This Document Contains Cases 20 to 22 Starbucks Corporation – 2011 Forest David A. Case Abstract Starbucks is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Seattle, Washington, Starbuck’s common stock is publicly traded under the ticker symbol SBUX. Starbucks is the largest specialty coffee retailer in the world with more than 16,850 coffee shops in 50 countries. Go into any Starbucks and you can buy coffee drinks and food items, as well as roasted beans, coffee accessories, and teas. Starbucks operates more than 8,800 of its shops, which are located in about 10 countries (mostly in the US), while licensees and franchisees operate more than 8,000 units worldwide (primarily in shopping centers and airports). Starbucks also owns the Seattle's Best Coffee and Torrefazione Italia coffee brands. Starbucks also markets its coffee through grocery stores and licenses its brand for other food and beverage products. Starbucks is doing great having very effectively weathered discount coffee promotions at McDonald’s and Dunkin Donuts. B. Vision Statement (proposed) To become the number one chain restaurant in the United States. C. Mission Statement (proposed) At Starbucks we strive to provide our customers (1) around the world (3) with the best coffee (2) we can offer from around the world. We are strong advocates of the fair trade (8) policies which means we only do business with companies that pay fair wages and do not engage in child labor. To ensure quality control, we have strict standards on the roasting method (7) and personally over all roasting to ensure it is done to our standards. We consider all of our employees (9) as partners and hire the best scientist who use the latest technology (4) to ensure quality standards are maintained (5, 6). 1. Customers 2. Products or services 3. Markets 4. Technology 5. Concern for survival, growth, and profitability 6. Philosophy 7. Self-concept 8. Concern for public image 9. Concern for employees D. External Audit Opportunities 1. Potential $377 million market annually for flavor coffee in the US. 2. Peet’s Coffee & Tea Inc. struggling with higher coffee commodity prices. 3. Customers enjoy single brew coffee machines. 4. Average Starbucks customer ears over $75,000 per year. 5. 25% of Americans eat fast food everyday. 6. Weaker US Dollar. 7. Growing economies in Eastern Europe and China. 8. Brazil is the 2nd largest coffee consumer in the world. Threats 1. Dunkin Donuts and McDonald’s offer lower priced coffee. 2. Green Mountain’s Keurig single brew coffee machine. 3. Weaker economic times can drastically hurt sales on expensive coffee. 4. Coffee can be made easily at home for a fraction the cost of Starbucks. 5. Dunkin Donut recent IPO in summer 2011. 6. The price of coffee is subject to wild swings on the commodity market. 7. Health minded customers consider many of their favorite coffee and lattes to be high in sugar and fat. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Starbucks is the third largest chain restaurant in the US based on 2010 sales. 2. World’s largest coffee company with 16,635 stores in 50 countries. 3. Starbucks has locations in 35 cities in China. 4. Plans to open 1500 stores in China by 2015. 5. Able to purchase Starbucks coffee from your phone at 6,500 locations. 6. Signed a deal with Courtesy Products to provide coffee in 500,000 luxury hotel rooms national wide. 7. Recently changed logo design dropping “Starbucks Coffee” to “Starbucks Logo.” 8. Stores are viewed as places to study, meet friends, and relax. Weaknesses 1. Policy of keeping the tap water running nonstop. 2. Mostly limited to coffee related products. 3. Inventory turnover of 11 vs 20 for the industry average. 4. Forced to close over 600 stores during the economic recession. 5. Do not offer cheaper coffee products for more price sensitive customers. 6. Mission and vision statements are not clear and lack direction. 8. Failure to develop a product to compete with Green Mountain’s Keurig single brew coffee machine. 9. Only 4% of revenues come from ground coffee sold in stores. Financial Ratio Analysis Growth Rate Percent Starbucks Industry S&P 500 Sales (Qtr vs year ago qtr) 6.80 8.50 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 28.50 28.00 47.50 Sales (5-Year Annual Avg.) 8.48 9.66 8.27 Net Income (5-Year Annual Avg.) 16.46 16.30 8.68 Dividends (5-Year Annual Avg.) NA 0.00 5.68 Profit Margin Percent Gross Margin 26.4 26.4 39.9 Pre-Tax Margin 15.5 15.1 18.1 Net Profit Margin 10.7 10.4 13.2 5Yr Gross Margin (5-Year Avg.) 23.1 27.5 39.8 Liquidity Ratios Debt/Equity Ratio 0.13 0.12 1.01 Current Ratio 1.8 1.8 1.4 Quick Ratio 1.4 1.4 0.9 Profitability Ratios Return On Equity 30.9 30.1 26.0 Return On Assets 18.2 17.9 8.9 Return On Capital 25.3 24.7 11.8 Return On Equity (5-Year Avg.) 24.1 22.9 23.8 Return On Assets (5-Year Avg.) 12.4 12.1 8.0 Return On Capital (5-Year Avg.) 18.7 17.9 10.8 Efficiency Ratios Income/Employee NA 1,246 126,213 Revenue/Employee NA 13,684 1 Mil Receivable Turnover 34.0 39.2 15.7 Inventory Turnover 11.4 20.8 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Develop two new flavor coffees for $25M (S1, O1). 