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Bmw Uk Strategy At A Time Of Recession Marketing Essay

Paper Type: Free Essay Subject: Marketing
Wordcount: 5483 words Published: 1st Jan 2015

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Faced with falling customer satisfaction since 2002 and confronted with intense competition during the worst economic climate since the 1930s, BMW UK has been forced to rethink its strategy. The new managing director has implemented a dual emphasis strategy, focusing on customer obsession and cost reduction. BMW UK has set itself the vision of becoming the “Ultimate Customer Experience” by 2012. This paper investigates the viability of this dual emphasis strategy and whether it will be successful in the current economic climate. Analysis by Gruca et al (2002) suggests a high level of customer satisfaction does not lead to higher cash flow growth in the automobile industry. Findings from Mittal et al (2005) conclude that firms that focus on both a cost and revenue emphasis tend to have greater financial benefits in the long run. At this point in time, the dual emphasis strategy is bearing fruit for BMW UK. Using a scenario analysis of the dual emphasis strategy in different types of recessions, this report concludes no matter which type of recession the UK faces, the successful execution of this strategy depends on two main elements. Firstly, to achieve a balance between customer satisfaction and cost reduction and secondly, harnessing a customer obsession culture.

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2009 saw the industry in exceptional circumstances. As expected, demand for cars had fallen sharply, adding to the existing problem of excess capacity within the industry (Haugh et al, 2010). Manufacturers who anticipated further deterioration in the economic climate in the short-term have been able to reap few benefits and have just managed to stay ahead of their competitors. The size of the automobile industry compared to the size of an economy is small. Due to its significant association with other parts of the economy, any impact to this industry will result in serious consequences. (Haugh et al, 2010).

During this turbulent period, car sales have dropped significantly, as Gross Domestic Product per capita (GDP) has fallen for several quarters, real oil prices have increased and the financial crisis has lead to credit markets freezing globally. Research by Haugh et al (2010) shows that, in the United Kingdom, the tightening of finance has influenced car sales but only with a time lag. (Haugh et al, 2010) The higher cost of credit and the inability to obtain affordable financing options, as well as the uncertainty in the economy had forced buyers to postpone their purchases to the future.

1.2 – The effect of the crisis on BMW Group and BMW UK.

BMW Group has managed to record positive earnings for the financial year 2009. Net profit for the year stood at €210 million. Which, although 36.4% lower than the previous year, has still enabled the group to payout dividends of €0.30 per share. BMW Group’s cost management and efficiency improvement programmes which began just prior to the crisis have had a positive impact on profit. A total of 1, 068, 770 BMW brand cars were sold globally, of which 98, 683 cars were sold by BMW UK in 2009. This has enabled BMW Group to retain its position as the world’s leading premium car manufacturer.

BMW UK has cut its excess capacity significantly. It has taken cars back from its dealers, thereby preventing inventories from building up and tying up funds unnecessarily. It has reduced its workforce by 3.8% this year compared to 2008 (Levvings, 2010). Discretionary spending has been reduced since the start of the crisis and BMW UK is offering greater financial support to its dealers.

1.3 The Issue

When faced with an economic crisis most firms react defensively by cutting costs. But BMW UK is following a dual emphasis strategy; reducing costs and improving customer satisfaction. Most literature suggests focusing on customer satisfaction leads to greater financial benefits for firms. But the need to reduce costs during recessions is also well documented. This paper discusses whether BMW UK’s dual emphasis strategy will realise the financial benefits it promises in theory?

This investigation introduces the dual emphasis strategy which is based on the Return on Quality framework introduced by Rust et al (1995). It then examines what BMW UK plans to achieve through this strategic realignment, the viability of the strategy in light of various internal and external challenges, before drawing conclusions from the amalgamated theory and analysis.

1.4 Theoretical Framework.

The dual emphasis strategy introduced by Mittal et al (2005) argues that firms can gain financially from the simultaneous cost emphasis, through efficiencies, and revenue emphasis, through customer satisfaction enhancements. The cost emphasis argues that operational improvements and efficiencies contribute to profits through decreasing costs. This accounts for economies of scale, standardisation and efficiency improvements. Revenue emphasis proposes to enhance customer satisfaction which leads to revenue enhancement and positive financial benefits. This approach involves implementing customer satisfaction improvement programmes.

