class. Before beginning my analysis, a brief summary of the BMW credentials Is In order. BMW Is one of the leading manufacturers of cars and motorcycles in Europe headquartered in Munich. The company primarily operates in Europe and the Americas.
Besides automobile manufacturing, the company also provides Information technology and financial services. The company has its manufacturing plants spread over 13 Mounties on four continents and showrooms across 150 countries worldwide. This allows the company to take advantage of favorable labor rates In developing countries to lower its production costs, as well as to set up platforms to facilitate the logistics of importing vehicles around the world. Chances are that my BMW 525 was produced In the plant located In Tailcoat, Mexico.
It was then shipped to California tariff-free based on NONFAT provisions. I bought my car at the time when the car market was swarming
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I focus my analysis in this paper on two topics: (1) Why the BMW, a German auto maker, was so readily available in U. S. And (2) How did BMW convince me to buy their car instead of other cars available to me? My analysis of the first issue is based on Michael Porter’s Diamond model that soy on four market conditions. B. Porter’s National Diamond Framework Michael Porter conceived that a nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Porter’s study tried to explain why a nation achieves international success in a particular industry.
This study found four broad attributes that promote or impede the creation of competitive advantage: factor endowments, demand conditions, relating and supporting industries, and firm strategy, structure, and rivalry. While considering how BMW came to be so popular and accessible in U. S. A. I look to the four elements of Porter’s Diamond (Hill 2013, p. 197): (1) Factor Endowments: The original concept that the patterns of commerce and production are dependent on the factor of endowments in a trading region was developed by the economists Hecklers and Olin at the Stockholm School of Economics.
Their model builds on David Orchard’s theory of comparative advantage. Basically, the model suggested that a nation will export products that use its copious and cheap factors of production and import products that use the country’s limited factors. According to Porter, the traditional factor endowment argument made by Heckler-Olin model is unsophisticated. Porter asserts that the factors most important to comparative advantage are not innate (as Heckler-Olin model suggested), but are created and that the broad categories of land, labor, and capital are too general.
He divides factors into two categories: basic versus advanced and generalized versus specialized. Basic factors like natural resources, climate and unskilled labor are inherited while advanced factors are those whose development demands large and substantial investment in human and physical capital. The distinction of generalized versus specialized is based on their ability to perform tasks. Generalized factors are available in most nations.
They can be obtained on global markets and their activities can be performed at a distance from the home base, whereas specialized factors are developed with considerable investment from the generalized factors. Porter argues that sustainable competitive advantage exists when a nation state possesses the factors necessary to compete in particular industry, which are both advanced and specialized. Germany is a rich source of skilled labor in technology and has a long tradition of engineering excellence.
The German workforce consists of 40 million people (the largest pool of ready labor in the ELI). Germany’s world-class education system ensures that the highest standards are always met. More than 80 percent of the German workforce has received formal vocational training or is in possession of an academic degree. German federal and state governments agreed in 2008 to increase public and private education investment levels to seven percent of gross domestic product by 2015. Skilled labor is a vital home grown factor condition identified by Porter as a source of comparative advantage.
Thus BMW has a comparative advantage in terms of access to skilled labor for competing in international markets (Hill 2013, p. 198). 2) Demand conditions: The nature of demand in the home nation determines which business from that country has the comparative advantage. In explaining the relevance of demand conditions Michael Porter specifically referred to the German dominance in high performance automobile segments by noting that “Daimler, BMW, their irrepressible urge to drive on autobahns at terrifying speed. As someone who had the opportunity (although only as a thirteen year old) to travel from Copenhagen to Amsterdam through Germany in the BMW seven hundred series sedan driven by my uncle at an average speed of 185 kilometers per hour (115 MPH) during the trip, I Lully concur with Mr.. Porter’s sentiment (Hill 2013, p. 199). (3) Related and Supporting Industries: The availability of key resources and capabilities in the form of clusters provides a source of comparative advantage over rivals from countries that lack comparable support network.
A number of major competitors in the automobile industry are based in Germany (BMW, Wed and Mercedes). So, there is a solid cluster of related and supporting industries (Hill 2013, p. 199). This has an undeniably positive effect on Bum’s economies of scale – specifically, on external economies of scale. To put it simply, economies of scale fifers to the fact that the unit costs decrease with the increase in production. In the case of external economies of scale, the size of the industry matters.
A company trying to expand will necessary face increased costs, but if the entire industry expands, the costs of the individual actors in the industry are lowered. This is the case in Germany where large saturation of automobile manufacturers exists. This benefits BMW and other German car companies. (4) Strategy Structure and Rivalry: The level of competition in national markets drives innovation and provides a platform for international competitive advantage.