2. Acquire Peet’s coffee and tea for $750M (S7, O2). WO Strategies 1. Develop a single brew coffee machine for in home use for $100M (W5, O3). 2. Open 100 new stores in Brazil at $500K each (W4, O8). ST Strategies 1. Spend $200M on advertising to portray Starbucks as a place to study and enjoy coffee (S8, T4). WT Strategies 1. Reduce price by 30% on regular coffee (W5, T1). 2. G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Segment (company operated) 2010 Revenue Beverages 75% Food 19 Whole bean and soluble coffees 4 Merchandise 2 Total 100 J. QSPM K. Recommendations 1. Develop two new flavor coffees for $25M. 2. Acquire Peet’s coffee and tea for $750M. L. EPS/EBIT Analysis (in millions) Amount Needed: $775M Stock Price: $43.30 Shares Outstanding: 745 Interest Rate: 5% Tax Rate: 31% M. Epilogue For Q4 of 2011 that ended September 30, 2011, Starbucks (SBUX) reported excellent same-store sales expansion and an improved business outlook, despite higher coffee costs. The company’s total revenues, on a comparable 13-week basis, increased 15 percent, while earnings per share increased 16 percent to a record $0.37. Global results for Starbucks in their fiscal Q4 rose 9 percent on a comparable 13-week basis thanks to a 6 percent jump in traffic and a 3 percent increase in ticket prices (US results increased 10 percent, while international comps advanced 6 percent). These excellent results were better than rival Dunkin Brands’ (DNKN) 6 percent increases. US consumers seemingly can’t get enough of Starbucks' brew thanks to growth of its loyalty program (My Starbucks Rewards program) and fall promotions (Pumpkin Spice Latte, etc.), while international growth continues to improve also. On the heels of this excellent performance, Starbucks increased its dividend by 31 percent in November 2011 and announced an authorization to purchase as many as 20 million shares more of the company’s stock. Starbucks plans to open 800 net new stores globally during 2012, with half opening in the Americas, 300 in China and Asia, and the balance in EMEA (Europe, Middle East, Russia, and Africa). In fact, the firm expects to have 1,500 stores open in mainland China by 2015, a rapid pace of expansion (it currently has about 500 stores open there). Starbucks’ future looks excellent as the company has locked in lower coffee costs through 2013 and Starbucks K-Cups (which will be available in US retail stores in 2012) will likely become a more material earnings driver. Its partnership with Green Mountain (GMCR) will help propel results as well. Starbucks is very confident about its Starbucks Blonde Roast (a premium light roast coffee), which will be available in retail stores in January 2012, and estimates the market opportunity to be about $1 billion. Pearson PLC – 2013 Forest R. David A. Case Abstract Headquartered in London, England, Pearson is the largest education company and the largest book publisher in the world. Pearson’s major competitor is McGraw-Hill. Pearson publishes market-leading books and newspapers in education (Prentice Hall, Longman & FT Press), consumer markets (Penguin, Dorling Kindersley, and Ladybird), and business information (Financial Times). With about 40,000 employees, Pearson has three operating divisions, as of 5-1-1): 1) The Penguin Group, 2) Pearson Education, and 3) The Financial Times Group. However, on July 1, 2013, Pearson and Bertelsmann completed the joint venture between Penguin and Random House to create Penguin Random House, the world's leading consumer publishing company with operations in the US, Canada, UK, India, South Africa, Australia, New Zealand, Spain, Mexico, Argentina, Uruguay, Colombia and Chile. The new joint venture company employs more than 10,000 people and publishes more than 15,000 new titles annually across 250 imprints. The new company publishes many of the world’s bestselling authors, including more than 70 Nobel Prize laureates. B. Vision Statement (actual) Pearson’s strategy has revolved around our commitment to become the leading global learning company. C. Mission Statement (proposed) We