bmw strategic management case study

How BMW’s strategic pivot made it a global automotive giant

Table of contents, here’s what you’ll learn from bmw's strategy study:.

• How changing industries is not a straightforward endeavor, but staying true to your identity’s core traits will help you achieve it.
• How clarity of vision guides the transformation process and helps you fit in an evolving industry.

The BMW Group – Bayerische Motoren Werke – is a German manufacturer of automobiles that markets its products through the brands BMW, Mini, and Rolls-Royce. It’s among the top 10 biggest car manufacturers in the world by revenue.

The Quandt family owns 50% of the company, specifically Stefan Quandt and Susanne Klatten, while the remaining 50% is publicly traded. Chairman of the Board of Management is Oliver Zipse since 2019.

BMW's market share and key statistics:

• Brand value of $27.6 billion
• Net worth of $52.9 billion as of December 22, 2022
• Annual revenue of $131.6 billion for 2021
• Total number of employees: 118,909
• 2,521,514 deliveries in the automotive segment in 2021

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Humble beginnings: How did BMW start?

BMW was officially founded on March 7, 1916.

It was the result of a merger between Gustav Otto’s company,  Otto Flugmaschinenfabrik  and  Bayerische Flugzeugwerke.  However, the company was combined with Karl Friedrich Rapp’s company  Rapp Motorenwerke  in 1922 and was named  Bayerische Motoren-Werke AG (BMW AG).

Today, BMW is known for its iconic cars and powerful engines. But its first business was aviation.

Aviation: BMW’s first business had people flying

The early twentieth century was a period of constant technological innovation in aviation.

As such, the demand was high and although there were only a handful of manufacturers, the competition was fierce. In the dawn of highly specialized spaces, the competition between companies is essentially a competition between individual inventors and their teams.

BMW had Franz Joseph Popp and Max Friz on its side, two excellent and experienced inventors. However, what set BMW apart from its competitors was the solid financial footing that enabled it to focus on supreme performance and reliability in the design of its aero engines. Instead of focusing on cost reductions and short-term convenience, the company focused on sophisticated engineering solutions and novel manufacturing techniques.

For example, the six-cylinder Type IIIa engine that Friz developed was performing exceptionally well in higher altitudes. In fact, it was so powerful that it gave the German Fokker D.VII fighter such an edge in World War I that it urged the air ministry to make space for its production in the BMW facilities by giving the production of another BMW engine to Opel, a competitor. In addition, once the war was over, Armistice’s fourth clause required Germany to hand over all D.VIIs to the Allies. It was that powerful.

But the Armistice also forbade the production of aero engines, forcing BMW to a complete restructuring.

It’s important to mention that building aircraft technology imbued BMW’s culture with values of extreme performance and technical sophistication that remain today.

BMW’s strategic pivot: how it moved to car manufacturing

The post-war era was tough for manufacturers in Europe since the end of military contracts meant that manufacturers were left with excess capacity, inflation was increasing, and the only available contracts were small and not very profitable.

Frank Popp, who ascended to General Director at BMW, devised a long-term strategy to develop future stability while keeping the company alive. His  strategic plan  was focused on three main pillars:

• Taking smaller manufacturing contracts to keep the cash flowing, like producing railway brakes.
• Modifying BMW’s star Type IIIa engine to a four-cylinder model, which was more appropriate for industrial and agricultural applications. That would allow the further development of the aero engine, despite production restrictions.
• Entering the motorcycle arena and using it as a stepping stone to move into the car market.

The strategy had a twofold intention.

The first was a bet  on the removal of the aero engine production restrictions. Fritz was developing the next generation of the company’s star engine, so once the restrictions were lifted, BMW could resume its position as a pioneer in aircraft technology.

The second was a pivot  with a simultaneous approach to retaining revenue streams. The modified engine proved to be profitable, and Fritz’s ingenuity gave birth to the famous “boxer” engine configuration – a motorcycle engine with innovations for more effective cooling and a higher power output – that brought BMW great success in motorcycle races. 

The brilliance of the strategy was its clarity and its executable nature. It took advantage of the company’s current strengths in engineering knowledge, technological innovations, and credibility to move to adjacent manufacturing markets. A tactic that proved to be quite profitable.

In 1923, the bet paid off. The restrictions were lifted, commercial flying was on the rise, and demand was increasing. BMW faced some competition, but its engines proved superior, consistently breaking records of distance - and height - traveled and sustained the company until its entering the car market.

BMW’s challenges during World War II as a car manufacturer

In 1928, BMW entered the car market.

It was a long-standing belief that the company had the capabilities to design and manufacture a car, and its leadership believed that BMW’s long-term survival wasn’t aero engines, but cars.

Its approach was calculated and a few years in the making. The company chose to compete in a smaller, less crowded segment of the market: the small-car segment.

BMW acquired the struggling Automobilwerk Eisenach manufacturer and used its factory to produce the first-ever BMW car under the manufacturer’s brand name: the  Dixi DA1 . It was a variation of the British Austin Motor Company‘s model, the Austin 7. BMW’s engineers improved the model and launched the next generation the following year under the company’s brand name marking the first car designed and manufactured by BMW.

However, the company was far from a car manufacturer at the time.

Its main business was motorcycles. At the start of the 1930s, BMW was known for its powerful engines in the aero industry and its innovative motorcycle designs. The successes in the latter funded the company while honing its engineering capabilities. So, BMW continued developing all three of its business segments – aero engines, cars and motorcycles – with the third one keeping it alive.

But Germany’s austerity had driven all but five German car manufacturers out of business.

In 1933, Adolf Hitler came to power, and things changed.

He revived the industry by providing financial security and certainty, reducing taxation, and building the necessary infrastructures to allow the industry to boom, i.e. highways like the  Autobahn  network. Evidently, Hitler’s intentions behind this investment were the development of engineering capabilities for military superiority and an efficient transportation system. They were in line with his long-term plans that resulted in the horrors of WWII, but nobody could predict that.

So, until WWII started, BMW took advantage of the new market conditions to improve its car engines, expand its target market and develop its first signature car:  the sedan . The car achieved moderate success, capturing 6% of the car market share, beating its number 1 competitor, the Daimler-Benz. BMW managed to make a name as a fashionable car manufacturer.

Soon after that, Hitler’s plans created two challenges for BMW.

The first challenge  was the increased demand for aero engines that took most of BMW’s manufacturing capabilities. With only one car-producing factory, the company was leaving money on the table with its decreased output. Popp’s strategic decision at the time unknowingly saved the company from a certain demise. Instead of opening a new factory, Popp decided to upmarket and aim for the high-end of the market spectrum where margins were better, and the demand couldn’t get out of hand. All three of BMW’s business units were booming until 1940.

The second challenge  was a hostile takeover of the company by Berlin’s dictator. The war was just around the corner. There was no room for commercial manufacturing, only military. Whoever tried to oppose was driven out of the company, including the company’s co-founder Frank Popp. BMW was forcefully transformed into an arms manufacturer and a forced-labor employer.

Once the war ended, the scene was not looking good for BMW. It had multiple facilities bombed, was affected by impossible restrictions imposed by the Allies, and its car factory was left on the wrong side of the Wall.

How BMW survived post-WWII

Good connections between the US Forces and senior BMW managers saved the company from total obliteration and allowed it to remain in business making domestic pots, bicycles and agricultural machinery.

However, the company never completely shredded its previous identity. Old employees returned and the design for a new motorcycle was secretly being developed.

By 1952, BMW had resumed motorcycle and car production. However, none of its products achieved sufficient sales, and by the end of the decade, the company escaped from a near Mercedes-Benz acquisition with the investment of the Quandt brothers. Through a few well-timed and well-seized opportunities, BMW got a hold of great talent and found its breakthrough in the steering wheel of the  BMW 1500 .

Since then, the company has had a steady course to the top accumulating successes in engineering innovation and trend-setting designs that helped the company expand its businesses internationally.

Key Takeaway #1: Accept incoming change and take your expertise with you

When the world changes, clinging to the old status quo is suicide. On the contrary, embracing change without shedding the identity of your company is the best way to adapt.

This is how you can do this:

• Identify what makes your company unique. Do a  SWOT analysis  and a culture inventory (values and accepted behaviors).
• Have clear answers to the following questions: Which strengths and cultural traits can you transfer? What weaknesses and cultural traits must you shed?
• Retain high levels of agility with an iterative approach to execution. Treat your approach as a learning process.

BMW’s current corporate strategy: “We see the future as electric, digital and circular.”

BMW is over 100 years old. It wouldn’t be here today, if it hadn’t demonstrated a powerful  strategic instinct  and a strong,  adaptive  corporate  strategy .

And today, it needs these two more than anything. The landscape of the car industry is going through a transitional phase. The survival of legacy carmakers, like BMW, requires massive transformation and a focused strategy tailored to today’s complex and differentiated external conditions. BMW’s leadership recognizes this fact.

Here are the three conditions that outline BMW’s complex and demanding competitive landscape:

• Increased global competition, including emerging new players in China with potentially global reach.
• Industry-shaping megatrends that take the focus away from traditional car manufacturing traits. Electromobility, connectivity and digitalization have become the new competitive arenas.
• Increased prioritization of sustainability and environmental impact from both buyers and regulatory forces. Followed closely by societal impact.

“BMW Group strategy” is a transformational bet on the future of the industry.

We see the future as electric, digital and circular.

BMW separates its operations into three segments:

• The Automotive segment
• The Motorcycles segment
• The Financial Services segment

And manufactures vehicles under three brands:

• Rolls-Royce

With a quick glance, it’s obvious the company targets the high-end of the market with its offerings ranging from premium to ultra-luxury products. Rolls-Royce is solely ultra-luxury, MINI is premium and BMW products range from premium to ultra-luxury. The company has a unified vision, but each brand will adapt to the company’s vision at a different cadence.

Let’s see how BMW’s corporate strategy tackles the company’s transformation.