The Return on Quality model, Rust et al (1995), forms the basis of this dual strategy. It suggests that the dual emphasis contributes to profit only if the financial benefit of the revenue emphasis exceeds its cost. Firms should focus on the profit impact of customer satisfaction programmes rather than the impact on revenues. This is because more satisfied customers may not be profitable customers; as servicing them may exceed the financial benefits generated, Reinartz & Kumar (2000).

The ROQ framework (below) shows that firms that invest in customer satisfaction can contribute to the bottom line through revenue enhancing outcomes or efficiency improvements.

Source: Rust et al (1995).

This model shows firstly a firm that overspends on customer satisfaction can see an overall negative impact on profit. Secondly, firms can financially gain from efficiency improvements. Thirdly, both the revenue and cost emphasis may be mutually reinforcing to financial consequences, Mittal et al (2005).

1.5 – BMW UK Strategy.

In February 2009, BMW Group appointed Tim Abbott as the managing director of BMW UK. Abbott’s team have echoed BMW Group’s strategy to the BMW UK team. Aligning with BMW Group strategy, BMW UK intends to follow a dual emphasis strategy.

BMW UK faces an unprecedented economic recession as well as intense pressure from its main premium rivals; Audi and Mercedes-Benz. BMW UK has responded by setting itself a clear vision to offer the “Ultimate Customer Experience” by 2012.

In shaping its future, BMW UK intends to accelerate out of this recession with its employees, dealer network and partners through customer obsession and cost reduction.

The company’s 3 key objectives are:

– 1. Put the customer back at the heart of the business

– 2. Improve employee satisfaction

– 3. Refocus the dealer network and use innovative ways to access customers.

These objectives are targeted to be achieved by the summer of 2012, in sync with BMW’s sponsoring of the London Olympics.

1.6 – BMW UK’s 5 key areas.

In its effort to implement its strategy, BMW UK will focus on 5 key areas in the run up to 2012.

Firstly, BMW UK is focusing on customer service. It has initiated a new customer charter for all BMW dealers. Dealers will now make 10 commitments to their customers. With this new customer charter, BMW UK hopes it will enhance its competitiveness, realign itself and its dealers to be more customer focused. It intends to be more transparent so as to research and learn more about the changing needs of its customers. The firm will soon move towards a customer centric bonus scheme for all its dealers.

The second key area BMW aims to focus on is the employee. It intends to develop an internal culture focused towards the customer. The employee is the person involved in offering the service, be it repairing a car or selling a new car. It is on this basis many businesses try to engage their employees. Various theorists suggest that the level of customer service offered is a function of the employee’s motivation level and knowledge. Engaging the employee more closely may be one way to improve the level of customer service. Employee satisfaction will be monitored by BMW UK’s ranking in the Times Top 100 employers list.

The dealer network is another area the firm intends to reinvigorate. BMW UK intends to leverage its way using new basic processes with structured plans for the future. It intends to keep its dealer network focused on stability and continuity, enabling them to achieve reasonable returns on sales.

On the business opportunities front, BMW UK intends to provide new offerings, new channels and enter new markets to increase its profitability and market share.

The last area is effective communication. It has already implemented new means of keeping its employees updated about company news; through a weekly communications update, a monthly newspaper and a quarterly business briefing.

1.7 – Conflict of strategies between BMW Group and BMW UK?

Although BMW UK has set its own vision and objectives, it too has to align with its parent company’s long term goal of ‘Strategy Number ONE’. This strategy aims to achieve a return on sales (EBIT) in the automotive segment of 8 percent by 2012 (BMW Group, Strategy, 2010). This raises the question: Will the “ultimate customer experience” achieve the target set by Strategy Number ONE?, since ultimate customer service may not always result in ultimate profitability.

BMW UK is focused on the customer, yet its parent company is focused on profitability. It would appear that the two firms are being driven by two completely different objectives. One could argue this reflects a conflict of strategies between the parent company and the subsidiary. Targets set under Strategy Number ONE measure mainly the financial performance of the whole group. Currently, there is no target measure of customer satisfaction for the whole group or even individual subsidiaries. Yet BMW Group intends to build a competitive advantage based on the customer. Figure 1, shows BMW Group’s Strategy House. The impact of such a conflict could be detrimental to BMW Group, as it’s likely that BMW UK’s employees are going to be disillusioned from the company’s goals, leading to an adverse effect on not just customer service, but also on profitability.