strive to help people of all ages grow and prosper by utilizing our extensive learning materials, technologies, (4) assessments, books, and materials (2). We are among the world’s leading education, publishing, and business information companies (7). While raising literacy levels and improving learning outcomes, we continually decrease our impact on the environments (8) in the 70 countries in which we operate (3) and build our brand in growing markets around the world. Our employees (9) maintain the highest levels of integrity (6) while delivering outstanding materials to teachers, students, readers, and the international business community (1). At Pearson, we believe in “Always Learning” and building esteem in people and communities (8) while growing profitably for our shareholders (5). 10. Customers 11. Products or services 12. Markets 13. Technology 14. Concern for survival, growth, and profitability 15. Philosophy 16. Self-concept 17. Concern for public image 18. Concern for employees D. External Audit Opportunities 1. E-books are becoming more popular among students and are renewed more frequently, cutting out the used book market substantially. 2. E-books remove many production expenses such as shipping, paper, binding, etc. 3. Professors and teachers are continually looking for online grading and programs to compliment in class instruction. 4. Emerging markets are going more rapidly than the USA and Western Europe. 5. There remains a strong desire among teachers and professors to continue to use the traditional hard back books. 6. Teachers value up to date materials. 7. Many students in the USA are on financial aid or receive scholarships that pay for their books. And k-12 books are provided by the tax payers. 8. Digital newspaper circulation as of Summer 2013 comprises nearly 20% of all newspapers. 9. Moving forward, there will likely be increased demand for dependable information from trusted authors. 10. McGraw-Hill’s profits declined from $911 million in 2011 to $437 million in 2012. Threats 1. McGraw-Hill is a large competitor that has cornered the market with their Connect Software and alliance with Blackboard. 2. McGraw-Hill is operating much more efficiently on most financial ratios. 3. There remains a strong desire among teachers and professors to continue to use the traditional hard back books. 4. Paper costs can increase as much as 10% per year. 5. Increased risk of electronic piracy on e-books. By some reports, e-book piracy increased 50% in 2010 alone. 6. Used book market significantly erodes into profits as many books are used multiple times with Pearson only generating revenues from the initial sale. 7. Print newspaper circulation has been falling rapidly for the last 10 years (although leveling out now) and suffered another slight decline from the first 6 months of 2012 to the first 6 months of 2013. 8. Up to 30% of all books are returned to the publisher unsold. 9. New competitors, possibly even solo authors can emerge more easily with the e-book model. 10. Recent laws in the USA allow books, not allowed by law to be initially sold in the USA, to leave port, be purchased at sea (often only a few miles offshore) then legally returned to the USA market for sale at reduced prices. 11. Competitive Profile Matrix Pearson is competing well with rivals McGraw-Hill and John Wiley, but needs to devote increased resources to MyLab products. EFE Matrix In an industry that is under heavy pressure from used textbooks and declining newspaper sales, Pearson is performing slightly above average in addressing these issues. Continuing to expand the electronic edition of the Financial Times as well as promoting increased e-books and developing strong electronic ancillary packages for textbooks are viable strategies moving forward. E. Internal Audit Strengths 1. Pearson is one of the largest education companies and the largest book publisher in the world. 2. USA accounted for 55% of revenues in 2012. 3. Student registrations for MyLab grew 11% in 2012. 4. 60% of education sales are from North America, but Pearson operates in over 70 countries. 5. Brand names include: Scott Foresman, Prentice Hall, Addison-Wesley, Allyn and Bacon, among others. Each brand is generally tailored to specific field of study. 6. Pearson’s Connection Education in the USA operates online K-12 schools and served more than 43,000 students in in 2012, up 31% from 2011. 7. Revenues in Asia Pacific grew from £514 to £647 million or 25% from 2011 to 2012. 8. Revenues in “other countries” (possibly Latin America) grew from £339 to £371 million or 9% from 2011 to 2012. 