Electric Mobility: the competitive landscape and BMW’s strategy

Electric Vehicles (EVs) have been a massively trending category in the last few years, driven by two powerful forces: demand and regulatory requirements. And BMW is committed to becoming one of its major players.

Its goals are to:

• Achieve >30% share of electrified cars in total deliveries by 2025
• Achieve >50% share of electrified cars in total deliveries by 2030

These are ambitious goals and reveal a significant shift in its business focus that requires a massive internal transformation. Success isn’t guaranteed because the space is already crowded and the competition fierce:

• TESLA , the category queen of EVs, defends its top place remarkably well by maintaining its edge in battery engineering and chip design with its in-house expertise.
• Honda partnered with Sony to enter the EV category and Xiaomi announced its plans to build an electric car plant.
• General Motors and Nissan have set their own ambitious goals and brought strong propositions to the market. Ford saw unexpected demand for its F150 all-electric lightning pickup truck, and Toyota promised to offer 30 EV models by 2030.
• Mercedes-Benz made an aggressive move to luxury EVs with its Mercedes-EQ range.
• Alternative, eco-friendly and healthy alternatives are drawing more and more demand.
• China’s investment in infrastructure lowers the barrier of entry for new players and Chinese brands increase their competitiveness.

Not all of these players are direct threats to BMW, but the combined presence shapes the market and the competitive landscape in ways that cannot be ignored. If BMW is to survive and achieve its ambitious goals, it needs to address all of these points with a cohesive and focused strategy.

And so it does.

The company’s strategy in the Electric Vehicles category is aggressive, structured, and developed early. BMW’s approach to its electromobility transformation has three distinct phases:

In the initial phase,  the BMW Group launched the fully electric BMW i3 in 2013, introducing electrification into standard production. The next year came out the BMW i8 with innovative technology and a futuristic design.

In the second and current phase,  the MINI Cooper SE* and BMW iX3* lead the EV offensive. The company aims to have at least one fully electric model in virtually all key model series by 2023. The transformation is supported by developing its in-house competencies and restructuring all of its factories, especially in Germany, to develop the capability of manufacturing EVs. It also incorporates plans for developing a charging ecosystem.

In the third phase,  BMW will launch its fully electric product line-up, the  Neue Klasse . This new line of EVs will be characterized by a complete technology redesign, including redefined tech stack for autonomous driving, a high-performance electric drivetrain generation, and a New Cluster Architecture (NCAR) geared exclusively towards battery electric vehicles. The Neue Klasse line will focus on the concept of circularity (more on this later). Rolls-Royce and BMW’s motorcycle segment will also evolve in the direction of electromobility.

The company’s transition to electric mobility isn’t developed in silos. It’s tied to its digitalization and sustainability initiatives making it cohesive and interdependent.

Tackling digitalization: BMW’s initiatives and transformation

According to BMW’s view, the future of automobiles is highly digitized with increased connectivity.

The company is moving decisively in that direction by focusing its digital transformation strategy on two pillars:

• Initiatives that improve its operations.
• Initiatives for further digitization of its products.

In its operations,  for example, the company implements a  predictive maintenance strategy  to prevent unnecessary production downtimes. It includes the use of sensors, cloud-based data analysis and Artificial Intelligence (AI) to assess the condition of its equipment before they present any flaws. It has also developed a complete online sales process and digital tools to aid customer experience inside the stores.

In its products,  the company is developing appropriate software for all of the engineering aspects of its vehicles and for additional services for its customers. It offers, for example, remote software upgrades and “functions of demand.” Since 2020, the company has been offering the  My BMW  and  MINI  apps. BMW also aims to develop technologies for autonomous driving, i.e.  technologies for automated driving beyond level 3 .

The future of driving is autonomous, and it causes premium and luxury brands, like BMW, to take their attention away from designing the perfect driving experience and directing towards designing a cabin for the perfect cruising experience.

Car mobility turns into a pleasant and sustainable cruise.

Circularity: BMW’s sustainability strategy

The introduction of stringent legislation and regulations regarding environmental impact and responsible governance forces corporations to incorporate sustainability and responsibility into their  strategic planning .

The more prudent companies have developed capabilities to address matters or, at the very least, develop the capacity to adapt to immediate additional regulatory changes rapidly.

So, BMW has set up impressive sustainable goals and mobilizes significant resources to accomplish them. Here are the company’s most important sustainability initiatives:

• Systematic integration of sustainability issues in decision-making. The Board of Management evaluates every topic submitted from the point of view of sustainability.
• Sustainability is built into individual market strategies. A holistic program is developed with centralized measures but combined with local activities in the markets. Best practices are shared within an established international sustainability network.
• Decarbonize the BMW Group’s vehicle fleet by an average of 40% over the entire life cycle (Scopes 1-3) by 2030 compared to 2019.
• Achieve net zero emissions across the entire value chain by 2050.

To achieve these goals, the Group integrates its electric mobility transition with its sustainability strategy. In other words, it changes its entire operational capabilities from product design to product development to product recycling in order to meet its sustainability targets.

But besides demand and regulatory requirements, there is a third force that shapes BMW’s transformation:

The limited availability of high-quality secondary raw materials.

A challenge that heavily impacted the industry in 2021 and is still present. BMW’s answer to that challenge is the concept of  circularity.

The circular economy concept requires a holistic strategic approach and is based on four principles:  Re:think, Re:duce, Re:use and Re:cycle . Its main objective is to create closed material loops that will give the company an alternative source of secondary material. Some highlights of the circularity concept are: 

• The preference for secondary materials by reducing the use of primary raw materials in the automotive value chain. For example, closing material loops in the production chain.
• The implementation of the  Secondary First  approach which stipulates specifications for products, materials, and suppliers.
• Investments in resource-friendly technologies through funding of startups like Lilac Solutions, Boston Metal, and H2 Green Steel that offer materials from total green or eco-friendly production processes.
• Effective resource management, including the reduction of water used in production processes, the reduction of waste generated in its facilities, and the reduction of its emissions of volatile organic compounds (VOC3).

The Group also implements various initiatives to increase its energy efficiency and the amount of energy drawn from renewable sources. However, challenges always occur, and in 2021, the scarcity of semiconductors increased the energy consumption at some of its plants, increasing the YoY absolute consumption of the company.

But the company expects to improve its progress in the following years.

As a testament to its circularity approach, BMW has announced the design of a concept car called  BMW i Vision Circular  that will be made entirely out of recycled material and will be 100% recyclable.

The last part of BMW’s transformation concerns employees and society.

BMW’s employee development, attractiveness, and corporate responsibility

Attracting, retaining and developing talent is crucial for the success of BMW’s transformation.

To become an attractive employer, the company offers the following:

• Above average remuneration packages.
• A variable component dependent on the BMW Group’s overall performance.
• Additional benefits such as Company pension schemes and an attractive range of mobility benefits.
• A diverse range of options for working conditions like flexible working hours, remote working, sabbaticals and additional holidays (with a corresponding reduction in salary)

Its favorable working conditions have earned the company a number of awards and rankings, claiming the top spot against its fellow car manufacturers in multiple prestigious surveys.

To retain the great talent it attracts, the company:

• Conducts an internal employee survey every two years to assess the organization’s performance from within. The last one was in 2021 and demonstrated significant progress in all areas surveyed, and, most importantly, it demonstrated employees' support for integrating sustainability with strategy.
• Encourages employees to submit ideas on matters out of their normal remit and rewards those that generate a positive financial effect for the company with a bonus. In 2021, the company paid € 30.4 million in bonuses.
• Trains its employees. In 2021, BMW launched the largest training initiative in its history that increases the expertise of its workforce in electrics and electronics, data analysis, innovative production technologies, and new working methods.

To further support its transformation needs, the company has also developed internal processes that promote the desired personalities and skills to management positions.

BMW views diversity as a strength and makes considerable effort to embed it into its culture.

• It implements group-wide initiatives to raise awareness throughout the organization, like its annual Diversity Week and the internal communications campaign called  Driven by Diversity .
• It encourages employees to engage and propose their own initiatives while it supports local internal networks and the BMW Group PRIDE group promoting the interests of the LGBT+ community.
• It takes a holistic approach by developing initiatives on five key diversity dimensions: cultural background, age and experience, sexual orientation and identity, physical and mental ability, and gender.
• It has set targets to increase the percentage of women in management positions and in the total workforce of the BMW Group.

The company has a set of KPIs to measure its progress on these fronts and is evaluated externally on the effectiveness of its initiatives.

When it comes to its corporate responsibility, BMW aspires to address concrete needs and achieve a long-term impact by means of its corporate citizenship activities. These activities leverage the company’s expertise and include crisis assistance – e.g. funded rescue services during the 2021 flood disaster in Germany – and developing local educational programs for younger people.

Key Takeaway #2: Bet on a clear and educated vision of the future

There are no strategies that are future-proof. At least, not good ones. When your industry evolves, make sure you’re prepared for the new way of things:

• Increase your sensitivity to market changes and industry trends. Have processes to gather the data, process it and evaluate it.
• Form a hypothesis for the future state of your industry and write it down as clearly as possible. 
• What changes in a fundamental way? For example, the transition from a driving to a cruising experience requires prioritizing different principles.
• Decide who you want to be in that future and what capabilities you need to build today to achieve that.

Why is BMW so successful?

The success of BMW is due to its innovative engineering and design, as well as its demonstrated ability to make sound strategic decisions that help it adapt quickly to market changes.

The company has a long history of innovation that has helped it stand out in the automotive industry, and it is consistently focused on making sure its customers are satisfied with the cars they purchase. Over the years, BMW has evolved into a relationship brand building a loyal – and, dare we say, sometimes hardcore – customer base.

What is BMW’s mission statement?

BMW’s mission statement is “ to become the world's leading provider of premium products and premium services for individual mobility. ”

This vision encompasses the company’s goal of providing the best experience possible in the automotive industry, from the design and engineering of its products to its customer service.

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Inside BMW’s Decarbonization Strategy

If you’re making complex strategic decisions based off of big, emerging trends in your industry, this episode is for you.