In contrast, it could be argued that the premium customer would demand premium customer service. And in order to achieve the group’s financial target it would have to provide the “ultimate customer service performance” anyway. The strategists at BMW Group believe that Strategy Number ONE aims to keep the Group well ahead of its rivals in the premium segment. It has to do this by prioritising the customer and that the customer is central to the group achieving earnings before interest and tax (EBIT) of 8% by 2012 (BMW Group, Strategy, 2010).

1.8 – The Dual Emphasis Strategy.

Hand in hand with implementing customer obsession is cost reduction. BMW UK has just recently shed 100 employees, based at BMW Financial Services and is further reducing its discretionary spending.

Almost always, the cheapest supplier is procured, irrespective of the project, even if they are technically incompetent. This forces one to suggest that perhaps one aspect of the strategy almost always takes priority. For instance, for the first time in 25 years BMW UK has moved from a dedicated outbound transport provider to a shared user solution, simply because it was the cheapest option. Six months in and the successes of this change are yet to be seen. This raises questions about the level of bias within this dual strategy.

It could be argued that the firm had to react to its external economic environment. Moreover, given the ominous possibility of an aggressive takeover by mass manufacturers, BMW Group as a whole has to remain agile, through cost reduction but also focus on the customer, so as to continue maximising shareholder value.

BMW Groups’ recent controversial cracked rear wheel issue raises further doubt about the dual strategy at BMW UK. The revenue emphasis would suggest BMW UK recall or refund its customers for the cracked wheel. However, BMW UK is being forced by BMW Group to keep the refunds to a minimum even when BMW Group’s metallurgical laboratory in Oxford has categorically confirmed a defect relating to the design of the 19″ wheel, (Douglas, 2009). This evidently highlights a conflict of strategies.

1.9 – Does satisfying customers really have financial benefits?

Strategists take different stances on customer satisfaction strategies. At a glance, some research suggests having satisfied customers, firms elicit desirable behaviours, such as greater loyalty, better receptivity to cross-selling efforts and positive word of mouth, (Fornell et al, 1996). Gruca et al, (2005), has shown that such behaviours translate into superior financial performance measured by Tobins q, stock and market to book values.

There is a direct link between customer satisfaction and future cash flow growth leading to greater shareholder value. Fahey (1998) argues, “satisfied customers can be viewed as economic assets, that yield future cash flows”. Satisfying a customer generates benefits for a firm beyond the first transaction and the current moment. This follows in that a satisfied customer is likely to be a loyal customer, who will increase his or her level of purchasing over time (Anderson et al (1993), cited in Gruca et al 2002). And as customers are satisfied in future occasions, they are less likely to turn to competing products due to a lower price (Fornell et al, 1996). It is based on this reasoning that executives at BMW UK have begun a journey based on satisfying the customer as they are of the same opinion.

However, research from Gruca et al (2005), suggests that customer satisfaction has the greatest influence for low involvement, routinised and frequently purchased products and the smallest influence for high involvement and less frequent purchases. BMW’s clearly fit in with the latter product category. Gruca et al (2005)’s regression analysis indicates that a higher level of customer satisfaction seems to give a negative effect on cash flow growth in the automobile industry. Moreover, their cash flow variability analysis suggests that even with high customer satisfaction, future cash flows are likely to be variable. Figure 2, summarises the association between customer satisfaction and future cash flows.

This argument complements the general consensus within the automotive industry to a certain extent. Research from industry commentators suggest:

“…. customer retention is becoming more crucial then ever during the next few years, dealerships must focus on not only on providing superior levels of customer service but also an enhancing convenience for vehicle owners and providing pricing that is more competitive with non-dealer facilities”. (J.D.Power, 2010.)

These comments illustrate that although there still is a great need for dealers to focus on customer satisfaction; there is no doubt demand will become more price elastic. In that, a small proportionate increase in the price of a BMW will lead to a greater proportionate fall in the quantity of BMWs’ demanded.

In addition, customer satisfaction with service at BMW UK has been decreasing since 2002 and it has been overtaken by all its main rivals on customer satisfaction. Figure 3, shows BMW UK has gone from being the best in customer satisfaction in 2002 to the worst by 2008.