9. Financial Times reported digital subscriptions increasing 18% in 2012. 10. Pearson’s Research & Innovation Network consists of 5 research centers devoted to market research techniques to improve the quality of education for students and teachers. Weaknesses 1. Pearson has no clearly stated vision or mission statement. 2. Penguin group is now classified as held for sale after the loss of control from selling 53% of Penguin group to Bertelsmann. 3. Professional division reported a drop in operating profits from £55 million in 2011 to an operating loss of £124 million in 2012. 4. Revenues in the USA only grew 3.4% in 2012 while revenues in the UK, Europe, Canada all declined slightly. 5. The Financial Times, while popular, only experienced revenue increases of 3% in 2012. 6. Total equity for 2012 totaled £5,710 million. However, intangible assets accounted for £6,218 million leaving for a negative equity position after subtracting out intangibles. 7. Inventory turnover is 6.1 and the industry average is close to 10. 8. ROA of 3.3% to McGraw Hill’s 14.6%. 9. Asia Pacific only accounted for 12% of 2012 sales. 10. Late entering the digital e-book and Blackboard type markets. Financial Ratio Analysis (Pearson in GBP, Industry in USD) Profit Margin Percent Pearson Industry Gross Margin 56.09 30.96 Pre-Tax Margin 7.79 11 Net Profit Margin 5.47 7.88 Liquidity Ratios Debt/Equity Ratio 0.39 0.41 Current Ratio 1.36 1.07 Quick Ratio 0.84 0.82 Profitability Ratios Return On Equity 4.89 6.66 Return On Assets 2.49 3.42 Return On Capital 2.31 4.58 Efficiency Ratios Income/Employee 6,561 11,485 Revenue/Employee 120,055 210,652 Receivable Turnover 4.15 7.51 Inventory Turnover 6.05 29.97 Asset Turnover 0.46 0.43 Pearson is performing well on most financial ratios, but struggles with inventory turnover. It is possible the industry average number here is inflated with firms who sell more newspapers than Pearson. Net Worth Analysis (in millions) Pearson is worth around £11 billion which is almost exactly the same value as McGraw-Hill’s $19 billion valuation. IFE Matrix Pearson’s performance is about average in addressing internal issues. Key weaknesses for Pearson are its weak ROA ratio in relation to McGraw-Hill as well as being a late mover into the digital e-book market. Pearson should also double sales in Asia in by 2016. F. SWOT SO Strategies 1. Increase e-book sales by 100% by 2015 (S1, S3, O1, O2, O3). 2. Increase sales of MyLab-supported products by 100% by 2015 (S1, S3, O1, O2, O3). 3. Expand the Financial Times electronic version by 50% in the USA and offer as a part of My Lab to students taking strategic management courses (S9, O8). 4. Double sales of traditional books in Asia and Latin America by 2018 (S4, S7, S8, O4, O5). WO Strategies 1. Divest the Professional division (W3, O1, O2, O3). 2. Increase authors’ royalties by 2% annually to attract the best authors and reward outstanding current authors (W4, W8, O9, O10). 3. Expand the Financial Times electronic version by 50% in the USA and offer as a part of MyLab to students taking strategic-management courses (W5, O8). 4. Double sales of traditional books in Asia and Latin America by 2018 (W4, O4, O5) ST Strategies 1. Spend £200 million to hire top qualified people to develop MyLab content for all Pearson books (S3, T1). 2. Offer increased incentives for professors and students to switch to electronic books (S1, S3, T3, T4, T6, T10). 3. Begin an annual renewal cycle for all textbooks (S1, T3, T4, T6, T8, T10). 4. Offer 3 free months for anyone signing up for a 12 month electronic subscription to the Financial Times (S9, T7). WT Strategies 1. Develop an improved vision and mission statement (W1, T1, T2). 2. Increase authors’ royalties by 2% annually to attract the best authors and reward outstanding current authors (W4, W8, T1, T2, T9). 3. Offer 3 free months for anyone signing up for a 12-month electronic subscription to the Financial Times (W5, T7). G. SPACE Matrix Pearson is well positioned within the SPACE Matrix. Key strategies to undertake are expanding the Asian market and developing a better MyLab package for professors. H. Grand Strategy Matrix As one of the largest textbook producers in the world, Pearson has a strong competitive position on its rivals. However, the textbook and publishing market in general is under pressure and not growing as rapidly as other industries. Focusing on growing areas such as Asia and Latin America are viable strategies, moving forward. I. The Internal-External (IE) Matrix Segment 2012 Total Sales (in millions) 2012 Operating Profits North American Education £2,658 £463 