3H Strategy and International Business 2001/02
Session 13 – The Rover/Honda Alliance and BMW Acquisition of Rover Group
The following comments are extracted from the teaching manual that accompanies Exploring
Corporate Strategy. Whilst they may not address directly the issues we covered in the classroom,
they offer some interesting and relevant insights.
The Rover/Honda Alliance
At the heart of the alliance between the two companies was the logic of strategic fit and the way in
which their strengths and weaknesses complemented each other:
ROVER
+
Good styling for European tastes
Established European presence
Wide supplier network
Wide distributor network
Inadequate range, especially in middle
segment
Reputation for poor quality
Excess manufacturing capacity
Loss making
Poor manufacturing work practices and
labour relations
HONDA
+
Dynamic reputation in USA and japan
State of the art production processes
Total quality approach
Solid financial position
No European presence
Poor styling for European tastes
Too small to compete successfully with
the majors
As to the alliance itself, the key point was the way in which it developed and deepened over the
years, despite obvious differences.
BMW Acquisition of Rover
The session can begin with a discussion about the car industry in 1993, which can be summarised as
follows:
 Maturing in life cycle terms.
 Becoming global.
 Uncertain short-term growth prospects.
 Increased cost of technological innovation.
 Ever-increasing economies of scale.
 Quality improvement a necessity for survival.
 Structural change in the US and EU auto sectors as a result of Japanese and Korean activity.
 Reconfigured value chain, as assemblers try to get closer to customers.
 Brands associated with lifestyles.
An assessment of BMW’s position in this environment in 1993 might include:
 BMW was falling behind in terms of volume compared to other manufacturers.
 Although BMW clearly competes on a generic strategy based on differentiation focus, the
company equally cannot ignore the economies of scale building up in certain parts of this
maturing industry.
 Toyota has also successfully entered the luxury car segment occupied by BMW, through its
Lexus brand. Development and promotional expenditure necessary to compete on a global basis,
has reached the point where even the largest players are collaborating.
 Certain companies, including Peugeot, Mercedes and BMW, were becoming isolated: they tended
to lack economies of scale and had few collaborative links, Nissan and Toyota alone, have
economies of scale without strategic alliances.
Other factors were also relevant:
 The build quality of BMW cars was not in fact as high as generally perceived.
 Range extension into the compact market risked compromising brand exclusivity.
 Despite this, the company needed greater volume and improved production methods.
 BMW lacked a four wheel drive and/or people carrier product range.
 BMW was suboptimal in terms of scale and this would continue to weaken its competitive
position.
Options facing BMW in 1993 were:
 Product line filling and market development by organic means.
 Sale of BMW to one of the top five global players.
 Acquisition by BMW of a company with real strategic fit to its’ assets and skills.
A discussion about the position prior to the acquisition might make the following points about
Rover and Honda:
 ROVER – has used the period of the alliance to consolidate and competes as a fragile segment
player.
 HONDA – as experienced dramatic growth and European market penetration due partly to the
styling influence of Rover – it is still the stronger of the two companies.
The question is then whether either company is in a position to compete effectively without the
continued benefits of the alliance. Indeed, strategic action by almost every other player in the
industry means that collaboration is now virtually essential to even survive.
Stakeholder analysis
The acquisition of Rover will have an impact upon many stakeholders including:
Rover
Honda
BMW
British Government
British Aerospace
Employees/Unions
Various shareholders
Customers
Suppliers
Competitors
Given that successful joint ventures are based on the factors listed below, there are questions about
how well all these stakeholder interests will be satisfied and the implications for success:
 Mutual trust.
 Commitment to shared ideals.
 Agreement and achievement of joint objectives.
 Cultural understanding.
Critically, the decision to sell rested with the managers of British Aerospace who were not a party
to the alliance and who would not therefore have felt bound by the same level of commitment as
Rover’s managers. Perhaps Honda’s management were not fully aware of this subtle distinction.
Future strategies for BMW/Rover
A consideration of the options for the combined company might involve the repositioning and
integration of the combined model range:
 Despite image, the model range complements but also overlaps in price terms. Mini and smaller
Rover cars span the price range from around £5,500 to £15,000 and do not really compete with
any BMW products.
 The four-wheel drive brands are simply complementary and BMW’s 7 and 8 series are effectively
in a different segment to any Rover product.
 The two problem models are the 600, competing with the lower part of the BMW 3 series market
up to around £22,000, and the 800 series which almost entirely overlaps the BMW 5 series price
range, from £17,500 up to over £30,000.
Bernd Pischetsreider intends sales outlets to remain separate and also that his stated intention is to
transform Rover into a brand, ‘as strong and exclusive as BMW’. Will this work given the ranges
concerned?
There are implications of Rover withdrawing from the executive segment: BMW would not expect
to gain more than a share of sales resulting from that move, as the rest would divide between other
marques. Further, is it realistic to expect BMW to continue to fund development, production and
promotion of two partly competing product ranges? BMW is investing £500 million per year until
2000, with no prospect of a profit from Rover until then.
Meanwhile the luxury car segment is increasingly being targeted by credible alternatives from
Toyota, Honda and Volvo. Cost control is crucial, in order to fund R&D aimed at producing
technologically advanced product features for the early part of the twenty-first century.
It is tempting not to confront the issues facing BMW senior management. The question of the logic
of the acquisition or possibly even the investment in Rover seems pretty clear cut superficially, but
there are dangers involved, as BMW spreads its resources and increasingly opens itself up to
competition in the volume segment.
It is clear, that while Pischetsrieder intends to exploit the separate Rover brands, he is also
determined to absorb Rover completely into the BMW management structure.
What are the sources of BMW’s competitive advantage? Which of these will be sustainable in the
future and therefore continue to act as mobility barriers. Several, including quality and customer
loyalty are under threat from a range of increasingly credible alternatives.