Thoughts about the Automotive Industry – Business Model Innovation

Too often we hear about product innovation. Lots of funds are invested to develop new products or to improve existing ones to better match the needs of consumers.

But we don’t often hear about business model innovation. This kind of innovation fundamentally changes the way companies do business. It challenges every single part of the value chain and fundamentally changes the way companies add value to consumers.

The research that is done to do product innovation starts from the product itself and the questions that are aimed at finding new features for the product or new uses.

Other type of innovation is that one that aims at finding new ways of reducing costs or new ways to increase willingness to pay, which eventually results in higher profit.

But true Business Model Innovation goes beyond that. It starts at the customer, and tries to find out new ways to deliver value in meeting specific customer needs.

Ok, too much consultant speech. Let’s use an example.

Amazon is a clear example of business model innovation. They started as a company that sold books, then migrated to auctioning used books, then moved on to selling e-commerce solutions for small business and now they are even selling hardware (Kindle). They continuously redefined the way to add value to customers and make money while doing it.

Another example is OnStar (full disclosure: I work for GM). The initial business model was a subscription based service for GM car owners. It is a service that, when you push a button located on the rear view mirror, offers you a set of concierge services (navigation, phone calls, booking service). It is much more than this; check it through this link to OnStar site.

Just recently, they started selling rearview mirrors with the button and the service to non-GM car owners, re-inventing the way they add value to customers and earn revenue through it.

Here are a couple of examples more. A hypothetical one and a real one.

Shai Agassi’s vision for Better Place revisits, not only product innovation (electric vehicles, re-charging stations, driver experience) but also the business model around electric vehicles.

He takes the traditional business model from a different industry and applies it to the electric vehicles industry. The principle of the innovative business model mirrors the one from the mobile telecommunications industry, where the hardware is heavily subsidized and users purchase usage in the form of minutes. Agassi challenges the fact that electric vehicle owners also have to own the battery, which is quite an expensive part of the vehicle. Instead, he builds a business model around purchasing electric miles. Users own the vehicle and, instead of recharging the battery in their car, they replace it in the “Switch Stations” and they pay for the usage in the form of miles that battery will allow them to run. Simply beautiful.

As put in Wired Magazine by Daniel Roth: “Agassi dealt with the battery issue by simply swatting it away. Previous approaches relied on a traditional manufacturing formula: We make the cars, you buy them. Agassi reimagined the entire automotive ecosystem by proposing a new concept he called the Electric Recharge Grid Operator. It was an unorthodox mashup of the automotive and mobile phone industries. Instead of gas stations on every corner, the ERGO would blanket a country with a network of “smart” charge spots. Drivers could plug in anywhere, anytime, and would subscribe to a specific plan—unlimited miles, a maximum number of miles each month, or pay as you go—all for less than the equivalent cost for gas. They’d buy their car from the operator, who would offer steep discounts, perhaps even give the cars away. The profit would come from selling electricity—the minutes.

There would be plugs in homes, offices, shopping malls. And when customers couldn’t wait to “fill up,” they’d go to battery exchange stations where they would pull into car-wash-like sheds, and in a few minutes, a hydraulic lift would swap the depleted battery with a fresh one. Drivers wouldn’t pay a penny extra: The ERGO would own the battery”

A traditional business model in one industry can become a very innovative business model in a different industry. Open your mind, look for solutions outside the box.

While I was writing this post I came across this great speech by Johanna Blakley, where, using copyright laws as the red thread, she challenges highly IP regulated industries to rethink their business model taking as a reference low IP regulated industries, mainly the fashion industry, which has proved to be more profitable and creative than the music and film industries. She blames the freedom to copy and explains the constraints that traditional thinking brings to business model innovation. Very interesting and thought provoking:

In the aftersales side of the automotive industry, the business model revolves around selling service and parts at the manufacturers official service centers. The real need of a car owner is to keep his car running, not to take the car to the official manufacturer’s service center. So, if he wants to take his car to his brother’s shop, the manufacturer is not adding value, is not supporting or meeting his need: “Bring it to our official center or you are on your own, pal”. And the entire business model is designed around this.