International Education 1,568 135 Professional 390 (124) FT Group 443 41 Total £5,059 £515 Pearson needs to decide what actions to take with its Professional segment, moving forward. The firm needs to rapidly develop new MyLab and electronic services for its USA market and continue expansion into Asia and Latin America. J. QSPM Focusing on expanding MyLab, e-books, and electronic versions of the Financial Times wins out of providing outstanding authors (based on sales) a 2% raise on royalties each year. The growing need to be electronic is an overwhelming issue facing Pearson and many in the publishing industry. However, attracting quality authors is likely to be just as important, moving forward, as quality information will become harder to find as the quantity of information increases. K. Recommendations 1. Increase e-book sales by 100% by 2015. 2. Increase MyLab sales by 100% by 2015. 3. Expand the Financial Times electronic version by 50% in the USA and offer as a part of My Lab to students taking strategic management courses. 4. Double sales of traditional books in Asia and Latin America by 2018. 5. Increase authors royalties by 2% annually to attract the best authors and reward outstanding current authors. 6. Spend £200 million to hire top qualified people to develop MyLab content for all Pearson books. 7. Begin an annual renewal cycle for all textbooks. 8. Offer 3 free months for anyone signing up for a 12 month electronic subscription to the Financial Times. 9. Develop an improved vision and mission statement. L. EPS/EBIT Analysis (in millions of £ expect for EPS and Share Price) Amount Needed: £400 Stock Price: £13.66 Shares Outstanding: 818 Interest Rate: 4% Tax Rate: 34% As economic conditions improve, debt financing becomes more attractive. M. Epilogue In June 2013, the MOFCOM, the Chinese competition authority, approved the planned merger between Penguin and Random House without conditions. This action follows approval in the USA, Europe, Australia, New Zealand, Canada and South Africa. The two companies expect to close the transaction in July 2013 at which time Bertelsmann will own 53% and Pearson 47% of Penguin Random House. The combined, new company will be the largest consumer publishing company in the world. In May 2013, Pearson announced a new organization structure and new top executives designed to accelerate Pearson’s push into digital learning, education services, and emerging markets. To take effect January 1, 2014, the new Pearson structure organizes around three global lines of business – School, Higher Education and Professional – and three geographic market categories – North America, Growth and Core. The new top executives are: School - Doug Kubach Higher Education - Tim Bozik Professional - John Ridding North America - Don Kilburn Growth markets - Tamara Minick-Scokalo Core markets - Rod Bristow The three new Global lines of business will have primary responsibility for strategy and product development, while the three new geographic businesses will have primary responsibility for customer relationships, sales, marketing and product delivery. Pearson will report its sales and profits by both lines of business and geography from 2014. On October 8, 2013, NBC News partnered with Pearson to launch a digital Parent Toolkit. Produced by NBC News and sponsored by Pearson, the Toolkit helps educate and empower parents in guiding the education of their children from ages 5 to 17. The Toolkit gives parents benchmarks of achievement that should be achieved at all ages of a child’s pre-college education, especially including Math and English Language Arts, with “Growth Charts,” a section featuring general U.S. academic benchmarks, organized by grade. Bayerische Motoren Werke (BMW) Groupe – 2013 Forest R. David E. Case Abstract Headquartered in Munich, Bavaria, Germany, BMW is a large automobile, motorcycle and engine manufacturing company founded in 1917. BMW is the parent company of Rolls-Royce Motor Cars. With about 100,000 employees, BMW produces motorcycles under the Motorrad and Husqvarna brands and sponsored the 2012 Olympics in London. Financial services bolster BMW's bottom line, including purchase financing and leasing, asset management, dealer financing, and corporate fleets. About 3,000 dealers worldwide sell BMWs, including the Mini, the 3, 4, 5, and 6 Series. In September 2013, Mercedes-Benz gained ground against both BMW and Audi AG as the introduction of the Mercedes CLA coupe helped demand almost double for the company’s compact models. Sales by Mercedes, owned by Stuttgart, Germany-based Daimler AG, rose 16 