Quick takes

Citation

Gorrell, C. (2003), "Quick takes", Strategy & Leadership, Vol. 31 No. 4. https://doi.org/10.1108/sl.2003.26131dae.003

Quick takes

These brief summaries highlight the key points and action steps to be found in the feature articles in this issue of Strategy & Leadership

Page 4Metamorphosis in the auto industryCathleen Benko and Warren McFarlan

Globally the automotive industry is transforming itself. During this period of uncertainty and discontinuity, entirely new ways of doing business are emerging. Three trends stand out. Together, they represent a convergence of progressive thinking from the major players.

Trend #1: The manufacturer's changing relationship with its customersThe biggest change in the auto industry is its relationship with its customers. Increasingly customers are being given the opportunity to customize their purchase, while the automakers are becoming more adroit at understanding which customers create the most value for them. Behind all of this is a fundamental change in perspective: the customer's desires and specifications are to drive the process, not the vehicle the automaker has planned.

The customer's demand for speed of delivery plus the automaker's desire to make only cars that customers want (so they won't be stuck with inventories that must be sold at discount), have resulted in shrinking the "order to delivery'' cycle. Instead of four years, GM plans to roll out a new model every 27 days. The strategy is increasing profits.

Another dimension is the fact that cars are evolving into electric appliances. Today, 22 percent of a car is electronic content. In ten years, that will be 40 percent. Via wireless connectivity, the car, its owner, and the automaker will be in continuous contact. Connectivity will promote extended relationships with auto owners fostering a greater customer-centric focus.

Trend #2: New partnerships with suppliers In the past, automakers and their suppliers have had an adversarial relationship. In an effort to hold down prices, manufacturers would squeeze their suppliers' margins. Now, US automakers are becoming more like their Japanese and European competitors: they strive for cooperation and are purchasing entire subassemblies (such as doors or power trains) from suppliers. This is leading to radically new infrastructure to support design, procurement and logistical processes. By connecting with suppliers and sharing demand data, quality and responsiveness are improving and costs are being reduced.

Trend #3: The reinvention of the factory floorThe factory is no longer a single assembly line. It is an assembly process that allows multiple cars to be assembled on one line. With "modular assemble'', the automakers are working collaboratively with suppliers to create cars with far more productivity, flexibility and speed.

Radical mindset shiftWhat does it take to deal with the kind of change that the auto industry is experiencing? A survey of a variety of industries (also in upheaval) identified four management traits that were common and that exemplify the radical shift in mindsets needed to respond effectively to changing business conditions. They are defined in the article as:

1. 1.

   Eco-driven

2. 2.

   Outside-in

3. 3.

   Fighting trim

4. 4.

   House in order

Cultivating these traits throughout the organization will allow leaders to product potent, concerted responses to their rapidly evolving market conditions.

Page 9Now or never: the automotive collaboration imperativeDaniel Blake, Tom Cucuzza and Sanjay Rishi

Today's automotive leadership faces harsh competitive truths. Competitive advantage will not be attained by size alone. Success in the future will depend on adopting a new model to create value and distribute the value benefits: a model that is based on collaborative relationships with suppliers and others.

Six forces will have transformed the automotive world by 2008:

1. 1.

   an imperative to create value for consumers and shareholders faster than ever before;

2. 2.

   further consolidation and scale (yet scale alone is not guarantee of success);

3. 3.

   a greater need for production and process agility, to embrace technological breakthroughs in vehicle engineering;

4. 4.

   the advent of new disruptive technology in vehicles, and in supply chains;

5. 5.

   accelerated innovation of products and services; innovation is the differentiator; and

6. 6.

   customers increasingly expect both choice and value.

The inherent costs associated with rapidly innovating, developing and delivering new technologies and products to customers will force companies to re-think their competitive positions and behaviors. In the future, competition will cease to be between individual companies. Instead, it will shift to the community level. The companies that can assemble the best supply communities and accelerate consumer-centric innovation faster than their competitor's network will be the winners.

Collaborative product commerce (CPC) provides the framework under which multiple-company collaborative communities can flourish and deliver long term sustainable value. CPC is the strategy that can resolve the fundamental tension between size and agility, address the need for redefined business relationships, and shape the new business models for the second automotive century.