• Apple Podcasts

In 2023, the auto industry went through huge changes in pursuit of lower carbon emission. Some automakers, like Ford, Mercedes, and General Motors, announced their plans to stop selling vehicles with internal combustion engines. The reaction from investment analysts was overwhelmingly positive, despite the fact that the production of electric vehicles (EVs) actually increases emissions in the supply chain.

In contrast, BMW decided to pursue a more flexible decarbonization strategy. Their plans include gasoline and diesel-fueled internal combustion engines, plug-in hybrid EVs, and battery EVs. The goal is to reduce lifecycle emissions across BMW’s supply chain, their production, and tailpipe emissions.

In this episode, Harvard Business School assistant professor Shirley Lu explains how BMW analyzed its sustainability goals alongside market-based risks to formulate their decarbonization strategy. She also discusses how the company’s leadership presented their strategy to skeptical stakeholders.

This is the second episode in a special series highlighting the four best strategy episodes of 2023, curated from across Harvard Business Review’s podcasts.

Key episode topics include: strategy, environmental sustainability, climate change, operations and supply chain management, financial performance measurement, transportation and distribution.  

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the original HBR Cold Call episode: BMW’s Decarbonization Strategy: Sustainable for the Environment and the Bottom Line (2023)
• Find more episodes of Cold Call
• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org .

RAMSEY KHABBAZ: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts – hand-selected to help you unlock new ways of doing business. I’m Ramsey Khabbaz, an editor here at HBR. This month, we’re highlighting four of the best HBR podcast episodes on strategy from 2023, curated by me. In 2023, the auto industry went through huge changes in pursuit of lower carbon emission. Some automakers – like Ford, Mercedes, and General Motors – announced their plans to stop selling vehicles with internal combustion engines. In other words, cars that run on gas. And the reaction from investment analysts was overwhelmingly positive, despite the fact that the production of electric vehicles, or EVs, actually increases emissions in the supply chain. In contrast, BMW decided to pursue a more flexible decarbonization strategy. Their plans include gasoline and diesel-fueled internal combustion engines, plug-in hybrid EVs, and battery EVs. The goal is to reduce lifecycle emissions across BMW’s supply chain, their production, and tailpipe emissions. In this episode, Harvard Business School assistant professor Shirley Lu explains how BMW analyzed its sustainability goals alongside market-based risks to formulate their decarbonization strategy. She also discusses how the company’s leadership presented their strategy to skeptical stakeholders. If you’re making complex strategic decisions about big, emerging trends in your industry, this episode is for you. It originally aired on Cold Call in March 2023. I hope you enjoy it as much as I did.

BRIAN KENNY: On April 3, 2020, a woman in Punjab, India posted a photo of the Himalayas on Twitter, taken from her rooftop – and it went viral. The photo itself was unremarkable. It became a sensation because that particular view simply hadn’t existed before that day, which came three weeks after the city was effectively shut down by COVID. Three weeks was all it took to wipe away the cloak of air pollution that obscured the iconic mountain range. The same phenomenon was taking place around the world as photos revealing deep blue skies emerged from the likes of Beijing, Rio, and LA. Scientists say that CO2 emissions dropped by as much as 7% in that period, the largest drop in history and the kind of impact we could expect if say, half of the drivers in the world converted to electric vehicles. But that of course is a big if. Today on Cold Call , we’ve invited Professor Shirley Lu to discuss the case entitled, “Driving Decarbonization at BMW.” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Podcast Network. Shirley Lu conducts research in the area of corporate social responsibility disclosure with a focus on topics related to climate change and gender diversity. Thank you for joining me today, Shirley.

SHIRLEY LU: Thank you for having me.

BRIAN KENNY: We’re going to touch on a couple of those topics today. So this is perfectly timely, and I think this case for me was super eye-opening in a lot of ways. I mean, I don’t have an electric vehicle. I’ve thought about getting one. And there’s some complications with electric vehicles that I think we’re going to get into and that BMW has certainly considered as they move down this path towards decarbonization. And they are sort of a bit of an outlier in terms of their competitors in this space. So I think it’s going to be really interesting for people to hear you talk about that. So thanks for writing the case and thanks for being here to talk about it. Why don’t we just get started right away here. If you want to begin by telling us what the central issue is in the case and what your question is to start the conversation in the classroom.

SHIRLEY LU: Absolutely. I see this case as a decarbonization 101 case for the students, where they learn the basics of carbon accounting, carbon management, but also strategies that today a lot of companies are facing this transition to a low carbon economy. So, I go in the classroom and start by saying that one of those industries is the automobile industry that is facing tremendous amount of pressure coming from regulators, investors. And they’re really focusing on this transition from internal combustion engines. I’ll call that ICE, to electrical vehicles, EVs, which really focuses on the tailpipe emissions. And so, our question for the student and the cold call is: why is BMW focusing on emissions across the entire value chain? So that will start from the supply chain to their own production and then to the use phase tailpipe emissions.

BRIAN KENNY: Now, I teased a little bit in the introduction about your areas of research. We always are interested in what motivates faculty to drill into a particular topic. I’m wondering why you decided to write this case.

SHIRLEY LU: Yes. First of all, I want to highlight this is also a joint work with two other amazing professors here, George Serafeim and Mike Toffel. And they were both kind of experts in decarbonization and thus great research there. So I definitely learned a lot from this process. And this is my first case. So, my hope is both to learn the art of case writing, but also that to do research in a climate space, I think the practice is moving very fast. So for example, the best practices, the challenges. In particular, I’m curious about the credibility of environmental disclosure. All of these are better learned in practice as opposed to having a lot of archival data. And so that’s why for me it’s really important to early on in the career to see how companies are actually doing these carbon accounting and management.

BRIAN KENNY: This is a pretty ambitious one and Mike and George are great. They’ve both been on the show and this is as good a time as any for me to plug Mike’s podcast Climate Rising, Mike Toffel is the host of that, cases like this are the kinds of conversations that he’s having with leaders in this field all the time. So, that’s awesome. Let’s talk about BMW. Everybody knows BMW. They make really nice expensive fast cars. You don’t necessarily think about them as a maker of EVs per se. You think about that stick shift on the floor and the sort of racing vibe that you get. Can you talk a little bit about their history as an automotive maker and the culture within the company?

SHIRLEY LU: BMW was founded in 1916 in Munich, Germany. And initially they actually produced aircraft engines and gradually moving to automobile engines and then automobile cars. And I think they’re best known for being the ultimate driving machine by having really strong engines.

BRIAN KENNY It’s great marketing right there, the ultimate driving machine.

SHIRLEY LU: And hence that transition to EV will be interesting. And two things I want to highlight about that culture when we visited a company. The first one that really comes off a lot when we talked to the employees there is this belief of under promise and over deliver. And so whenever they make a promise, they’ll make sure they deliver it, and if not, they’d rather not make the promise. And for example, when you look at EV, they talk about their driving range. So, when BMW releases a driving range and then someone independent goes in and test it, it’s actually probably longer than the one they listed. Whereas the other companies, it may be the opposite.

BRIAN KENNY: That’s pretty smart actually on their part, I think.

SHIRLEY LU: And then the second part about their culture is they’re very metric target driven, very quantitative. So, they set clear targets. And what’s interesting is everyone in the company owns a bit of that target. What we see is everyone knows the overarching target. So, down to every engineer, when they designed one component for the car, they have a part of that target. So, when I meant target, I mean the decarbonization target. They focused on sustainability starting way back in 1970s, but that’s when they first hire an environmental officer for the purpose of complying with environmental regulations. And then in 2000 is when they defined sustainability as part of their overarching strategy. And starting in 2007, that’s when they started developing the first battery electrical vehicle inside of the company. And that’s a time when there’s no mass produced BEV on the market, before the times of Tesla. And then in 2013 is when they release that EV, which is I3 model. And what’s fascinating is they try to have a EV that has the lowest emissions across the entire value chain, that even the door, they say if you compost a door, you put it on the ground, it will be composted.

BRIAN KENNY: I’ve seen the I3 and the I4, and some of them are a complete departure from what you would expect to see from BMW. So I’m wondering when they introduced these models, how were they viewed? How were they received by people?

SHIRLEY LU: It is quite divided. So, there are some that find it very revolutionary. It’s very different from their traditional cars. It’s very beautiful. To me, it looks a little cute even.

BRIAN KENNY: Right.

SHIRLEY LU: But on the other hand, you also have some critics saying that the market’s simply not ready. And they say it’s because they came up with an I3 so early in the game that’s why right now they’re a laggard in the EV game.

BRIAN KENNY: Okay. And who else are they competing with in this space? Who else is introducing models like this?

SHIRLEY LU: There are two types of players. First of all, you have the newer startups type company like Tesla and like XPeng or NIO in China that are all producing only electrical vehicles. But at the same time, a lot of the traditional automobile companies like Mercedes, like Ford, GM, they’re also facing this transition and pushing out their version of BEVs, battery electrical vehicles.

BRIAN KENNY: So, several of their competitors have already put a stake in the ground about when they’re planning to go completely cut away from ICE vehicles and go completely electric. Is that right?

SHIRLEY LU: Yes. For example, Mercedes say they will be ready to go all electric at the end of the decade where market conditions allow. And also at COP26, a lot of companies including Ford, Mercedes, General Motors, they signed a declaration to essentially ban ICE by 2040. And that’s no later than 2035 in the leading markets.

BRIAN KENNY: But BMW has not put that stake in the ground.

SHIRLEY LU: Exactly. So BMW is not making that statement, and instead they’re focusing on having a flexible powertrain strategy. So, by that, it means if you’re a customer and you want a particular type of car, you should be able to choose having an electrical battery inside or an internal combustion engine inside. So, you should leave that option to customers. And part of that reason is customers have different driving habits. So, some may be using a car for professional reasons, some may be using for leisure, for commute, some may in rural, some maybe in urban areas. And there’s this concern from the customer that the battery power cannot last for such a high range. And they call that a range anxiety, as one potential-

BRIAN KENNY: I have range anxiety. That’s one of the reasons why I haven’t made the move to the electric vehicle.

