BBD 1033/BDE 1023 Microeconomics Individual Assignment

Table of Content

1.0 Introduction.......................................................................................................... 2
1.1 Company Profile: BMW (Bayerische Motoren Werke).........................................2
2.0 Production Process............................................................................................... 2
2.1 BMWs Production Process.................................................................................3
2.1.1 High Tech Material....................................................................................... 4
2.1.2 Body Shop................................................................................................... 4
2.1.3 Painting....................................................................................................... 5
2.1.4 Mounting..................................................................................................... 5
3.0 Pricing Decisions: BMW........................................................................................ 5
4.0 Purchase Decisions: Consumers...........................................................................7
4.1 Market Structure: BMW..................................................................................... 8
5.0 Conclusion............................................................................................................ 9
6.0 References............................................................................................................ 9
7.0 Appendix.......................................................................................................... 11

TABLES OF FIGURES
Figure 1: Transformation Process:........................................................................................ 3
Figure 2: BMW Transformation Process................................................................................4
Figure 3: BMWs Segmentation, Targeting and Position relative to price decision.............................6
Figure 4: Demand Curve: BMW.......................................................................................... 7
Figure 5: Purchase Decision Making Process...........................................................................8

TABLE OF APPENDENCES
Appendix 1: Brewery Transformation Process.......................................................................10

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1.0 INTRODUCTION

1.1 COMPANY PROFILE: BMW (BAYERISCHE MOTOREN WERKE)

Founded in 1917 by Franz Josef Popp, the BMW Group is now one of the ten (10) largest care
manufacturers in the world and, with its BMW, MINI and Rolls-Royce brands, possesses three
(3) of the strongest premium brands in the car industry. In addition to this, the group has a strong
market position in the motorcycle sector and operates a successful financial services business.
Since the companys establishment, BMW Malaysia, as other subsidiaries of BMW Malaysia in
Asia, wholesales and distributes new and used motor vehicles. The company offers prestige,
luxury, sports, and double sitter cars and (Bloomberg, 2016) constantly improves professionalism
in all areas of it business, by constant launches of products as well as significant investment for
the improvement in after-sales service (BMW, 2016). The purpose of this report will be to
evaluate; i) the production process (inputs and outputs), ii) pricing decisions (how the company
fixes their prices on their vehicles) and iii) purchase decision. To evaluate these variables, this
report will be using BMW (Bayerische Motoren Werke) as a case study.

2.0 PRODUCTION PROCESS

The transformation of a companys input to finished goods and services (outputs) is the unique
role of operations management (Abari O., and Odunayo M., 2012). Inputs include human
resources like workers and managers and processes including facilities like buildings and
equipment as well as material technology and information (Byeong C., 2011). Outputs include
goods as well as service that are produced by a company. Figure 1 demonstrates/represents the
process of transformation at any given factory, the physical process of changing raw materials
into finished products is the transformation process such as the transformation of rubber and
leather into sneakers or denim to jeans.

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Figure 1: Transformation Process:

Source: (The Open University, 2016)

Several different transformations are usually required to produce a good or service. The overall
transformation can be described as the macro operation, and the more detailed transformations
within this macro operation as micro operations (Manel M., 2011). For instance, the macro
operation in a brewery is making beer (appendix 1).

2.1 BMWS PRODUCTION PROCESS

BMW offers exceptional automobiles which are characterized by high quality and outstanding
design. Automobile production with this claim is a complex process with a high logistical effort;
as premium is not only best quality but delivered individually tailored and in time. This is made
possible by efficient and customer -oriented production systems of BMW. BMW follows four (4)
steps in the production process. Figure 2, demonstrates BMWs Transformational process leading
to the creation of the brands vehicle. Economies of scale are reducing the cost of production by
increasing the number of products produced. Generally, it means to do things more effectively by
producing a large number of the products at time. BMW benefits from this as their products are
considered luxury goods, meaning the average costs of production is high. By applying this
concept, BMW can decide its costs as well as increase its outputs while maintain effectiveness.
The man aim is to generates as much revenue and profit as possible for the company while
keeping costs to minimum.

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Figure 2: BMW Transformation Process

INPUT TANSFROMATION OUTPUT

PROCESS BMW Vehicle
Raw Materials (e.g.
Steel and Engine
Emissions (air,
Aluminum)
Brakes/suspension water)
Operating Materials
Electronic/mechatroni Thermal
(e.g.
cs discharge
Machinery/Technolo
gy) Body Attachments Scraps
parts
Labor (e.g. highly
Skilled Employees Body carcass

Feedback & Requirements

Source: (Self-Made based on the Transformation process model)

2.1.1 High Tech Material

The manufacturing process starts with heavy rolls of steel and aluminum sheets, also known as
coils. In the coil systems, the bands are initially cut to form boards and then pulled with fully
automated high-speed servo presses in several steps, bent and punched. This results in molded
parts such as side frames, doors, hoods and roofs (BMW, 2016). Within the item production, the
company has already laid the basis for the unique designs and the extremely rigid, but
lightweight bodies for their vehicles.