What if, for an extra amount of money (to be determined through the normal pricing processes that take into account cost structure, elasticity..etc) the official dealer sends someone to pick up the car at the customer’s house, leaves a temporary replacement car with him, drives it to his brother’s service shop and supervises that the repair/maintenance work is done to certain standards that ensure the manufacturer’s quality? I am sure that quite a big number of customers would be ready to pay for this, creating a new revenue stream that relies on meeting a clear and focused customer need and on performing a necessary customer task while adding value. And it is an assembled solution and not a sale of an owned product or service.

It also might generate additional revenue through those independent shops that purchase more official parts from the manufacturer.

Starting with the consumer needs/problems and working around assembling solutions for those will unearth innovative business models.

This post is very related to the previous one (Owner-less) as automotive companies need to do some business model innovation if they want to remain relevant. If they want to provide transportation solutions for customers who are increasingly less interested in owning a car. If your fundamental business model relies on the revenue you generate by selling cars, parts and service, how is your business model sustainable in the long term when people will not want to own cars?

If your only revenue comes from the price consumers pay for your product, what will happen when consumers don’t want to buy your product? Innovate your business model or die.

This is just one more reason why companies need to really be customer centric, putting the consumer and its needs at the core of what they do and assembling solutions to customer problems beyond manufacturing and selling products. But I will elaborate on the whole idea of Customer Centricity in a future post.

Only when you have the consumer and its problems at the core of what you do as a company, and you identify what are the unmet needs, the tasks he needs to perform and figure out the way to add value when meeting those needs and solving those problems, you can define your business model in a robust and sustainable way.

Inherently, consumer needs and problems evolve and change rapidly, so business model innovation is vital for survival.

Thoughts about the Automotive Industry – Owner-less

I have been reading a lot lately about a very powerful Global trend that has a major impact on the Automotive Industry. It is what has called “Owner-less”.

In a nutshell, this trend advocates access to products without having to own them. Quite an appealing proposition for many types of products. As describes it:

“For consumers, the appeal is obvious:

• Traditional ownership implies a certain level of responsibility, cost and commitment. Consumers looking for convenience and collecting as many experience as possible want none of these things.

• Fractional ownership and leasing lifestyle businesses offer the possibility of perpetual upgrades to the latest and greatest, the ability to maximize the number and variety of experiences, and allow consumers to access otherwise out-of-reach luxuries.

• Owning bulky, irregularly used items is both expensive and unsustainable, especially in dense urban environments where space is at a premium. With more consumers having mobile access to online systems, it becomes easier to book items whenever and wherever they are needed.”

Now, obviously, this trend has a huge impact on a big-ticket item such as a car. It ticks all three boxes mentioned above. Owning a car:

  • Commits the owner to a certain ownership time and a cost of maintaining that car.
  • It is a barrier to multiple experiences with multiple products and presents a difficult and costly upgrading experience.
  • Space wise, owning a car presents a problem, as it requires additional “storing” space (your parking spot, parking around the city…)

The Automotive industry has gotten away with just selling cars and services because, while solving the transportation need of customers, owning a car represented a social achievement. And it still does in many developing countries. But now that achievements are represented in many other ways, the car makers need to adjust their business models to remain relevant in a World where transportation needs will remain, but the ways to solve that need are multiplying, and they go beyond owning a car. Even in developing markets, they will catch up to new ways of demonstrating achievement faster than the developed World did.

