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