SHIRLEY LU: Exactly. And also the lack of charging infrastructure that when you go into oil station, you can just charge quite instantly. For EV, you have to charge for half an hour at the moment, the current technology. So, it’s adding that pressure. But what’s interesting here is in reality, the average driving distance is not that long for a trip. In the US for example, the average daily driving is less than 30 miles, but an EV’s range can go up to 300 miles.

BRIAN KENNY: Right. So, you’re saying that my anxiety is unwarranted as most people’s anxiety is probably unwarranted.

SHIRLEY LU: But again, it depends on the use case.

BRIAN KENNY: Yeah, yeah. And I would imagine that this strategy that they have pursued, I mean it makes sense to the extent that they’re able to meet the needs of the customer regardless of whether they’re looking for an electric vehicle or a combustion vehicle. But it’s got to be taxing on them as an organization because now they have two manufacturing processes, they have two sets of suppliers. It’s got to be complicated. So I can imagine that Mercedes and the other firms that have put this stake in the ground are saying, We’re converting everything because it’s just going to be a more fluid process for us.

SHIRLEY LU: Part of the reason for staying flexible, I think also relates to their experience with two other major trends in the automobile industry. So, you may have heard the three major trends are automation, ride sharing, and electrification. And with the first two, BMW invested in technology that relates to ride sharing and automation driving. The technology of the market is not quite there yet and end up they have to write off these investments. And so when it comes to the electrification, they’re also being very careful with the timing that they’ll keep it flexible. And again, relating back to their culture of not trying to overpromise. So that’s why I think partly they’re not going to give a date by which we’re going to ban internal combustion engine before they’re certain they can do that.

BRIAN KENNY: So, what’s the regulatory environment look like around EVs?

SHIRLEY LU: There is a lot of regulations coming out, and I think they’re the catalyst for this transition from internal combustion engine to EVs. For example, the EU parliament approved the ban of selling new ICE, new combustion engine by 2035.

BRIAN KENNY: Okay.

SHIRLEY LU: California also announced similar rules and other states like Massachusetts and New York are considering following. So the regulatory environment, I think it’s another big push. That’s why a lot of companies are also using those dates. 2035. That’s when we are going to also ban ICE.

BRIAN KENNY: Okay. So that puts a lot of pressure on BMW to put a date out there to put a stake in the ground. Are they suffering any consequences from not actually taking that step?

SHIRLEY LU: Yes and no. So, on the yes side, there are media articles that are calling them the EV laggard. And there’s even a social impact investor that comes out and say they are the Blackberry of the automobile industry. But on the other hand, potentially no. Because the more sophisticated analysts or investors may be able to see that BMW is still investing a lot in the EV technology. And even if you look at their actual sales of EV, it is higher than some of their traditional competitors.

BRIAN KENNY: And for those who remember Blackberries, by the way, they were really good, and they’re making a comeback. I think people are…

SHIRLEY LU: Really?

BRIAN KENNY: Yeah. Yeah. They’re pining for those again. Those and flip phones, who knew? Let’s talk about what exactly they’re measuring and reporting on within the EV cars themselves. And I think that begins with the GHG, the greenhouse gas protocol. Can you just describe as succinctly as possible, because I know it’s a very complicated measure, what exactly are they looking at with GHG?

SHIRLEY LU: Yes. And that’s what we hope the students can learn from that. The current way they measure carbon is through the greenhouse gas protocol and they divide greenhouse gases into three buckets. And first of all, there’s more than one greenhouse gas. They will aggregate everything in terms of a carbon equivalent in terms of the global warming potentials. So let’s call that carbon for now, carbon equivalent. So they separate those into three buckets. Scope one, two, and three. Scope one is the company’s direct emissions. So, for example, BMW burns certain fossil fuel for their paint shop. And so, that’ll be scope one direct emissions. Scope two is the electricity they purchase, and that has some emissions associated with that. Scope three is everything else. So for BMW, scope one and two is in total only 1% of their total emissions. Scope three, everything else can be separated into the supply chain and the use phase. Supply chain is around 15%, whereas the use phase is 80% of emissions.

BRIAN KENNY: Okay. And is that the use of the actual customer in the vehicle itself?

SHIRLEY LU: The use phase, exactly. That will be when the customers drive the car. And then the tailpipe emissions, that’s also being considered on BMW’s books.

BRIAN KENNY: Where are they focusing their decarbonization efforts? What are they looking at?

SHIRLEY LU: And that is back to our cold call question. Yeah, they look at the full value chain. So they set a science-based target, which are targets that can align with the scenario to limit the global temperature rise to 1.5 degrees. And so for them, the target is by 2030, per car, the scope one and two emissions, they want to reduce it by 80%. So that is quite ambitious. And part of the reason is, this is their own emissions. They need to own it, and really show they’re making a sincere effort. Scope three supply chain is 22% reduction. But in reality, to achieve that, it’s much harder. The reason is by converting to electrical vehicle, you’re having the battery. The battery increases your supply chain emissions by around 50%. So in total, for them, a true reduction of 22% really feels like a 70% reduction. And finally, scope three use phase, which is the driving. And that’s more depends on the car they sell that one they hope to reduce by 50%.

BRIAN KENNY: So, they are putting targets against all of these. And as you said, they’re ambitious targets, which flies a little bit in the face of their under-promise and over-deliver strategy. But what are some of the issues that they’ve run into as they try to make these goals?

SHIRLEY LU: Exactly. I think initially when they first set the targets, they are quite reasonable. And there will be surprises they learn afterwards that made it harder to achieve potentially. And I think it’s not unique to BMW. A lot of companies, they set a target, but how to achieve it? It’s a learning process. In the case of BMW. Let me share three surprises they had-

SHIRLEY LU: … that are challenges. The first one is realizing a lot of the decarbonization opportunities are not readily available everywhere. So when they think about changing to solar and wind power, but not all the plants have the same amount of sunlight or wind. And so, when they plant at a high level and then realizing at the local level, it is not fully available. The second is some of the processes turn out to be more expensive. So, for example, electrification is a major step towards decarbonization because if you electrify all of your process, you don’t need to burn fossil fuel anymore. So that lowers emission, and then you can then move into using renewable energy to really transition to closer to almost zero emissions. But for them, they realized that to electrify for example the paint shop, that will mean they have to stop the operation and really rebuild the facility. And that is more costly than they initially thought. Whereas if they build a new facility with the new technology and become electrified to begin with, that is actually cheaper and that’s what they’re going for as well.

BRIAN KENNY: Okay. So scopes one and two are somewhat within their control, but difficult nonetheless. Scope three is really hard because now they start to dive into the supply chain. How deep are they going into the supply chain?

SHIRLEY LU: Very deep. Ideally, it’s all of the supply chain.

BRIAN KENNY: Wow.

SHIRLEY LU: But then as you imagine some of them four or five tiers down their supply chain, how are they going to get the measurements? And that speaks to one issue in the carbon accounting for scope three supply chain, which is this issue of primary versus secondary data. Ideally you get primary data, which is the real number that contributes to the tire, to the steel that you acquired. But then, because they don’t have such detailed information right now, they will use industry averages. So for example, steel produced in this region under this method as an average emissions of this number. And that’s what they’ll use on their books. And you can imagine the problem with this is, well then you are not compensating for firms that are greener.

BRIAN KENNY: The case goes into the Catena-X approach. How does that help them in this focus on phase three?

SHIRLEY LU: This is an industry effort that they are one of the pioneers in it. The idea is to build almost something like a blockchain for emissions data, where within the automobile industry, all of the suppliers will put their information on that chain. And Catena-X, actually the “Catena” stands for chain in Greek. And so, it’s the idea that if they all put in their data, then they can have this primary data. But you can imagine the challenge, it’s also how do you coordinate with everyone in the industry?

BRIAN KENNY: There’s also a big emphasis on recycling within the automotive space. The case goes into some of the complications of using recycled batteries in just recycled materials in general. Can you talk a little bit about that?

SHIRLEY LU: And that’s actually the third surprise that I wanted to mention earlier with recycling. The surprises with recycling is that it’s difficult to have a closed loop. So some of the materials like aluminum, you need a higher quality for automobile industry, you need higher purity, let’s say purity. Whereas for Coca-Cola can you also need aluminum, but that’s of a lower quality. And the issue is some of the cars being recycled, the aluminum were used to produce Coca-Cola cans. So, you actually lose that same purity of aluminum, which are not going back into the automobile industry. So, these are some of the issues, how can you get back the material? So the same with battery. The battery is even more important to have recycling because of the rare minerals that is of limited supply. And so, who can really keep the battery to their own company, to their own production can really dominate the market. And one thing they mentioned that’s interesting is in China, the requirement is that whoever produces the battery, the company, so if BMW sells a car with a battery, BMW has to recycle that battery. Whereas in the rest of the world, there’s no such a regulation. So the question becomes who gets those recycled batteries?

BRIAN KENNY: I was really surprised to read in the case that there are ICE vehicles in the BMW line that have lower emissions than some of their EVs, which made me say, “Well, why are they doing this at all?” Because that throws up a big red flag. But maybe you can talk a little bit about why an ICE vehicle would have lower emissions than a smaller size EV.

SHIRLEY LU: And that really depends on a few factors.

SHIRLEY LU: That is actually one of the major exercises we have the students do in class. We share an Excel file with them with all the emissions numbers and ask them to tweak certain assumptions. And in particular, we ask them to tweak where the battery’s being produced, what is the local grids emissions and how long do you drive the car for? And these factors, let me highlight two key things here. So, the first one is the transition from ICE to EV is a trade-off where you lower your tailpipe emissions, but you increase the emissions from the battery. So, with ICE, you are kind of creating emissions as you drive. With the electrical vehicles, you don’t see the emissions, but you charge them using the local electricity. So, the emissions of your local electricity will determine how much emissions that process creates.

BRIAN KENNY: Very interesting.