There is plenty of research that states that teens in the US are not interested in driving, let alone, owning a car. Many of their social interactions are now perfectly met by technology (they rather chat than drive to a friend’s house to talk face to face). And for those who still prefer to physically transport themselves from A to B, the alternatives to owning a car are much more relevant: public transport, car pooling, car swapping, sharing, renting…
Bradford Plumer calls it “The End of Automania” in his article in The New Republic.
Jim Motavalli writes about how Gen Y is “not that into driving” in his commentary on BNET and then reflects on ZipCar’s recent poll and how it shows that Millenials prefer texting to driving (although they’ll consider car sharing)
Jack Neff asks himself in AdAge whether it is the Digital Revolution what drives the decline in U.S. car culture

There is a rise in what Rachel Botsman calls “Collaborative Consumerism” that is making all of us much more open to sharing and in ways we never thought of. You can find examples of this in her TED video below.

Specifically, for the car industry, there are many new initiatives that promote pooling, sharing, swapping and renting like ZipCar, GoGet and ZazCar. But also, big brands, having seen the success of these smaller startups are increasingly getting in on the action: Hertz launched their car sharing service Connect back in December 2008, and now Daimler has added Hamburg and Austin, Texas following the successful pilot of their car2go pilot in Ulm (Germany). In July 2010, Peugeot launched its Mu ‘mobility’ service in the UK after successful launches in France, Germany, Italy and Spain. Customers can rent cars, scooters, vans or even bicycles.

So what does a car manufacturer have to do to remain relevant in a World where car ownership is declining? Well, going from a car manufacturer who sells products and services, to a transportation problem solver. The entire business model needs to change so that revenue not only comes from selling cars and service, but from assembling solutions for transportation problems. This is what Professor Ranjay Gulati talks about in his amazing book “(Re)Organizing for Resilience” where he explains how to become a true Customer Focused Organization; the path from selling products and services to assembling complex solutions for specific customer problems (and making a profit out of it)

Yes, it is a huge move, but it is all about survival, resilience and relevance. It is not an option…

Tell me what you think

Thoughts about the Automotive Industry – The alternative to dealers?

As a follow up to my post Thoughts on the Automotive Industry – Do we really need dealers? where I wrote my thoughts about the role the dealers play in the automotive industry business model and wondered about a different model, I would now like to elaborate on alternatives to the franchise model as we know it. After all, if you don’t come up with a solution, you are part of the problem.

But before I do, I would like to reinforce 2 of the premises I outlined in that initial post:

1.         The power of a strong brand
2.         The power of an awesome product.

The alternative model I am about to outline relies on the power of an awesome product, a product that people just GOT TO HAVE. A product they would do anything to buy. Very much like the iPhone and the Apple stores.

It also relies on the power of a strong brand, a brand that draws consumers beyond the products it sells. A brand people want to be identified with, learn more about and, ultimately, become its ambassadors.

THE PROBLEM. Today’s model is inefficient, expensive and conflictive.

Dealer franchises are independent business, which eventually makes dealers from the same brand, direct competitors. While competition might be healthy, it is not if it is detrimental to the customer and to the brand.

Geographic coverage (network planning) is a delicate thing and customer (and lead) allocation to dealers become a tricky practice.

Coverage it key, so it is very important to have dealerships located at key spots. These key spots are at times very expensive ones. It is like the old marketing model, where it was all about exposure. Lots of media dollars bought more exposure on TV. We all know that is an old model and we are seeing the evolution of it to a more sophisticated, targeted and personal marketing. But, why is the dealer network approach stagnant? Why is it not evolving to the evolving customer? Coverage is only needed if you are weak and you need to buy your way into the consumer’s mind.

You could argue convenience is what drives this pursuit for full coverage, but I would counter argue 2 things:

1.         Is coverage what drives sales of Apple products? I don’t think so. You want their products SO BAD that you are happy to drive anywhere just to buy them or even see them.
2.         If you want to talk convenience, as a customer I want a car delivered to my doorstep (or picked up for service). Now that is convenience, not forcing me to go to a dealership.