percent from their September 2012 number to 143,000 cars and sport-utility vehicles. The 16 percent number was higher than BMW’s 7.6 percent increase and Volkswagen’s Audi’s 10 percent increase in September 2013. BMW, Audi and Mercedes are all seeking to attract buyers with new vehicles such as the CLA, the BMW 4-Series coupe and the sedan version of Audi’s A3 compact. Audi and Mercedes have plans to overtake BMW as the world’s biggest luxury-car seller by the end of the decade. With such fierce, determined rivals, BMW needs a clear strategic plan going forward. F. Vision Statement (proposed) To be renowned as the top quality automobile and motorcycle company in the world. G. Mission Statement (proposed) We strive to be the most successful automobile manufacturer (2) in the world (3) by providing premium products and services to people and businesses (1). We manufacture products in sustainable facilities (8), using the latest technology (4), and offer exceptional benefits and growth opportunities to our employees (9). Our philosophy is to uphold the highest ethical standards (6) while maintaining strong fiscal stability (5) and a commitment to excellence (7). 19. Customers 20. Products or services 21. Markets 22. Technology 23. Concern for survival, growth, and profitability 24. Philosophy 25. Self-concept 26. Concern for public image 27. Concern for employees 28. H. External Audit Opportunities 1. Growth in sales of luxury vehicles exceeds growth in all other automobile categories. 2. Formula One, NASCAR, Indy Racing, and other racing organizations are outstanding ways to promote products. 3. Growing middle and upper class in China, India, Eastern Europe and Latin America. 4. Financially well to do people are less effected by down turns in the economy than middle and lower class families. 5. Growing desire for hybrid style cars among customers. 6. BMW head of sales and marketing recently said “We are confident of healthy sales growth especially in Asia and the Americas.” 7. Ford and GM saw sales drop by around 10% in Europe. 8. Growing demand for diesel engines and trucks in China and other developing markets. 9. Ford and GM continue to struggle in the USA and international markets. 10. Germans take a sense of pride in their subject matter and want to be as well prepared as possible, so they can contribute and make key points during the meeting. In general, the German worker is well skilled. Threats 1. Volkswagen (VW) is the largest car manufacturer in Germany and aims to double its USA market share from 2% to 4% by 2014, and aims to be the world's largest carmaker by 2018. 2. VW introduced diesel-electric hybrid versions of its most popular models in 2012, including the Jetta, followed by the Golf Hybrid and the Passat. VW owns Porsche. 3. Mercedes-Benz is active in three forms of motorsport racing: Formula Three, DTM, and Formula One. The parent, Daimler AG, holds a 60 percent stake in Formula One team Mercedes-Benz Grand Prix 4. Mercedes-Benz’s U.S. sales surged 11% in January 2013, in its effort to overtake BMW in luxury-auto deliveries for all of 2013. 5. Lexus sales (owned by Toyota), were up 23% in the USA in 2012 through November, and are expected to gain at least 10% in 2013. 6. Audi designs, engineers, manufactures and markets automobiles and motorcycles and competes heavily with BMW on luxury cars. 7. Rising gas prices and pressure to produce more fuel-efficient automobiles and growing concern over emissions and pollution. 8. Public transportation is fairly common in much of Europe and large cities in the USA. 9. “Looking ahead, we expect the headwinds in Europe to remain,” said Ian Robertson, BMW’s head of sales and marketing. 10. Competitive Profile Matrix All three firms above are top rivals in the auto industry. BMW lags on ROE and inventory turnover. EFE Matrix BMW is performing very well across the board on all external issues with a score of 3.15. E. Internal Audit Strengths 1. In June 2012, BMW was listed in Forbes magazine as the #1 most reputable company in the world. 2. BMW owns and produces the Mini marque, and is the parent company of Rolls-Royce Motor Cars and produces motorcycles under the Motorrad and Husqvarna brands, led by the K 1200 GT, R 1200 RT, and F 800 S models,. 3. BMW Group operates 29 production and assembly facilities in 14 countries and has a global dealer network in more than 140 countries. 4. BMW's premium lineup includes sedans, coupés, convertibles, and sport wagons in the 1, 3, 5, 6, and 7 Series, as well as the M3 coupe and convertible, the X5 sport active, and the Z4 roadster. 