Unlike in the case of European firms in high-tech industries that failed because of the tendency of respective EX. governments to create so called national champions (like Siemens in Germany) which in turn has diminished the level of domestic competition, the automobile industry is subject to intense competition between major actors in the industry for the European market in general, and for the German market in particular. This provides an incentive for innovation. Thus, BMW is (as it was when I purchased my BMW 525) in a position to develop and transfer applicable capabilities to the international markets (Hill 2013, p. 9). Based on the above-discussed factors, BMW is in a favorable position to exploit its position to make its presence felt in a bigger way not only in the national market, but also in the international automobile arena. Not surprisingly, USA is Bum’s biggest single market. Ergo, l, as a consumer, was able to get access to the “ultimate driving machine” in California. C. BMW Global Strategy (1) Market Segmentation: BMW uses three steps in its marketing process: market segmentation, target choice, and product positioning. How does BMW use segmentation to identify specific buying characteristics?
To find more information BMW looks at the geographic, demographic, psychological, socioeconomic, and beneficial characteristics of society which helps them to target the market more effectively (Hill 2013, p. 584). Geographically, Bum’s main markets (where they achieve almost two thirds of sales) are Europe and North America. Both these areas are highly economically developed locations, and the residents there are better situated financially to buy upper market cars than those in developing or undeveloped countries because their per capita income is substantially higher.
The demographics of people who are able to purchase a BMW are men and women aged hose customers are superiority, performance, reliability and quality (Hill 2013, p. 585). The image that BMW has managed to achieve over the years is to position itself on the customers mind is that of a technologically advanced, performance oriented, exceptional quality automobile maker. The market where BMW positioned its products is highly competitive because of a number of other automobile manufacturers that produce cars with the similar attributes.
Bum’s main competitors include Mercedes, Jaguar, Audio, Range Rover, and Propose. Most of these manufacturers use differentiated strategies to produce a argue range of cars and has similar product life cycle which BMW follows. The difference is that each of these companies relies on different brand images to sell their cars. For example, Jaguar is seen as a reliable luxury car producer similar to BMW, where Alfa Romeo is seen as a stylish high performance automobile which spends more time “on the blocks” than on the road.
BMW has strategically attained its brand position in the market over the course of more than 60 years. However, in today’s hyper competitive auto market, BMW is facing increased pressure to add value to its product to stay competitive by implementing a business strategy which ill allow the company to stay ahead of its competition. (2) Transnational Strategy: A firm’s business strategy is a course of action managers take to attain the goals of the firm, I. E. , to increase profit and to expend profitability.
In order to compete in a global marketplace, a company must face two kinds of conflicting competitive pressures: (1) the pressure to reduce costs and (2) the pressure to be responsive to local needs by adopting its products to meet demands in each market. On one hand, because of the competition in a prime car market resulting in similar prices on comparable cars from other manufacturers in the auto industry, different government policies on imports, trade environment, etc. , BMW faces pressure to lower its costs to compete with other Mans in the industry (Toyota, VOW, Daimler, etc).
On the other hand, it has to contend with differences in customer expectations which may vary greatly from region to region. By selecting to pursue this transnational strategy, BMW is attempting to achieve low costs through location economies, economies of scale, and learning effects while differentiating its products globally to account for local preferences. (a) Adding Value by Lowering Costs: Firstly, BMW managed its supply costs by eating up its production facilities in countries around the world: Germany, North America, South Africa, I-J, India, and China.
By doing this, the company gave its assembly units more flexibility and substantially reduced the costs of transportation of raw materials. Secondly, BMW has attained economies of scale by increasing its production capabilities. Why does it matter? Well, economies of scale are factors that cause the average per unit cost off product to go down. One of the major factors in achieving economies of scale in the context of manufacturing is by increasing the output. BMW has the capacity to substantially increase its weekly hourly operations when demand changes from weak to peak.
BMW had produced a whopping 1,963,798 million cars in fiscal year 2013. Finally, the unit costs of BMW are declining due to the gain of cumulative experience Monsoons, Schools, Whetting, 2011). BMW has been in the automobile sector since the end of the Second World War. BMW To that end, the company continues to increase the output by establishing new assembly plants. (b) Adding Value by Adopting to Local Preferences: BMW achieves its goal of catering to its customers in several ways. In addition to its flagship BMW brand, the company also owns “Mini-Cooper” and “Rolls Royce. So, BMW offers a wide range of vehicle from the middle market category to premium and luxury models. For example, more Mini-Cooper cars have been sold in China last year than in the United States. Because the average age of the buyers in India and China is 9 years younger than of the buyers in the US, BMW concentrates its attention on smaller vehicles, as well as its electrical units to promote its image as CEO-friendly. BMW has a “one- global-brand” approach (global standardization) that allows minor adaptations pending on the region’s demographics, environmental, and economic conditions.
For example, in India, the car maker offers a higher suspension because of the low ground clearance on Indian’s roads. BMW vehicles also use different intake filters because of the Indian’s high air pollution. These minor adjustments are made to insure the serviceability of the cars sold in India. Also, BMW does not provide the type of made-to-order customization in BRICK markets (Brazil, Russia, India, and China) that has become common place in more traditional markets like US in asses. In entrant, in the United States BMW utilizes mass customization to meet the demands of the consumers.