2.1.2 Body Shop

Body shop refers to the precise assembly of several hundred individual parts made of steel and
aluminum of different sizes and thickness to a precision body. Depending on the vehicle
requirements besides steel and aluminum, also carbon and fiber composites are installed. Most
modern robots perform these serious and complex work with maximum precision, while highly
qualified employees control the machine (BMW, 2016)

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2.1.3 Painting
The Bodies of the cars are first cleaned in plunge polls and degreased, then coated with a zinc
phosphate layer. This forms the basis for lasting corrosion protection. After that, four (4) more
coats of paint protect the vehicle against environmental influences and give a durable color gloss.
After each production step, the quality is checking in the paint. Laboratory specialist examine,
for instance, by environmental simulation, the colorfastness of all coating and resistance to
environment influences (BMW, 2016).

2.1.4 Mounting
Experienced and well-trained staff complete the painted bodies. In the course of individual
production can be realized even unusual customer requests. Various equipment, attachments,
country versions and more lead to the distinctive customized product. For instance, more than
20,000 interior variants are possible solely with the BMW 3 series (BME, 2016).

After mounting, the drive unit of the engine, transmission, axles and exhaust system meets
precisely to the corresponding body and is screwed. At this stage, the vehicle is stationary on its
own wheels. Last parts are mounted and the engine is started for the first time. After the
numerous tests, the new vehicle now becomes the output and rolls off the line.

3.0 PRICING DECISIONS: BMW

The Sellers cost play several roles in pricing a product or service. First, a new product me be
priced provisionally early in the research and development (R&D) stage and then again
parodically as it progresses toward market (Imoleayo O., 2010). Forecasts of production and
marketing costs will influence the decision to continue product development and ultimately to
commercialize. Secondly, the sellers cost is important in establishing a price floor that Is also
the threshold for maximizing return on the product investment over the long run. Furthermore,
other factors such as; rate of return, market stabilization, demand and competition-led pricing,
market penetration, early cash recovery, prevention of competitive entry, company and product
factors, market and environmental factors, as well as economic, political, social and cultural
factors have to be considered in the decision-making process.

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BMWs price decisions are based on future costs, forecast over a range of volume, production
technologies, and promotional outlays in the companys marketing plan. BMW believes that the
production, marketing, and distribution costs that matter are the future costs over the long run
that will be incurred by producing and selling their vehicles. In addition, BMW follows a high
cost option known as prestige pricing whereby customers purchase products from the company
knowing they probably paid too much (Etienne M., and Uzziel N., 2008). Figure 3 demonstrates
BMWs STP (Segmentation, Targeting and Position) Model in relation to price decision.

Figure 3: BMWs Segmentation, Targeting and Position relative to price decision

Industrialized Premiumization
Areas
Consumers trigger
Age Group: 25- the demand and
40 STP are willing to pay
high price for the
Quality, Safety, perceived quality
Technology and of the vehicle(s)
Satisfaction

Companies like BMW who have an oligopoly market structure tend to have a downward sloping
demand curve (figure 4). Hence, BMW will not increase their prices because if they do, not
matter how little these increases are, they could potentially lose a substantial number of
customers to their competitors. For instance, when a rival like Mercedes increases its prices,
other companies maintain prices in hopes that customer will come to them instead. Nevertheless,
this does not las long, although their price may be slightly lower, companies such as BMW
would have brand loyalty from their consumers, allowing them to continue having the same
number of consumers no matter how much they increase the price. This means they will now
gain more revenue and profits as compared to their rival companies.

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Figure 4: Demand Curve: BMW

Source: (BMW Economic Analysis, 2013)

BMW is considered a luxury good and not a normal good, it generally has an elastic demand. It
can be proven that BMW has a relatively elastic demand because of the portion of income spent
on the products and the time that has elapsed after each product is introduced. The price of a
BMW product is high because of the quality and the brand name, therefore many people would
not be able to afford the product, creating a budget line. The budget line indicated the amount of
money that can be allocated for certain necessities as well as luxury goods.

Nevertheless, since demand for BMW cars is price elastic, changes in price will lead to
proportionately change in the quantity demand. For instance, from 2007 to 2008, significant
price reduction occurred to BMW after 2008, because UK auto markets were heavily hit by the
credit crunch and dealers had no choice but to cut price in the hope of selling more cars.
Therefore, due to the effect of law of demand, discounts of BMW cars lead to higher demand,
which explains the rise of sales volume from 2008-2009 (BMW, 2008).

4.0 PURCHASE DECISIONS: CONSUMERS

To be able to assess the importance of the environmental awareness in the car purchase decision,
it is necessary to obtain an insight into the process of purchasing. The consumers decision to
purchase a product Is a multi-stage process. Kotler (2006) identifies that the consumer will go

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through five (5) stages. Vehicle purchase behavior is very complex, as car purchase implies a
high level of social and/or psychological involvement. Hence, the consumer will transit each
stage of purchase decision making process as presented in figure 4.