Another problem is the actual experience at the dealership. It is well known that customers dread going to a car dealership. It is up there with “going to the dentist” on the list of least favorite places to go. So why do brands keep on wanting to draw people to their dealerships? And once there, there is no chance to learn more about the brand itself, the heritage, what it stands for. They are sterile hard selling spaces. Not pleasant…

And this network is pretty expensive to maintain. For the brand, the amount of costs in the form of sales allowances and sales persons’ commissions they have to bear makes the margin in each car tiny. Let alone the marketing materials, campaigns, media dollars, training, qualified employees, signage, stock management costs… I could go on and on…

THE SOLUTION – The way I envision it to be

If a brand is strong and its cars are awesome, the manufacturer should build, own and manage directly macro Brand Experience Centers.

These centers would be bigger than a typical dealership and would play several roles;

–           Car show. All models, colors and trim levels would be in stock.
–           Brand experience center. Where customers could learn more about the brand, enjoy brand content and build a stronger like towards the brand.
–           Test drive centers, where all models, colors and trim levels would be available for test drives.
–           Complete service points. With service bays for maintenance and repairs.

The employees at these centers would be brand enthusiasts and product experts, but not necessarily salesmen. The purchase decision is often made outside the dealership and sometimes the customer who walks into a dealership finds out he knows more about the product and its competitors from what he has gathered on the Internet than the salesperson himself.

These employees would be young, energetic, web savvy and passionate about cars and people. This profile sounds much easier to recruit…

There would be an army or drivers who would deliver and pick up a test drive car or a car due for service from and to customers’ doorstep should the customer decide to.

A customer wouldn’t need to come in for service as his car would be picked up and delivered back. I see lots of dealers investing money in a better waiting room (internet connection, vending machines, free food, Wii for the kids…). But what they don’t realize is that the customer does not want to go back to the dealership ever, let alone wait there while the car is being serviced! Instead, investing in a picking up and delivering program would be a much better experience that would build a stronger loyalty and, ultimately a better customer experience.

I envision these centers to be great looking places where people WANT to go to check out cars and brands, and there is no fear of being harassed or ripped off.

I envision these centers to be the Apple stores of the automotive industry. Why not? After all Apple is much more profitable that many car companies and that many dealers.

They must be doing something well….

Automotive Brand Experience Centers
Copyright Jaime del Valle 2010


Thoughts on the Automotive Industry – Do we really need dealers?

Several things triggered my thoughts about car dealers.

  1. At a Google Conference I attended in Mountain View, John A. Casesa showed the audience the breakdown of the costs of distributing a car from the moment it leaves the plant to the moment the customer picks it up. I was shocked at the huge bite the dealer took at it. The funny thing is that most of them are fixed costs, so they are not even turning into dealer profit. The majority are destined to cover the cost of maintaining a dealer structure. It does not make any sense that such products that take so much engineering to build and costs so much to produce make such tiny margins. This is broken.
  2. In many cases, dealers that I have dealt with haven’t really acted as partners. Brands have been forced by dealers to do things against their will, mostly around marketing and commercial strategies. An example I kept on seeing over the World was when dealers demanded the brands to have TV ads on air. Just because. Or forcing manufacturers to launch new models under heavy discounts, and therefore damaging the brand image. Dealers are much more interested in the short term sales results than in building long term strong brands that can therefore charge a premium. Car manufacturers have lost the control over their own brands to comply with strong dealer group demands.
  3. Most of the Customer Satisfaction Surveys that we deal with in the Automotive Industry reveal that, the experience at the dealer is one of the worst parts of the auto shopping experience. Car purchase research also says that dealers are a key part of the process, but I like to think it is because in the purchase of a big ticket item (a car is the second biggest purchase you do in your life) the physical experience is irreplaceable. It is not because of the dealer itself.
  4. Also, those same purchase process studies reveal that most of the research and decision making is made outside the dealership – on the Internet or with friends and family.
  5. Over the entire period of learning, shopping, buying, owning and repurchasing a vehicle, people spend a very tiny portion of the time AT the dealership:
    1. When they take a test drive
    2. When they sign the contract
    3. When they pick up their new car
    4. When they take their car for service / repair
    5. When they pick up their car from service / repair.