In light of Gruca et al’s (2005) research, bearing in mind BMW’s current level of customer satisfaction, which is rather low; is becoming the Ultimate Customer Experience by 2012 is really necessary, let alone achievable? Furthermore, will such a strategy generate future cash flow growth, given that BMW is already the market leader in the premium segment?

“Perhaps BMW Group as a whole should have started focusing on this strategy several years ago” (Willisch, L. 2010, Head of sales, BMW Group). One could ask the question; is this is one step too late, not just for BMW UK but for BMW Group? Should Strategy Number ONE have been initiated much earlier? As all of BMW Group’s subsidiaries are now trying to catch up with their rivals. Perhaps BMW Group’s hope of attaining a competitive advantage in customer service should not just be a pillar; rather it should be the foundation of its Strategy House. Is Strategy Number ONE really delivering on customer satisfaction at all?

One thing that remains for certain is that BMW UK cannot do anything

about its current customer satisfaction. The 2009 UK Vehicle Ownership Satisfaction Study shows BMW currently stands at 9th position. Figure 4.

A pertinent issue that has been raised within the business already is whether it’s worth focusing on such a strategy during an economic recession while the firm is so cash-stripped, and implementing a raft of cost cutting measures? For instance, BMW UK has had to shed over 100 employees based in its Financial Services arm; the firm also froze last year’s payable bonus as a cost cutting measure. The financial targets set by BMW Group for its Strategy Number ONE have already been adjusted in light of the economic climate. Intriguingly, questions are asked whether BMW UK’s strategy will be fully implemented or will it just be a quick fix given the financial constraint’s the firm is facing already?

One could argue, to an extent, that BMW UK is being forced to focus on cost-efficiencies as their financial gains contribute to BMW Group’s bottom line; at the same time as it begins its journey on customer obsession, because BMW Group’s most unequivocal goal is maximising shareholder value, even though it does not emphasise this.

2.0 – Do dual emphasis strategies really work?

It is widely accepted that firms face trade-offs when identifying ways to generate sustainable income. Firms can choose to contribute to the bottom line by going downstream i.e. implementing projects and outcomes focusing on the revenue emphasis or by going upstream i.e. through efficiency improvements from processes focusing on the cost reduction emphasis (Mittal et al, 2005).

Recent research suggests, only a handful of companies have the ability to implement a dual emphasis. This emphasis looks to simultaneously reduce costs and enhance revenues through customer satisfaction improvements. Mittal et al (2005), argues that it is difficult to implement such a strategy as efficiency and revenue enhancement perspectives stem from different organisational philosophies.

BMW UK is implementing a dual strategy, cost reduction and revenue expansion. Although there lies a conflict between the two emphasis, Mittal et al (2005), argues that if a dual strategy is successfully implemented, it will produce the best results with respect to reducing costs and increasing revenues, especially in the long run. Mittal et al (2005), depict a comprehensible scenario in favour of this argument.

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Assuming there are two firms, one being more efficient than the other. The efficient firm will have greater resources, with the ability to allocate resources more efficiently towards customer satisfaction programmes and investment projects. Over time this advantage multiplies, giving the efficient firm greater economic returns, enabling the firm to consistently improve satisfaction programmes and efficiencies. Based on these theoretical grounds, the theorists conclude that firms that successfully achieve a dual emphasis, exhibit greater long term financial performance than firms’ with a revenue or cost emphasis only.

Although Mittal et al (2005)’s analysis is slightly different to that of Gruca et al (2005), Mittal’s sample consists of more than 200,000 customer surveys, including some from Honda & Chrysler. Mittal et al (2005)’s results show a relatively stronger association between customer satisfaction and financial performance for firms that have successfully achieved the dual emphasis. These results give further weight to BMW UK’s reasoning for a dual strategy. Not just that, these results further eliminate any suggestions of BMW UK’s strategy being “stuck in the middle”, (Porter, 1980, cited in Mittal et al (2005)).

On the other hand, some would argue that Mittal et al (2005)’s findings have little practical relevance. Their regression analysis is based on theoretical grounds that assume investing in customer satisfaction programmes lead to positive multiplier effects and that these increase over time. Yet economists have long used the principle of diminishing marginal returns; in that if BMW UK spends more and more on customer satisfaction programmes it will lead to a point beyond which the resulting positive outcomes will start to diminish eventually.