Figure 5: Purchase Decision Making Process

Source: (Kotler, 2006)

BMW vehicles are classified under luxurious goods, hence, consumers who can afford a luxury
car need a certain income level, which often correlates with factors such as education, age, and
time in the workforce (Anurit J., 2002). Malaysia household debt to disposable income is
amongst the highest in the world (figure 5), as Malaysians are burdened with significant car
loans that consumer a large part of their income due to high car taxation. As a result, consumers
will purchase luxury car brands such as BMW, if there is more disposable income as a research
conducted by Vikram S., (2014) found that increase in disposable income seemed to be the most
important reason for purchasing luxury vehicles, and the trend is reflected in the growth of their
per capita income. This means that as the income of a person changes, so does their buying
habits (Mankiw and Taylor, 2006). If individuals have more money, they tend to buy more of
normal and luxury goods, such as BMW, whereas if income decreases, so will the amount of
money spent on luxury items. This is also known as the income effect.

4.1 MARKET STRUCTURE: BMW

As mentioned before, BMW is considered an oligopoly market structure as only a small number
of firms in the industry have control over the market. Moreover, the decision made in one firm
can drastically affect the other firms as every decision made in BMW influences it competitors.
For instance, if Mercedes Benz modified it latest model of care to have an extra slim rim on its
tires with personal engravings, then BMW would come up with another idea to be at the same if
not high level in order to compete with their rival. Another characteristic of an oligopoly market

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structure is that BMW will have high barriers of entry. In this case, BMW would need advanced
technologies and economies of scale.

5.0 CONCLUSION
Throughout this report, there has been insight towards BMWs transformational process,
whereby various inputs such as raw materials, labor, and operational material have resulted to the
final output of the production of BMWs vehicles. In addition, this report has gained
understanding that consumers have several needs in which they may not be sure of, thus the
reason why a decision processes are needed. All countries experience economic problems at a
certain point. BMW can solve economic problems worldwide. Exports are an important part of a
countrys economy as it can help the country stay out of an economic downfall. As car exports,
has increased dramatically, so has the job opportunities for people. Since more cars like BMW
are being imported and exported, a lot more people are needed to work in the company and
factories to keep up with the demand. This means they level of unemployment would be low in
the country, whilst simultaneously increasing the countrys total GDP. Moreover, when many
people buy BMW cars, it helps the countrys economic growth as the money spent on the cars
can be used to help the local economy. This shows that BMW has contributed to helping out the
economy in a positive way

6.0 REFERENCES

Abari Ayodeji Olasunkanmi and Odunayo Olufunmilayo Mabel (2012) 'An Input-Output
Analysis of Public and Private Secondary Schools in Lagos, Nigeria ', International Journal of
Humanities and Social Science, 2(18), pp. 85-96.

Adrian Micu and Angela Luiza Micu (2006) 'Strategic Pricing', Seria tiine Economice,
58(2), pp. 43-52.

Anurit Jakrapan (2002) An investigation into consumer behaviour towards the purchase of new
luxury cars in two culturally distinct countries: the UK and Thailand, PhD Thesis edn., London:
Middlesex University.

Bloomberg (2016) Bmw Malaysia Sdn Bhd, Available at:

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http://www.bloomberg.com/profiles/companies/6066142Z:MK-bmw-malaysia-sdn-bhd
(Accessed: 17 October 2016).

BMW (2016) About Us, Available at:

http://www.malaysia.bmw.com.my/com/en/general/corporate/content.html (Accessed: 19
October 2016).

BMW (2016) FASCINATION PRODUCTION, Available at: http://www.bmwgroup-

plants.com/en/munich/production/vehicle-production.html (Accessed: 23 October 2016).
BMW (2008) Annual Report, Available at: https://www.bmwgroup.com/content/dam/bmw-
group-websites/bmwgroup_com/ir/downloads/en/2008/BMW_Group_2008.pdf (Accessed: 16
November 2016).

Byeong-Yun Chang (2011) 'Business Process Management of Telecommunication Companies:

Fulfillment and Operations Support and Readiness Cases', International Journal of Future
Generation Communication and Networking , 4(3), pp. 73-85.

Etienne Musonera and Uzziel Ndagijimana (2008) 'An Examination of Factors that Affect
Pricing Decisions for Export Markets', The Journal of Global Business Management, 4(1), pp.
189-198.

IMOLEAYO OBIGBEMI (2010) 'THE ROLE OF COMPETITION ON THE PRICING

DECISION OF AN ORGANISATION AND THE ATTAINMENT OF THE
ORGANISATIONAL OBJECTIVE ', Annals of the University of Petroani, Economics, 10(1),
pp. 229-247.

Manel Mastouri and Salah Boumaiza (2011) 'Process-based CRM: A Pilot Study', International
Journal of Business and Social Science, 2(13), pp. 176-188.

Mankiw Gregory and Taylor Mark (2011) Economics, 1st edn., Bedford, United Kingdom:
Thomson Learning.

Vikram Shende (2014) 'Analysis of Research in Consumer Behavior of Automobile Passenger

Car Customer', International Journal of Scientific and Research Publications, 4(2), pp. 1-8.

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7.0 APPENDIX
Appendix 1: Brewery Transformation Process

Source: (The Open University, 2016)

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