SHIRLEY LU: And that really varies by region. So the emissions of the local grid in China, for example, is three times that of EU and twice as much as in the US. And so, in certain combinations where you don’t drive long distances, you are in a local grid with very high emissions and battery produced in regions with high emissions, there is that potential that the EV is actually dirtier than an internal combustion engine. And the other question we also ask students is, what about outside of the model? Are there some things we’re not capturing just by looking at one car scenario? And one factor is, imagine if all the cars convert to EV, let’s say right now, there’s not enough renewable energy or clean energy such that you may need to actually end up firing up more coal plants and that is higher emissions.

BRIAN KENNY: Yeah. This is part of it, the whole tension around sustainability. And we talk about this in other cases that we discuss on the show as well. This has been a really interesting conversation, Shirley. If there’s one thing you want listeners to remember about the BMW case, what would it be?

SHIRLEY LU: The measurement. You need to measure emissions because you can’t manage what you don’t measure. And with the better measurements, it helps you make better decisions. And one thing we want to highlight is emissions across the entire value chain. Sometimes by focusing on one type of emission, you end up increasing another emission. So it’s important to see the full picture. And one final thing, what I really am grateful for, is BMW for sharing with us all of their experience. And our hope, or my hope, is that some of the students who learn this will one day go into their own company and this case can show them once you have the measures, you can start making better decisions.

BRIAN KENNY: Shirley Lu, thank you so much for joining me on Cold Call.

RAMSEY KHABBAZ: That was Harvard Business School assistant professor Shirley Lu – in conversation with Brian Kenny on Cold Call . We’ll be back next Wednesday with another hand-picked conversation about strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of Harvard Business Review – if you want more articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Anne Saini and Hannah Bates. Ian Fox is our editor. And I’m your guest host, Ramsey Khabbaz. And special thanks to Adi Ignatius, Maureen Hoch, Karen Player, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.

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Please note you do not have access to teaching notes, how bmw successfully practices sustainable leadership principles.

Strategy & Leadership

ISSN : 1087-8572

Article publication date: 8 November 2011

This BMW case aims to show how many of the company's practices that accord with principles espoused in the authors' sustainable leadership model contributed to its recovery after the global financial crisis (GFC).

Design/methodology/approach

This case illustrates how BMW institutes the 23 honeybee leadership principles and practices described in the authors' 2011 article “Sustainable leadership: practices for enhancing business resilience and performance” in Strategy & Leadership .

The examples provide a glimpse into the honeybee practices that enabled one firm to emerge successfully from the GFC. Regarding the five performance outcomes on the sustainable leadership pyramid, BMW clearly exceeded expectations in 2010 on financial returns and shareholder value.

Practical implications

Clearly BMW provides long‐term value for all its stakeholders – suppliers, shareholders, employees and customers – as is expected of a sustainable enterprise. BMW's business model, innovative approach to problem‐solving and adherence to sustainable leadership practices underpin a capacity to survive crises such as the GFC.

Originality/value

This is a rare case study of corporate‐wide sustainability practices and principles in operation. Informed by the examples of best practices at BMW, managers at other companies can envision how honeybee management might be implemented at their firm.

• Sustainable leadership model
• “Honeybee” leadership
• Business model
• Environmental protection policy
• Business ethics
• Ethical behavior
• Continuous improvement initiatives
• Automotive industry

Avery, G.C. and Bergsteiner, H. (2011), "How BMW successfully practices sustainable leadership principles", Strategy & Leadership , Vol. 39 No. 6, pp. 11-18. https://doi.org/10.1108/10878571111176583

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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BMW Group Supply Chain: an ESG Case Study

The BMW Group is a world-leading manufacturer of premium cars – including Rolls-Royce models – and motorcycles. Its 30 production sites helped fuel sales in 2022 of 2.4mn vehicles across 140 markets. It employs 149,500 people.

Ensuring compliance with ESG standards across its vast supplier network is “one of our declared aims”, the BMW Group says. “This specifically includes respect for human rights and responsible extraction of raw materials,” it adds.

Creating transparency around far-reaching, dynamic supply chains – and making goods flows traceable – are two of the most important requirements for meeting ESG targets. 

This, says the company “is why we are constantly expanding our close cooperation with our partners in the supplier network”.

BMW explains that it sources components, materials and other services from a variety of production and delivery locations worldwide, and adds its ESG due diligence obligations associated with this “are set out for our suppliers in contractually binding sustainability standards”.

It continues: “When we identify risks at our direct suppliers we respond to these with preventive and corrective measures, as well as enabling activities.” 

It explains that a multi-stage due diligence process “anchors our responsibility for the supplier network in all relevant areas of the BMW".

It adds that this process incorporates requirements relating to ESG issues as these affect “component development and product group strategies”, and that due diligence informs both the tendering process and supplier development strategies.

The company says it does the same for its indirect suppliers on “an ad-hoc basis”, adding that “these measures have been systematically anchored in our processes”.

BMW Group cutting use of raw materials

Naturally, automotive manufacturing involves a massive amount of raw materials, and BMW Group says it is “working on reducing our consumption of raw materials and increasing the use of secondary materials”.

(Secondary materials are materials that have been used, recycled and sold for use in manufacturing.)

“As part of our materials strategy, we constantly analyse and pay special attention to raw materials that could be linked to potential breaches of environmental and social standards,” the company adds.

It goes on to explains that the potential risks are highest “during the extraction and processing of 37 raw materials and raw material groups of relevance to the automotive industry”. 

It says the biggest challenge here is “ensuring transparency and traceability within the ever-changing supplier network”. 

To improve visibility the company leverages the Catena-X Alliance, an open data ecosystem for the automotive industry, designed to create data chains to enhance value chains. 

“We are also working to reduce or eliminate our use of critical raw materials and have established raw material-specific sustainability standards for the relevant components,” it adds.

This, it says, “has already enabled us to gradually reduce the share of cobalt in battery cells to just under 10% at present”.

In addition, BMW Group adds it has sworn off using cobalt, nickel and manganese that are extracted via deep sea mining. 

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BMW Key Strategic Issues Analysis Essay

Introduction, background information of bmw, swot analysis, conclusion and recommendations.

The business environment has in the recent past been experiencing tremendous growth and development. The growth in technology and globalization has significantly impacted on the business environment through increased global activity. These developments have opened up new opportunities and means of production for the business society thus leading to success.

Nevertheless, the increased global activity as well as the technological innovations have not come singly but have rather raised new challenges for business organizations. The issues of competition, environmental management, and sustainability have emerged thus putting unprecedented pressure on the business community. With this in mind, there has been every need for business organization to identify and develop strategies so as to ensure business success and sustainability.

The automobile industry has not been exempted whereby the levels of competition have multiplied over the years. The issues of sustainability and efficiency in the use of petroleum oil as the sole source of power have also risen thus calling for adoption of new technologies. Other issues emerging in the automobile industry include the ever rising customer demands on innovative, luxuries and distinctive products.

These issues have put undue pressure on the various business organizations operating in the industry thus calling for more efficient and sustainable strategies. BMW which is a key player in the automobile industry has been demonstrating success over the last century. In this essay, key strategic issues in BMW will be reviewed and appropriate recommendations made to enhance the success and sustainability of BMW.

Bayerische Motoren Werke (BMW) is a German Automobile, engine and motorcycle manufacturing company which was founded back in 1917. The company has its headquarters in Munich, Bavaria, Germany and also owns and produces the mini marquee.

The massive production and success of the company has been acknowledged across the globe with a production record of 1,481,253 automobiles and 112,271 motorcycles in 2010. The strong brand name and capital potential of the company is the core elements of the company’s success and popularity across the globe. BMW primarily focuses on the premium segments of the global motorcycle and passage car market (Hill 2008; Martin 2010).

The business operations of BMW are diverse with key concern on automobile and motorcycles as well as the provision of information technology services. A point worth of consideration is that BMW markets its products through various channels including company-owned showrooms, subsidiaries, independent dealers and importers. T

he production activities of BMW are undertaken across 23 production and assembly plants in 13 countries, whereby it sells its products in over 140 countries worldwide. The massive research and development operations of the company have been of great concern whereby it has been able to adopt the recent technologies in automobile production thus leading to product and service differentiation (Hitt et al. 2009).

BMW has reported commendable performance and success in the automobile industry for a couple of decades. Being the leading luxury car manufacturer across the globe, the company has been able to position itself among the consumers. The strong luxury car brands owned by BMW, Roll-Royce and Mini have enabled the company to attract and retain a wide population of customers.

The competitiveness of the company has been felt across the automobile industry based on the strong brand names and market share commanded by the company. The company has also been under due pressure due to the ever increasing steel prices, competition and need for better technologies (Gerry et al. 2008).

Table 1. SWOT Analysis.

Strong brand image

The company is globally recognized due to its strong brand image. Being the leading luxury car manufacturer, BMW has been able to secure a suitable position among the 10 largest car manufacturers across the globe. The key brands of the company including BMW, Rolls-Royce and Mini have been able to adequately position the company above its competitors. These are among the three strongest premium brands in the car industry thus making the company one of the most recognized far above its competitors (Ranchhod and Gurau 2007).

Diversified operations

BMW is among the leading diversified companies in terms of geographical operations and market ends it serves. The operations of the company are currently in over 140 countries thus enhancing its global presence.

The key geographic regions of the company including, America, Asia, Africa, Oceania and Europe have been able to facilitate the success of the company. The diversified business operations in the automobiles, financial services, motorcycles and information technology services have also yielded great success for the company (RanChhod et al 2004).

Strong financial performance

In the recent years, BMW has shown up its strong financial performance through its consistently increasing revenues. For instance, by December 2007, BMW was able to record revenues of $76,786.1 million which was an increase of 14.3% over the year 2006.

The commendable financial performance of the company can be attributed to the consistence increase in all businesses of the company. Despite the impacts of the global financial down turn of 2007/2008, the company has been able to sail through the challenges thus reinforcing investors’ confidence (Martin 2010).