A further argument against Mittal et al (2005)’s case is that, firms often have fixed budgets for each year, and that essentially cost reduction and customer satisfaction programmes are mutually exclusive. This has been significantly true at BMW UK. Even after making various commitments to the customer project, which entails improving the visual branding, meeting rooms and developing a customer showroom at the headquarters, BMW UK seems to have shelved these projects as the cost reduction emphasis is overriding the customer satisfaction emphasis. It also leads one to suggest again that one emphasis may clearly take priority over another (Rust et al, 2002). And through this recession, BMW UK may have just experienced this effect, as at the time of writing BMW UK has so far only received approval for half of its financial budget. One further questions whether these projects will receive any funding, should there be a cost freeze. As BMW UK’s second half of year’s budget is under review. One is but forced to question whether BMW Group itself should have set a side a sum of money well in advance for the implementation of this project for all its local markets, depending on which subsidiary required the greatest investment.

To counter this argument, some would suggest that this review of budget may have simply be in place, as the firm is facing exceptional circumstances and it does not want to compromise its corporate independence, and thus will continue its discretionary spending once economic conditions improve.

Such an argument however, leads one to assume whether the management at BMW UK have over extended themselves with this dual emphasis strategy. The effect of not living up to the expectations of the firm’s workforce could be not only be detrimental to individual morale, but also to the Group’s share price, should it have to adjust its financial targets yet again.

Rust et al (2002) have shown that firms that are in the process of achieving a dual emphasis are likely to face deterioration in short-term financial performance during the implementation phase. This may be due to the firm implementing two opposing strategies which stem from different organisational philosophies, and this is precisely what BMW UK is experiencing.

Even after taking Mittal et al (2005)’s findings into account, one concedes that their research was undertaken predominantly in the boom years and thus may not fully hold substance in light of the current economic climate. Not all firms make conscious efforts to cut costs during boom years, rather firms may be aiming for completely different goals such as consolidating market share and increasing profitability.

A further limitation of Mittal et al (2005) is that their findings are based on firms that are in the process of achieving of the dual emphasis. Although plenty has been inferred their analysis, it could be argued, it may have been useful to use findings on firms that have already achieved the dual emphasis. Inferences made on from such a dataset may be more authoritative.

2.1 – Scenario Analysis – will the dual strategy last the mile?

Another limiting factor that needs to be considered is the type of economic recession that the UK is facing and its consequences for the dual strategy. The specific type of an economic recession can have various implications, not only for countries and companies, but also for society as a whole.

Although the study of the recession shape is not an exact science, it is merely used as a means by which economists’ describe the type of a recession a country is experiencing, after considering the total movement of various metrics such as employment and GDP over a time period. There are mainly three types of recessions V, W or U shaped recessions. In this section, the implications of each of these types of recessions are considered in the context of BMW UK’s dual strategy.

A V shaped recession is one where an economy suffers a sharp but brief period of economic decline with a clearly defined trough (Morley, 2009). Such a recession forces companies to regroup, cut its overhead expenses, reduce investments and downsize in order to come out of the recession stronger. So far, BMW Group as a whole has done exactly this. It has had to rethink its Strategy Number ONE and alter its targets; it has introduced new infrastructures which will enable it to reduce basic costs. Telephone costs have been reduced by adapting voice over internet telephone systems globally. Research and development for newer products and technologies has been reduced by 0.6%, but this is in line with the level spent by its competitors. (Strategy, BMW Group, 2010).

Should the UK economy face a U-shaped recession, it’s likely to be much longer than a V-shaped recession, where the economy shrinks for various quarters and only slowly returns to growth. The implications for BMW UK, should the economic recovery chart in this way, could be detrimental. According to this theory, the recession is likely to be much longer, deeper and more painful. For BMW UK, this would mean carrying on with dual emphasis, in the face of an ever increasing need to reduce costs to ensure survival. The need to effectively balance the dual emphasis would be of utmost significance. Some would also argue that should the UK face this lost decade scenario, it may have to identify whether the customer satisfaction programmes attract new customer leads or existing ones, as demand for luxury cars may be little or non-existent. It may have to take further steps to ensure its employees and dealers are not disillusioned from this dual emphasis strategy; as one would wonder how long the company could keep spending on improving satisfaction?