5. In calendar 2012, BMW Group sold 1.85 million cars and nearly 117,000 motorcycles worldwide, the highest annual total ever for the company and an increase of 10.6% over the previous record year in 2011. 6. Success was led by the highly successful BMW 1 Series, with a total of 226,829 vehicles sold in 2012, an increase of 28.6% over the previous year. The BMW X1 also did very well in 2012 with a total of 147,776 vehicles sold, up 16.9% over the prior year. The BMW 3 Series Sedan did best though with 294,039 vehicles delivered, an increase of 22.4% over 2011. 7. In early 2013, BMW Group and Toyota Motor Corp. extended their long-term collaboration agreement for the joint development of a fuel cell system, joint development of architecture and components for a sports vehicle, joint research and development of lightweight technologies, and collaborative research on lithium-air batteries with a post-lithium-battery solution. 8. China led all nations with 30,000 BMW vehicles sold in 2012, 50% higher than the 20,000 sold in the USA. 9. “BMW Genius Everywhere” program will began in the USA in late 2013, with a full launch by early 2014, which is when the new BMW i3 electric car is due to go on sale. 10. Total revenue increased 13% in 2012. Weaknesses 1. BMW only sold 2,311 units in Russia in 2012. 2. Over 50% of all motorcycle sales come from Europe. 3. Note that BMW is the smallest firm (between Daimler, Toyota, GM, Nissan, and Volkswagen) in terms of # of employees, but has the second highest EPS. 4. USA only accounts for 18% of all BMW automobile sold. 5. USA only accounts for 10% of all BMW motorcycle units sold. 6. No meaningful sales are derived from developing countries on motorcycles. 7. Inventory turnover of 5 vs the industry average of 10. 8. Quick ratio of 0.66 vs an industry average of 1.0. 9. Debt-to-equity of 1.24 vs an industry average of 0.70. 10. Only uses premium gas, and cost of repairs can be higher than normal. Financial Ratio Analysis Profit Margin Percent BMW Industry Gross Margin 19.98 16.37 Pre-Tax Margin 10.2 4.13 Net Profit Margin 6.76 4.82 Liquidity Ratios Debt/Equity Ratio 1.26 0.72 Current Ratio 1.08 1.25 Quick Ratio 0.66 0.98 Profitability Ratios Return On Equity 17.28 10.99 Return On Assets 3.96 3.44 Return On Capital 6.4 4.93 Efficiency Ratios Income/Employee 48,376 31,652 Revenue/Employee 715,364 730,037 Receivable Turnover 34.8 3.24 Inventory Turnover 5.77 10.45 Asset Turnover 0.59 0.71 BMW is doing very well on most ratios, but the firm has a problem managing inventory versus its peers. Net Worth Analysis (in millions) Daimler is worth about 32% more than BMW based on 2012 data. IFE Matrix BMW is doing very well in addressing internal issues, but needs to focus on increasing market share in the USA market. F. SWOT SO Strategies 1. Increase presence in the USA by 20% by 2016 for €1 billion (S3, S4,S6, O1, O6, O7). 2. Establish 50 new dealerships in China by 2016 for €25 million (S2, S4, S6, O3, O8). 3. Build 4 new production facilities (Georgia, USA; Southeastern China; Northeastern China; Czech Republic) for €100 million each (S2, S4, S6, O3, O8). WO Strategies 1. Open 20 new dealerships in Russia, mostly in Moscow and St. Petersburg (W1, O4, O8). 2. Spend €10 million on advertising motorcycles in Brazil (W2, W6, O3, O6). 3. Spend €25 million on advertising motorcycles in the USA (W5, O6). 4. Spend €100 million to redevelop engines to accommodate gas of lesser octane ratings (W10, O10). ST Strategies 1. Spend €50 million promoting the advantages of BMW over Audi in the USA market (S1,S4, T7). 2. Offer free sunroofs on all cars sold in the US market in 2014 for a cost of €75 million. (S1, S4, T2, T5, T6, T7). 3. Establish 50 new dealerships in China by 2016 for €25 million (S2, S4, S6, T6). 4. WT Strategies 1. Add heated seats in the back seats of all BMW 1 Series cars in 2014 for €25 million (W3, T1, T2, T3, T4, T5). 2. Reduce the amount of cars provided to European dealerships in 2014 and 2015 by 10% each year (W7, W8, T8, T9). 3. Spend €25 million on advertising motorcycles in the USA (W5, T7). G. SPACE Matrix While BMW is smaller than its larger competitors, it still is a large firm, offering an excellent product and should continue to expand into USA and China, moving forward. H. Grand Strategy Matrix Sales for BMW, Daimler, and Honda grew 11%, 8%, and 25% respectively from 2011 to 2012. I. The Internal-External (IE) Matrix Segment 2012 Total Sales (in millions) (1) Europe (not including Germany) €16,364 (2) Asia 14,436 (3) North America 12,991 (4) Germany 11,974 Other 3,042 Total €58,805 BMW is a well-balanced company with revenues fairly consistent across regions. With the high euro and lower transport costs, it is assumed the Germany would have the highest profit margin, resulting in that segment being in the upper right corner even though it has fewer revenues. The firm also produces motorcycles, but only 2% of total 2012 revenues were derived from these operations. J. QSPM Both strategies are attractive, but building new production plants, especially two new ones in China and one in the USA, should be undertaken first. K. Recommendations 1. Increase presence in the USA by 20% by 2016 for €250 million. 