Weak performance in Germany

Despite that Germany is a huge market for BMW; the company has been reporting declining sales volumes since 2005 in Germany. There has been an alarming negative sales growth of motorcycles in Germany over the last couples of years. This phenomenon calls for alarm concerning the success and sustainability of the BMW’s Germany market (Martin 2010).

Weak turnover ratios

The turnover ratios of BMW are not appealing thus raising questions on its financial stability. In comparison with its competitors, BMW has weaker turnover ratios. For instance, the asset turnover ratio was at 0.7 in 2007. This is low in comparison with other companies like Honda with 1.0 and Volkswagen at 0.8. This weak turnover ratios demonstrates the inability of the company’s management to deploy assets profitability which can in this case affect the company’s top line growth (Martin 2010).

Opportunities

Emerging markets.

Emerging markets across the globe are great opportunities for the success and sustainability of BMW. The massive economic growth and development in China and India is a great avenue to steer the much needed growth in BMW. India and China are potential global markets which will definitely drive global demand. The cheap production costs and high technological know how in China and India will enhance fast growth of BMW through mass production of quality and cheap vehicles (RanChhod et al. 2004).

Increasing demand for hybrid vehicles

Over the recent past, the global population has demonstrated a sharp turn into the demand for hybrid electric vehicles. Influenced by the need for environmental sustainability as well as the rising petroleum fuel costs, the world population is seeking alternative vehicles. Global estimates show that over 4.5 million units of hybrid electric vehicles will be demanded by the year 2013.

This can be attributed to the rising energy costs as well as increased emissions regulations. BMW is hereby keen to capitalize on the increased demand thus enhancing its success. The technological potential of the company as well as the active hybrid drive concept will enable the company to demonstrate leadership in the hybrid electric vehicle market (Hill 2008).

Increasing demand for dual fuel vehicles

Like the demand for hybrid electric vehicles, the demand for dual fuel vehicles is in a constant increase. BMW is well placed in capitalizing on this new market due to its technological capacity as well capital potential (Hill 2008).

Rising raw materials prices

The success and sustainability of BMW is at jeopardy due to the numerous threats surrounding its operations. The rising prices of aluminum and steel which are the primary raw materials for vehicle production is threatening the success of the company. The ever increasing raw material prices is in turn raising the production costs which limits profit margins as well as limiting affordability of the vehicles since excessive burden is passed to the customers (Martin 2010).

Economic slowdown in Europe and US

The global economic slowdown in 2008 has adversely affected the US and European markets. The decline in the GDP of these two giants is posing a great threat not only for BMW but the entire business sector. It is worth noting that the unhealthy economic growth of Europe and US has great impacts on the performance of BMW since demand for vehicles is significantly declining (Copper 2008).

Stringent emission standards

The stringent emission standards established in the automobile industry has unprecedented repercussions on the automobile industry whereby BMW is not exempted. Based on the new directives on emission standard, BMW and other automobile manufacturers will be held responsible for emission performance of the vehicles. These restrictions will not only attract financial losses but also tarnish the reputations of the company’s thus leading to loss of business (Martin 2010).

Strategic options for BMW

In light with the discussion and analysis on the current situation of BMW, it has been evident that the company is leading success in the automobile industry. The company is well endowed with modern technology in hybrid electric vehicles and has also abundant financial resources as well as human capital. Nevertheless, the company is facing numerous weaknesses and threats which jeopardize its future prospects. In response to these weaknesses and threats, the following strategic options should be considered (Hejiden 2006).

Diversification strategy

The diversification strategy is one of the most appropriate move for BMW in attaining its growth and sustainability prospects. Market diversification is very appropriate for businesses in competitive industries in the sense that it helps in spreading risks as well as enhancing growth prospects (Kaynak 2003).

In order to gain success and sustainability in the automobile industry, BMW should continue with its diversification operations in new markets. Due to the concentration of the European and US markets, BMW should seek new markets. China and India are in this case potential and unexploited markets which BMW should adopt.

Since most markets of Europe and America are established and moving to age due to the strong brand loyalty, BMW should move to new markets. In order to ensure smooth change and transition to new markets, BMW should put the market diversification strategy into action (Paley 2006). By adopting this strategy, the company will be in a position to consolidate its customer base thus increasing sales and ultimately boosting its profitability.

Cost leadership & the pricing strategy

Despite that BMW focuses on manufacture of luxurious cars, its prices are extremely high thus making them unaffordable to many people. In order to enhance its market performance, the company should resolve to adopt the cost leadership strategy (Steinmann & Schreyogg 2005). This can be attained by streamlining all operational activities by cutting down costs.

This can be attained through outsourcing of production activities, use of latest technologies in production as well as retrenchment of excess personnel. By doing this, the company will be able to minimize the operational costs thus widening the profit margins (Bradley 2005). This will also have significant effects on pricing whereby the company will be in a position to lower prices. As a result of this approach, more customers will find the products affordable thus enhancing sales and profits.

Product differentiation

In this era of global competition in the automobile industry, BMW can attain success by adopting product differentiation strategy. Consumers across the globe are looking forward to see high tech products to satisfy their needs (Porter 1985). This scenario can not be exempted from the automobile industry whereby manufacturers can differentiate their products by incorporating latest technologies and innovations in automotive production (Pettigrew, Thomas and Whittington 2002).

Consumers each day are looking for new and more innovation and technological features to be built in their cars (Muller & Lecher 2005). This scenario puts undue pressure for BMW to come up with innovative features. This will help in differentiating its products above those of competitors thus gaining brand loyalty.

Research and development is the most appropriate strategy for BMW to attain product differentiation (Palmer and Hardy 2000). It is worth noting that by considering the product differentiation strategy, BMW will be able to establish superior and appealing products (Mintzberg et al. 2005).

Technology leadership

Being in a competitive industry, BMW has every obligation to demonstrate efficiency and sustainability in its operations. In regard to this perspective, the company can attain success by investing massively on technology and innovations. For instance, the increasing demand for hybrid electric cars puts the company pressure to embark on new technologies (Barney and Hesterly 2009).

In this case, BMW should be vigorous in research and developing new technologies to facilitate smooth transition to the new vehicle models. BMW should consider various approaches for enhancing its products by adopting the concepts of active hybrid program, intelligent energy, and innovative technologies like iDrive. By adopting these strategies, BMW will be in a position to position itself above its competitors.

On the other hand, the company should also focus on innovative features on its services (Besanko et al. 2004). For instance, driver-focus services and reinforce mobile service should be researched on and fitted in the vehicles. In regards to hybrid electric vehicles, BMW should be in the forefront in ensuring technology leadership.

For instance, the company should put into practice the hybrid dive concept together with other innovative strategies (Clegg et al. 2005). By so doing, BMW will be able to position itself above competitors hence enhancing success.

Customer relationship management

Customer relationship is an aspect of key concern in the contemporary business platform. BMW should hereby be efficient establishing effective strategies and structures for customer relationship management (Thomas 2007). One of the main approaches in customer relationship management is establishment of a customer care department.

This will facilitate communication and interaction between the company and the clients. Customer care services will help in collecting customer feedbacks which helps in ensuring customer satisfaction (Ferrell and Hartline 2010). Market research and analysis should also be considered which will in this case help in enhancing product design to match customer taste and preferences (Timmers 2008; Sadler & Craig 2003).

Based on the above discussion and analysis of the current situation of BMW it is evident that the company is potential of sustaining its success. The SWOT analysis of the company has placed BMW far above its competitors due to its strong financial, technological and human resource potential.

In order to attain continued success and sustainability in the automobile industry, BMW should adopt the above stated strategic options. The key strategies including technological leadership, cost leadership, pricing strategy, market diversification, product differentiation, and customer relationship management should be put in pace. By considering the above discussed strategic options, BMW will be able to realize its growth and profit maximization objectives.

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BMW’s Operations Management (10 Critical Decisions) & Productivity

Operations management at BMW (Bayerische Motoren Werke/Bavarian Motor Works) involves critical decisions in vehicle manufacturing, distribution, and sales. External factors affecting the automotive and motorcycle industries influence critical decisions in the company’s operations management. For example, the trends discussed in the PESTEL/PESTLE analysis of BMW come with opportunities and threats that affect operations management effectiveness and business productivity. The automaker’s organizational characteristics, strategies, and goals determine business responses to these external influences. Operations management effectiveness influences BMW’s productivity and profitability in manufacturing, distribution, sales, and other areas of the automotive and motorcycle business.

Best practices in operations management optimize the business for high productivity and efficiency that mitigate the effects of the competitive pressure detailed in the Five Forces analysis of BMW . This pressure involves multinational competitors, such as General Motors , Tesla , Ford , Toyota , and other automakers, as well as motorcycle manufacturers, like Harley-Davidson . These competitors’ operations management practices are also aligned toward achieving industry leadership and business growth in vehicle markets where BMW operates.

BMW’s Operations Management: 10 Critical Decisions

1. Goods and Services. BMW’s operations management objective for its products is to maintain consistent production costs and output quality. Consistent costs ensure profit margins, while consistent vehicle quality supports customer satisfaction and competitiveness in the market. Product design revolves around goals based on BMW’s mission statement and vision statement , which focus on premium solutions for transportation and mobility. Thus, the company’s operations management decisions and productivity targets in this area are focused on enhancing business processes for excellent automobiles and motorcycles.

2. Quality Management. BMW’s quality standards and related operating targets align with the company’s premium branding. The company’s operations management ensures that quality satisfies the expectations of customers, including car buyers and drivers. Premium quality measures and standards in operations management contribute to competitiveness and growth that satisfy BMW’s competitive strategy and growth strategies . For example, managers implement quality standards alongside productivity goals to grow the automotive business based on economies of scale and the strategy of product differentiation.

3. Process and Capacity Design. BMW’s strategic objective for this area of operations management is to optimize its business through streamlined manufacturing processes that maximize the utility of organizational capabilities and technological resources. For example, the company uses automation and information technology integrated into the design of car production processes. This critical decision area of operations management utilizes economies of scale and the other business strengths enumerated in the SWOT analysis of BMW . These competitive advantages maximize productivity and output while keeping business profitability and the premium status of BMW’s brands.