BMW UK may also have to ensure that it does not abruptly alter its strategy should the UK face a W shaped recession. This is where the economy has a recession, emerges from the recession with a short-period of growth but quickly falls back into recession (White, 2009). The consequences of abruptly changing strategies may not only be costly; but also may delude the employees, dealers and associates, leading to a negative psychological impact, affecting performance. So far BMW UK’s dealers have been pleasantly surprised by this new dual strategy, after years of consolidating market share; a change in the midst of a recovery may have drastic consequences.

Given the countless uncertainties surrounding recessions, one is again forced to question whether BMW UK should really be focusing on this dual strategy. Would consolidating market share and cost reduction during an economic recession be enough to survive?

2.2 – Conclusion

Survival is crucial but not sufficient, Reeves et al (2009). Cost reduction is essential to ensure that the BMW Group survives. BMW UK does not only want to survive but also wants to be the market leader. Focusing on customer satisfaction is equally important if BMW UK really wants to be the Ultimate Customer Experience by 2012. This is perhaps the only way BMW will remain the market leader in the UK.

As a subsidiary of the BMW Group, it is likely that conflicts may arise. Its clear BMW Group’s Strategy Number ONE has to be focused on profitability as its aim is to maximise shareholder value (SHV). It can only continue to maximise its SHV if its subsidiaries achieve their sales targets; and BMW UK has identified the only way it can achieve its targets, is by improving its customer satisfaction.

Theoretically, as Mittal (2005) analysis shows, focusing simply on customer satisfaction is not enough. Firms which focus on both cost reduction and customer satisfaction tend to have better financial performance in the long term than firms which focus on one or another. Based on the analysis above, clearly the arguments for the dual strategy outweigh the arguments against following the dual strategy.

Although Mittal et al’s (2005) arguments are based on various theoretical assumptions they still are comprehensive and applicable to BMW UK. Mittal’s (2005) results are based on companies that have already implemented this dual emphasis strategy. What gives further legitimacy to this argument is that Honda’s results are part of Mittal et al’s analysis, and Honda currently ranks second in the 2009 Vehicle Ownership Satisfaction Survey. See figure 4.

It is also important to note that BMW UK needs to weigh up the ‘in process’ consequences of the dual strategy to the long term benefits, as in the short-term, financial performance may be negatively affected. So far, sales in the first quarter of 2010 are up by 35 percent. This leads to the suggestion that this dual strategy has already set off to a good start that is going to build momentum to deliver positive results.

In addition to this, one may suggest that there is no need to deviate from the dual strategy, irrespective of the shape of recession the UK faces. Besides one will only find out the exact shape several months after the economic climate has stabilised and various revisions to economic data have been made. So far central projections suggest the recession is taking the V shape. For BMW UK, this would be reassuring news as BMW UK “does not have a contingency plan as the strategy has longetivity”, (Levvings, 2010).

Yoshinori (2009) suggests that when Toyota faced the lost decade:

“it was a tough decade in preparation for instilling a sense of the need to survive the global competition and implementing fast-paced management changes.”

BMW UK seems to be learning and instilling this from its competitor. The dual emphasis strategy has already prepared the whole organisation top-down, about the need to improve its customer service while simultaneously reducing costs, even if that is a lesson learnt late.

The positive effects of following the dual emphasis strategy are starting to emerge. BMW UK’s dealers are already reinvigorated with a sense of optimism that has lead to a faster than expected recovery in sales, especially in the last quarter of 2009, and first quarter of 2010. In 2009, BMW UK sold just over 98,000 cars, about 13% less than the amount of cars sold in 2008. BMW UK has just managed to retain its number one position in the UK market, with about 4.95 % of market share of the premium segment.

In conclusion, at this point it appears that the dual emphasis strategy is bearing fruit for BMW UK. This is evident in all the positive statistics quoted above. However, there are going to be various challenges that may stall the execution of the dual emphasis strategy for BMW UK. To avoid this, BMW UK needs to firstly strike a balance between customer obsession and cost reduction. Even if this means setting up two opposing spending budgets, as getting the balance right will ensure no one aspect of the dual strategy is prioritised, ensuring no one individual


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