Think about how much time over the entire cycle these events represent…. Very little.

BUT they are critically emotional moments, either because they are very exciting (picking up your new car) or very unpleasant (taking it for service – which is a necessary evil)

Manufacturers and dealers want to make customers come back for service over and over again, while customers wish they would never have to go back to the dealer for service, because it is normally an unpleasant experience. But they have no choice. Well, they should have a choice.

To me, it just seems that dealers represent a tiny unpleasant part of the business and the customer experience, so, I would like to think of an alternative model that, without eliminating the physical interaction with the car, removes the dealer body as we know it today.

Identifying the moments when a physical interaction with the car before purchase is required (check out the car, test drive it…) and with a technician when it needs to be serviced and figuring a way these can be done without the existence of a dealer, will be the basis of my thoughts. Today, technology, the Internet, car owners and social interactions could become the substitutes of a dealer network as we know it today.

So what I will challenge is the dealer body as it exists today (independent franchised agents), and I will not be advocating online sales of cars.

I would like at this point advocate the power of ignorance. Ignorance can be a very dangerous thing, but it can also be a very powerful tool. As I approach issues without having all the knowledge about it or all the facts, I am been able to ask all the questions and challenge standard conventions. And that is, I strongly believe, the genesis of change: Challenging conventions.

I advocate this because I might have all the facts and inside intel about the automotive business model, but neither do consumers. So I want to believe all the questions and ideas I will present over the next posts, are valid, worth proposing and considering. I hope they trigger answers, opinions and additional ideas. So feel free to reinforce my thoughts or debunk them. And feel free to call me ignorant. I don’t mind.

All my thoughts are based on 3 premises:

  1. The power of a strong brand. Many of my ideas are not feasible if the brand is weak. BUT, any of these ideas could help build a stronger brand.
  2. The power of awesome product. You need to have cars that people WANT to own. Mediocre product won’t take you anywhere.
  3. The power of a newly created challenger company. Implementing many of my ideas in a long established manufacturer/brand would be quite inefficient (just the sheer cost of shutting down dealerships renders haunting…)

I believe that established car manufacturers should still use the dealer business model but focus on re-engineering it to make it more profitable and efficient.

But if a new manufacturer/brand came to the market from a fresh start, from scratch, I would want to see some of these ideas being considered.

Stay tuned for future posts about this; I do have ideas around how to solve these issues and build a different model. And if you have ideas or thoughts around this topic, please send them to me so I can enrich this series.


Marketing and Picking Up Girls – Kino Escalation

This is the second post of the series Marketing and Picking Up Women (or Men), where I explore the similarities between picking up women at bars (for example) and doing great marketing.

I always start with one of the concepts that Mystery teaches his socially challenged students to become pick up artists in his TV Show The Pick Up Artist and in his book The Method

The concept for today’s post is: Kino Escalation.

The principle, in few words, is that when you are picking up girls, you cannot go from “Hello” to “Kiss” directly. You need to climb a “Kino Escalation Ladder” to gauge interest and to build momentum. It is a long distance race, so you need to pace yourself and stop at checkpoints. And these checkpoints should be incremental so they build towards a higher destination. They are called “kino” because they typically are physical checkpoints. Touching her hand, putting your arm around her, smelling her neck… you physically get gradually – hence “escalation”- closer to kissing her. And those checkpoints are also testing her interest. You don’t move up the ladder if you slip in one of the steps.

Well, not any different in Marketing. Going from “Hello” to “Kiss” in marketing would be something like having a banner for a new launched vehicle taking over the Yahoo homepage saying “Buy Me”!
“Hey, wait a minute! I don’t know what car you are, that brand doesn’t even ring a bell, and, most importantly, I am not interested in buying a car at all!”

To be able to start off the right foot, with a nice RELEVANT “hello”, targeting techniques must be applied. Whether they are contextual, behavioral or any other type of sophisticated targeting, marketers MUST present themselves in a humble and relevant way, stepping into the ladder with the right foot before they take the next step.