4. Location. Operations management at BMW accounts for the proximity of manufacturing operations to suppliers and target markets. The locations of the company’s facilities around the world are based on economic opportunities, market size, ease of doing business, and other variables. For example, the company has many facilities in Europe to support production that matches market demand for BMW cars and motorcycles in the region. This location strategy optimizes the automaker’s productivity in manufacturing processes and ability to satisfy market demand. This strategic decision area of operations management accounts for BMW’s marketing mix (4Ps) , particularly the places or locations involved in the company’s distribution strategy.

5. Layout Design and Strategy. BMW approaches this critical decision of operations management by integrating technology into conventional manufacturing operations, resulting in a hybrid layout strategy that accommodates technology to support efficiency. In this area, the company’s objective is to maximize productivity through the efficient movement of resources and information in facilities, such as manufacturing plants and offices. The departments, divisions, groups, and teams in BMW’s organizational structure (business structure) set some of the requirements for the layouts in this area of operations management.

6. Human Resources and Job Design. BMW’s human resource management aims for continuous development that supports the requirements for innovation, design, competitiveness, and profitability. The automotive company needs to ensure the innovative excellence and productivity of its workforce to satisfy business goals through this critical decision of operations management. The traits of BMW’s organizational culture (business culture) are included in decisions and programs for human resource management. This area of operations management includes cultural considerations in job design to support cohesion in BMW’s business organization.

7. Supply Chain Management. BMW’s supply chain involves suppliers of materials and components used in cars and motorcycles. In this area, the automaker’s operations management focuses on streamlining the supply chain to support manufacturing processes despite fluctuations in productivity targets based on market demand. This critical decision of operations management accounts for technological changes, economic trends, and other external factors affecting BMW’s operations and business performance. For example, smart technology is increasingly a factor in the design of BMW automobiles and, consequently, in procurement decisions in the company’s supply chain management.

8. Inventory. Inventory management depends on markets where BMW facilities are located. For example, the automaker’s operations management objectives and measures for inventory control in the European market are different from those in the North American market. BMW accounts for market-specific supply and demand trends and their effects on productivity, efficiency, and inventory sufficiency.

9. Scheduling. BMW matches production schedules and human resource schedules to market demand and sales. Forecasts are used to inform this critical decision of operations management to maintain schedules that keep operations productive. For example, supply shortage forecasts inform BMW’s operations management when to schedule procurement to prevent disruptions in manufacturing processes.

10. Maintenance. BMW’s operations management objective in this critical decision area is to maintain reliable and consistent resources and processes, including manufacturing and distribution processes. Maintenance determines the automaker’s stability and reliability in satisfying market demand. Effective and timely maintenance supports BMW’s sustainability and other CSR and ESG goals and objectives by ensuring productivity and optimal efficiency that minimizes waste. The company’s managers also provide business maintenance guidelines for operations management at dealerships and other business partners.

Productivity Metrics at BMW

Focus on premium mobility and transportation solutions makes BMW’s operations management apply productivity metrics specific to material procurement and vehicle manufacturing and distribution. The following productivity metrics apply to BMW’s operations:

• Cars assembled per quarter (manufacturing productivity)
• Concept designs completed per year (vehicle design productivity)
• Cars sold per quarter (dealership productivity)
• Motorcycles sold per quarter (dealership productivity)
• BMW Group – Industry 4.0 – Digitalisation in Production .
• BMW Group Design .
• BMW Group Locations Worldwide .
• BMW Group Strategy .
• BMW Group Technology Radar .
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• Plantec, Q., Deval, M. A., Hooge, S., & Weil, B. (2023). Big data as an exploration trigger or problem-solving patch: Design and integration of AI-embedded systems in the automotive industry. Technovation, 124 , 102763.
• Tsarouhas, P. (2023). New trends in production and operations management. Applied Sciences, 13 (16), 9071.
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• Educators, Researchers, and Students: You are permitted to quote or paraphrase parts of this article (not the entire article) for educational or research purposes, as long as the article is properly cited and referenced together with its URL/link.

Artificial intelligence in strategy

Can machines automate strategy development? The short answer is no. However, there are numerous aspects of strategists’ work where AI and advanced analytics tools can already bring enormous value. Yuval Atsmon is a senior partner who leads the new McKinsey Center for Strategy Innovation, which studies ways new technologies can augment the timeless principles of strategy. In this episode of the Inside the Strategy Room podcast, he explains how artificial intelligence is already transforming strategy and what’s on the horizon. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform .

Joanna Pachner: What does artificial intelligence mean in the context of strategy?

Yuval Atsmon: When people talk about artificial intelligence, they include everything to do with analytics, automation, and data analysis. Marvin Minsky, the pioneer of artificial intelligence research in the 1960s, talked about AI as a “suitcase word”—a term into which you can stuff whatever you want—and that still seems to be the case. We are comfortable with that because we think companies should use all the capabilities of more traditional analysis while increasing automation in strategy that can free up management or analyst time and, gradually, introducing tools that can augment human thinking.

Joanna Pachner: AI has been embraced by many business functions, but strategy seems to be largely immune to its charms. Why do you think that is?

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Yuval Atsmon: You’re right about the limited adoption. Only 7 percent of respondents to our survey about the use of AI say they use it in strategy or even financial planning, whereas in areas like marketing, supply chain, and service operations, it’s 25 or 30 percent. One reason adoption is lagging is that strategy is one of the most integrative conceptual practices. When executives think about strategy automation, many are looking too far ahead—at AI capabilities that would decide, in place of the business leader, what the right strategy is. They are missing opportunities to use AI in the building blocks of strategy that could significantly improve outcomes.

I like to use the analogy to virtual assistants. Many of us use Alexa or Siri but very few people use these tools to do more than dictate a text message or shut off the lights. We don’t feel comfortable with the technology’s ability to understand the context in more sophisticated applications. AI in strategy is similar: it’s hard for AI to know everything an executive knows, but it can help executives with certain tasks.

When executives think about strategy automation, many are looking too far ahead—at AI deciding the right strategy. They are missing opportunities to use AI in the building blocks of strategy.

Joanna Pachner: What kind of tasks can AI help strategists execute today?

Yuval Atsmon: We talk about six stages of AI development. The earliest is simple analytics, which we refer to as descriptive intelligence. Companies use dashboards for competitive analysis or to study performance in different parts of the business that are automatically updated. Some have interactive capabilities for refinement and testing.

The second level is diagnostic intelligence, which is the ability to look backward at the business and understand root causes and drivers of performance. The level after that is predictive intelligence: being able to anticipate certain scenarios or options and the value of things in the future based on momentum from the past as well as signals picked in the market. Both diagnostics and prediction are areas that AI can greatly improve today. The tools can augment executives’ analysis and become areas where you develop capabilities. For example, on diagnostic intelligence, you can organize your portfolio into segments to understand granularly where performance is coming from and do it in a much more continuous way than analysts could. You can try 20 different ways in an hour versus deploying one hundred analysts to tackle the problem.

Predictive AI is both more difficult and more risky. Executives shouldn’t fully rely on predictive AI, but it provides another systematic viewpoint in the room. Because strategic decisions have significant consequences, a key consideration is to use AI transparently in the sense of understanding why it is making a certain prediction and what extrapolations it is making from which information. You can then assess if you trust the prediction or not. You can even use AI to track the evolution of the assumptions for that prediction.

Those are the levels available today. The next three levels will take time to develop. There are some early examples of AI advising actions for executives’ consideration that would be value-creating based on the analysis. From there, you go to delegating certain decision authority to AI, with constraints and supervision. Eventually, there is the point where fully autonomous AI analyzes and decides with no human interaction.

Because strategic decisions have significant consequences, you need to understand why AI is making a certain prediction and what extrapolations it’s making from which information.

Joanna Pachner: What kind of businesses or industries could gain the greatest benefits from embracing AI at its current level of sophistication?

Yuval Atsmon: Every business probably has some opportunity to use AI more than it does today. The first thing to look at is the availability of data. Do you have performance data that can be organized in a systematic way? Companies that have deep data on their portfolios down to business line, SKU, inventory, and raw ingredients have the biggest opportunities to use machines to gain granular insights that humans could not.

Companies whose strategies rely on a few big decisions with limited data would get less from AI. Likewise, those facing a lot of volatility and vulnerability to external events would benefit less than companies with controlled and systematic portfolios, although they could deploy AI to better predict those external events and identify what they can and cannot control.

Third, the velocity of decisions matters. Most companies develop strategies every three to five years, which then become annual budgets. If you think about strategy in that way, the role of AI is relatively limited other than potentially accelerating analyses that are inputs into the strategy. However, some companies regularly revisit big decisions they made based on assumptions about the world that may have since changed, affecting the projected ROI of initiatives. Such shifts would affect how you deploy talent and executive time, how you spend money and focus sales efforts, and AI can be valuable in guiding that. The value of AI is even bigger when you can make decisions close to the time of deploying resources, because AI can signal that your previous assumptions have changed from when you made your plan.

Joanna Pachner: Can you provide any examples of companies employing AI to address specific strategic challenges?

Yuval Atsmon: Some of the most innovative users of AI, not coincidentally, are AI- and digital-native companies. Some of these companies have seen massive benefits from AI and have increased its usage in other areas of the business. One mobility player adjusts its financial planning based on pricing patterns it observes in the market. Its business has relatively high flexibility to demand but less so to supply, so the company uses AI to continuously signal back when pricing dynamics are trending in a way that would affect profitability or where demand is rising. This allows the company to quickly react to create more capacity because its profitability is highly sensitive to keeping demand and supply in equilibrium.

Joanna Pachner: Given how quickly things change today, doesn’t AI seem to be more a tactical than a strategic tool, providing time-sensitive input on isolated elements of strategy?