2. Establish 50 new dealerships in China by 2016 for €25 million. 3. Build 4 new production facilities (Georgia, USA; Southeastern China; Northeastern China; Czech Republic) for €100 million each. 4. Open 20 new dealerships in Russia, mostly in Moscow and St. Petersburg for a cost of €10 million. 5. Spend €10 million on advertising motorcycles in Brazil. 6. Spend €25 million on advertising motorcycles in the USA. 7. Spend €100 million to redevelop engines to accommodate gas of lesser octane ratings. 8. Spend €50 million promoting the advantages of BMW over Audi in the USA market. 9. Offer free sunroofs on all cars sold in the US market in 2014 for a cost of €75 million. 10. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: €950 Stock Price: €83.28 Shares Outstanding: 602 Interest Rate: 5% Tax Rate: 35% Debt financing produces the highest EPS for BMW; however, with the current level of debt above the industry average, equity financing or some combination of financing may be more appropriate. The equations here are assuming 5% interest, so if it were possible to obtain a lower rate, then debt may indeed be the most attractive option. M. Epilogue BMW Group is doing well in all product lines and regions of the world, although sales in Europe lag other regions. The company reported its best May sales ever in 2013 when 166,397 Group vehicles (BMW, MINI and Rolls-Royce) were sold worldwide, an increase of 6.0 percent. Worldwide sales of BMW brand vehicles grew 7.8 percent to 139,161 cars. Sales of the BMW X1 were also great with 14,718 vehicles being delivered in May, an increase of 29.3 percent over the same month in 2012. The BMW 3 Series also sold well in May with a total of 41,811 vehicles delivered, an increase of 27.5% compared to 2012. Sales of the BMW 6 Series were great too with 2,391 vehicles delivered worldwide in May 2013, up 18.9 percent over the prior year. Also in May 2013, worldwide sales of the BMW MINI declined 2.1 percent with 26,955 cars delivered. Year-to-date, MINI worldwide sales however were down 1.5 percent from last year’s level with 117,694 units sold in the first five months. But, BMW Motorrad sales increased 14.2 percent to 13,081 vehicles. In the first five months of 2013, BMW Motorrad increased sales by 7.1 percent to 52,400 vehicles. In Asia, BMW Group sold a total of 46,838 vehicles in May 2013, a 13.4 percent increase over the prior year, including in Japan (4,810/ +16.2%), South Korea (3,340/ +11.3%), and Mainland China’s 31,938 deliveries, an increase of 14.8 percent over the same month last year. Year-to-date, 148,319 BMW and MINI vehicles were sold in Mainland China, up 9.8 percent over the prior year. Also for May 2013, BMW Group reported big increases in sales across America with 38,771 vehicles delivered (previous year 35,127/ +10.4%). The USA contributed 31,174 deliveries to this total, an increase of 10.1 percent over the same month in 2012. A total of 139,142 BMW and MINI vehicles were sold in the USA since the beginning of 2013 (previous year 130,843/ +6.3%). In Europe, sales remained at the year 2012 level in May with 74,918 units sold, but in Russia, sales increased 19.9 percent to 3,891 units. Year-to-date as of June 1, 2013, BMW Group sales in Europe grew 2.2 percent to a total of 352,013 vehicles. In September 2013, BMW Group sold 189,675 vehicles, an increase of 6.7 percent over the 2012 figure. For the first nine months of 2013, BMW’s sales increased 7.5 percent to a new all-time high of 1.43 million vehicles delivered. The excellent results were led by the BMW 3 Series which showed a 13.9 percent increase in units sold in September 2013 vs the prior year. The BMW 5 Series reported a 2.7 percent increase in units delivered, while the BMW 6 Series sales grew 22.6 percent. BMW’s sales in Asia in September 2013 grew 18.0 percent compared to 8.3 percent in the Americas and only 0.7 percent in Europe. Instructor Manual Case for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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