And if the interest comes from the customer, even more so! This is where Search Engine Marketing comes into play. As a girl might say hello to you first, a customer can type some words in a search engine to express his interest. You don’t want to mess up the second step. Think about it.

Girl says “Hi ;-)”. Boy turns around or says “Bugger off :-p”

Customer types “Price of car X” in Google. Brand of Car X doesn’t show up in the results.

It is basically the same…. Rude.

But this only speaks to the relevance of marketing. If I stick to the initial concept of “kino escalation”, the analogy would be something like this:

Girl says “Hi ;-)”. Boy says “Let’s sleep together”

Customer types “Car” in Google. Brand X appears in the results saying “Click here to buy”

Ok, ok, depending on the product or service, that customer might be ready to buy, but the marketer needs to acknowledge the interest of the customer and build progressively and in a relevant manner towards purchase (after all, we are here to do business)

So, without wanting to drag this topic any longer, my takes on “kino escalation”

Don’t be rude.

If someone says hello or shows interest in you, acknowledge it always and try to find out more.

Take one step at a time.

Ideally, you want a longer term relationship with that person (yes, even a one-night-stand counts as a longer term relationship if you compare it with having a drink) so solidly build your path to that goal. Aim to have several occasions to interact with that person and use those occasions to gauge the interest, build the momentum, exchange value and engage further. I hate those online forms that ask you for your post address, telephone number, social security number and date of birth just to subscribe to an email update.

Ask me for my email address only, then provide me value and progressively, if I trust you and the value you are giving me, I will give you more (information)

Be relevant.

If a girl asks you for the time, give it to her. Relevance is what trust is built on, and escalation is based on trust and feeling comfortable. If I ask you for the time and you answer “red”, I will (think you are stupid or that the music in the club is too loud) not want to engage in a conversation with you.

So if a customer types “price of x” in Google and you take him to a landing page where there is only an overview of the product, you have not answered his question.

Be daring.

We have all been afraid of what would that girl think if I put my arm around her. Well, if you don’t, you will never find. She knows what you are there for, as a customer knows you will eventually want to sell something. You need to avoid the “friend” condition (I will write a different post about this). You both know there will be something more; something else and you have to take the steps to achieve it.

Hopefully, at the end, if you are polite, you are relevant/interesting, you sequentially build the interest and the attraction and dare to move from one step to the next one, the relationship, whatever that might be that you pursue, will be fruitful


Marketing and Picking up Women (or Men)

Two events happened in the last months that pushed me to write this post. I attended a Harvard course and I watched the entire first season of “The Pick Up Artist”. (I know, it is lame…)

They seem totally unrelated, don’t they? Well, they are. But the thoughts they sparked in my mind are not.

While I was watching the complete first season of the “Pick Up Artist”, I was applying the lateral thinking that I learnt at Harvard. And I started seeing similarities between what the Master Pick Up Artist was teaching socially challenged subjects and many basic marketing principles I have been learning and applying along my professional career.

Another thing that captured my interest, was the simplicity of the pick up principles and tips. They were all based upon basic human principles and therefore, they all had  a very strong sociological power.

Also, the pedagogical simplicity of the pick up lessons made me wonder how difficult could it be to explain basic marketing principles in a way that everybody understood them, that everybody could relate to. Because at the end of the day, we all are subjects of marketing. We all receive and do marketing ourselves.

I started to see that all the concepts that were taught to pick up women were absolutely applicable – with slight semantic adjustments – to Marketing.

In future posts I will, taking as a starting point the main proven concepts of the art of picking up women, try to explain the relationship I find between these and the basic principles of doing successful marketing.
Those future posts will be much richer if you let me know also, what similarities do you find between picking up women or men with doing great marketing. So, please, leave your comments.

After all, it is all about making a stranger want to engage with a “product”, isn’t it?

Always loved this video…