Yuval Atsmon: It’s interesting that you make the distinction between strategic and tactical. Of course, every decision can be broken down into smaller ones, and where AI can be affordably used in strategy today is for building blocks of the strategy. It might feel tactical, but it can make a massive difference. One of the world’s leading investment firms, for example, has started to use AI to scan for certain patterns rather than scanning individual companies directly. AI looks for consumer mobile usage that suggests a company’s technology is catching on quickly, giving the firm an opportunity to invest in that company before others do. That created a significant strategic edge for them, even though the tool itself may be relatively tactical.

Joanna Pachner: McKinsey has written a lot about cognitive biases  and social dynamics that can skew decision making. Can AI help with these challenges?

Yuval Atsmon: When we talk to executives about using AI in strategy development, the first reaction we get is, “Those are really big decisions; what if AI gets them wrong?” The first answer is that humans also get them wrong—a lot. [Amos] Tversky, [Daniel] Kahneman, and others have proven that some of those errors are systemic, observable, and predictable. The first thing AI can do is spot situations likely to give rise to biases. For example, imagine that AI is listening in on a strategy session where the CEO proposes something and everyone says “Aye” without debate and discussion. AI could inform the room, “We might have a sunflower bias here,” which could trigger more conversation and remind the CEO that it’s in their own interest to encourage some devil’s advocacy.

We also often see confirmation bias, where people focus their analysis on proving the wisdom of what they already want to do, as opposed to looking for a fact-based reality. Just having AI perform a default analysis that doesn’t aim to satisfy the boss is useful, and the team can then try to understand why that is different than the management hypothesis, triggering a much richer debate.

In terms of social dynamics, agency problems can create conflicts of interest. Every business unit [BU] leader thinks that their BU should get the most resources and will deliver the most value, or at least they feel they should advocate for their business. AI provides a neutral way based on systematic data to manage those debates. It’s also useful for executives with decision authority, since we all know that short-term pressures and the need to make the quarterly and annual numbers lead people to make different decisions on the 31st of December than they do on January 1st or October 1st. Like the story of Ulysses and the sirens, you can use AI to remind you that you wanted something different three months earlier. The CEO still decides; AI can just provide that extra nudge.

Joanna Pachner: It’s like you have Spock next to you, who is dispassionate and purely analytical.

Yuval Atsmon: That is not a bad analogy—for Star Trek fans anyway.

Joanna Pachner: Do you have a favorite application of AI in strategy?

Yuval Atsmon: I have worked a lot on resource allocation, and one of the challenges, which we call the hockey stick phenomenon, is that executives are always overly optimistic about what will happen. They know that resource allocation will inevitably be defined by what you believe about the future, not necessarily by past performance. AI can provide an objective prediction of performance starting from a default momentum case: based on everything that happened in the past and some indicators about the future, what is the forecast of performance if we do nothing? This is before we say, “But I will hire these people and develop this new product and improve my marketing”— things that every executive thinks will help them overdeliver relative to the past. The neutral momentum case, which AI can calculate in a cold, Spock-like manner, can change the dynamics of the resource allocation discussion. It’s a form of predictive intelligence accessible today and while it’s not meant to be definitive, it provides a basis for better decisions.

Joanna Pachner: Do you see access to technology talent as one of the obstacles to the adoption of AI in strategy, especially at large companies?

Yuval Atsmon: I would make a distinction. If you mean machine-learning and data science talent or software engineers who build the digital tools, they are definitely not easy to get. However, companies can increasingly use platforms that provide access to AI tools and require less from individual companies. Also, this domain of strategy is exciting—it’s cutting-edge, so it’s probably easier to get technology talent for that than it might be for manufacturing work.

The bigger challenge, ironically, is finding strategists or people with business expertise to contribute to the effort. You will not solve strategy problems with AI without the involvement of people who understand the customer experience and what you are trying to achieve. Those who know best, like senior executives, don’t have time to be product managers for the AI team. An even bigger constraint is that, in some cases, you are asking people to get involved in an initiative that may make their jobs less important. There could be plenty of opportunities for incorpo­rating AI into existing jobs, but it’s something companies need to reflect on. The best approach may be to create a digital factory where a different team tests and builds AI applications, with oversight from senior stakeholders.

The big challenge is finding strategists to contribute to the AI effort. You are asking people to get involved in an initiative that may make their jobs less important.

Joanna Pachner: Do you think this worry about job security and the potential that AI will automate strategy is realistic?

Yuval Atsmon: The question of whether AI will replace human judgment and put humanity out of its job is a big one that I would leave for other experts.

The pertinent question is shorter-term automation. Because of its complexity, strategy would be one of the later domains to be affected by automation, but we are seeing it in many other domains. However, the trend for more than two hundred years has been that automation creates new jobs, although ones requiring different skills. That doesn’t take away the fear some people have of a machine exposing their mistakes or doing their job better than they do it.

Joanna Pachner: We recently published an article about strategic courage in an age of volatility  that talked about three types of edge business leaders need to develop. One of them is an edge in insights. Do you think AI has a role to play in furnishing a proprietary insight edge?

Yuval Atsmon: One of the challenges most strategists face is the overwhelming complexity of the world we operate in—the number of unknowns, the information overload. At one level, it may seem that AI will provide another layer of complexity. In reality, it can be a sharp knife that cuts through some of the clutter. The question to ask is, Can AI simplify my life by giving me sharper, more timely insights more easily?

Joanna Pachner: You have been working in strategy for a long time. What sparked your interest in exploring this intersection of strategy and new technology?

Yuval Atsmon: I have always been intrigued by things at the boundaries of what seems possible. Science fiction writer Arthur C. Clarke’s second law is that to discover the limits of the possible, you have to venture a little past them into the impossible, and I find that particularly alluring in this arena.

AI in strategy is in very nascent stages but could be very consequential for companies and for the profession. For a top executive, strategic decisions are the biggest way to influence the business, other than maybe building the top team, and it is amazing how little technology is leveraged in that process today. It’s conceivable that competitive advantage will increasingly rest in having executives who know how to apply AI well. In some domains, like investment, that is already happening, and the difference in returns can be staggering. I find helping companies be part of that evolution very exciting.

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Case study: Smartly reducing your investment while maintaining market exposure

Koen Hoorelbeke

Options Strategist

Summary:  This case study illustrates how Alex strategically employs long-term call options to both realize profits and maintain exposure to NVIDIA stock. By adjusting his holdings through these options, he secures gains while keeping potential for future growth, showcasing effective risk management and investment foresight.

Introduction:

In the dynamic world of investing, the ability to adapt strategies to changing market conditions is crucial for maximizing returns while managing risks. For buy-and-hold investors like Alex, who have seen substantial gains in certain stocks, the challenge often lies in realizing profits without losing potential future growth. This case study explores how strategic use of long-term call options can provide an innovative solution to this dilemma, allowing investors to secure gains and maintain market exposure simultaneously.

Important note : the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Background:

Meet Alex, an investor with a portfolio valued at $153,319, showing a profit of $44,534 from an initial investment of $108,785. His holdings include various stocks, but a significant portion of his profit comes from his investment in NVIDIA Corporation (nvda), which currently constitutes 55% of his portfolio's total value.

Alex's NVIDIA shares have appreciated significantly, and he's looking to realize some of these gains. However, he wants to maintain his market exposure to NVIDIA due to its potential for further growth.

Solution: Using a long-term call option:

To achieve his goals, Alex decides to buy a long-term call option on NVIDIA. This option will allow him to buy NVIDIA shares at a set price of $850 each anytime until the option expires in June 2025, regardless of how high the stock price goes. This option costs him $20,300 for one contract, which covers 100 shares.

Portfolio overview:

Here is a breakdown of Alex's current portfolio before any transactions:

• NVIDIA (nvda) : 100 shares at a buy price of $496, now valued at $847.2 each, totaling $84,720.
• Other holdings : Includes stocks like PayPal (pypl), Nike (nke), and Palantir (pltr), with various performances and allocations within the portfolio.

Financial mechanics simplified:

• Current stock position : Alex holds 100 shares of NVIDIA.
• Option purchase : The call option has a cost of $20,300 and provides similar market exposure to owning approximately 66 shares of NVIDIA.

How many shares can Alex sell?

By purchasing the call option, Alex can sell about 66 shares of NVIDIA without reducing his effective market exposure to NVIDIA's future price movements. This is because the option helps maintain a similar level of investment influence as the shares he plans to sell. Specifically, the call option has a delta of 0.66, which means that one contract of the option (covering 100 shares) effectively corresponds to the exposure of owning 66 shares of the stock (0.66 * 100 = 66).  

• Reduced direct investment : Alex can reduce his direct exposure by selling 66 shares, which would secure approximately $56,000 (66 shares × $847.20/share). After accounting for the cost of the option ($20,300), the net amount secured is about $35,700. This allows him to use these funds for other investment opportunities or to diversify his portfolio further.
• Maintained market exposure : The long-term option ensures that Alex still benefits from potential price increases in NVIDIA's stock.
• Flexibility and security : This strategy allows Alex to lock in profits while keeping the flexibility to participate in future growth, providing a balanced approach to managing his successful investment.

While using long-term options can offer significant advantages, there are inherent risks to consider:

• Premium cost : The initial cost of the option ($20,300) is a sunk cost, meaning it is not recoverable if the option expires worthless. This represents a fixed loss if NVIDIA's stock price does not perform as expected.
• Volatility and time decay : Options are sensitive to changes in market volatility and lose value over time as they approach expiration — a phenomenon known as time decay. If NVIDIA's stock price remains below the strike price as the expiration date nears, the value of the option could decrease significantly.

Conclusion:

This approach allows Alex to capitalize on his gains in a high-performing stock while strategically maintaining his position for future growth. By using a long-term call option, Alex smartly adjusts his portfolio to reduce risk and secure profits, demonstrating a prudent method of portfolio management in a rising market. However, it's essential for Alex to consider the risks associated with options trading and monitor his investments accordingly.

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Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

Fixed income: Keep calm, seize the moment

With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

Commodities: Is the correction over?

Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

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