The transition to a collaborative model requires strategic leadership. The formation of new communities will not happen as a natural evolution from the lower forms of collaboration that currently exist. Senior management initiatives are required to overcome existing barriers that prevent true collaboration. The benefits of CPC include: shorter cycle times, cost reductions, development of consumer-centric offerings. These create sustainable competitive advantage.

Six key steps to CPC:

1. 1.

   make collaboration the centerpiece of strategy – obtain a community of partners that excel in customer responsiveness, speed to market, and innovation;

2. 2.

   anticipate the upcoming disruptive forces and create a collaborative response with key community partners rather than in isolation;

3. 3.

   work with community partners to identify essential areas where collaboration can create a superior business model;

4. 4.

   begin working with partners first on enhancing product development;

5. 5.

   focus on core competencies and eliminate redundant processes; and

6. 6.

   share value within the community.

The better business model, possible with CPC, will look similar to the model used by the high-tech industry – where effective collaboration is already the norm among industry leaders – in which specialized players rapidly reconfigure the value chain around specific product, services, and projects. The tools for collaboration in a complex automotive supply chain are now available. The need is clear. The mastery of collaboration will prove a defining and indispensable strategy for the automotive leaders that will emerge early in the second automotive century.

Page 17Demand innovation: GM's OnStar caseAdrian Slywotzky and Richard Wise

Creating sustained growth is hard under the best of circumstances. So, how does a company achieve strong growth in a market that does not grow? Consider emulating the pioneering practices of a handful of farsighted companies. They have shifted their business approach from product innovation to demand innovation. "Demand innovation'' focuses on creating new growth and new value by addressing the hassles and issues that surround a product.

Demand innovation expands the market's boundaries. It focuses on using the company's product position as a starting point from which to do new things for customers, things that solve their biggest problems and improve their overall performance. Thus companies skilled in demand innovation do more than simply take value and market share away from tradition businesses. They also create new value and new growth in revenues and profits, even in mature industries that appear to have reached a plateau.

General Motor's OnStar company is an example: a new-growth business focused on growing new value by discovering new forms of demand. OnStar uses new technologies in an exciting way to address many of the latent issues associated with owning and driving a car. It offers a new mobile hardware system and a service package for drivers that provides safety and security, and convenience and fun. This offering required GM to adopt two new perspectives:

1. 1.

   OnStar had to be viewed as a different category from traditional automotive amenities. Those amenities were tools to enable a onetime vehicle purchase. OnStar was a new form of value capture for GM and a significant revenue growth opportunity through a recurring stream of monthly subscriptions.

2. 2.

   GM chose to allow OnStar to be offered through competitor OEMs. This was a break with traditional car industry culture and a change in GM's relationships with its offspring company.

The crucial factors in GM's success have been its ability to look at customers' driving needs from a fresh perspective (an expanded view of the market) and its decision to serve these needs through a business design that leverages GM's unique hidden asset: its unequalled installed base of vehicles.

If you are working in a traditional product-centered manufacturing company, there may be a significant growth opportunity in the areas surrounding your product's installed base. Ask these questions:

• •

  OnStar sought to address the emotional and empowerment issues associated with improving the car driving experience. Do your customers have "soft'' emotional needs that might be addressed in innovative ways?

• •

  GM's installed base represents an asset that would be virtually impossible for a new competitor to replicate. Does your core business generate any assets that are similarly difficult to match?

Page 23Achieving competitive differentiation: the challenge for automakersHerbert K. Tay

The automotive industry is at a crossroads. Too much capacity is chasing consumers in mature, affluent markets, while demand has yet to take off in emerging markets such as China and India. Excess capacity is causing the most harm to the largest established automakers (GM, Ford, and Daimler Chrysler). Even the few, focused and more nimble automakers (BMW, Honda, Nissan, Porsche, and Toyota) are being challenged to continually reposition themselves with consumers. The key to survival and prosperity will be to achieving and sustaining competitive differentiation.

Competitive differentiation will be based on the automaker's ability to distinguish their products by strategic innovations to improve quality, cost/value, and timeliness. As a whole, the industry is experiencing significant changes in how competitive advantage in these attributes is achieved:

• •

  Quality – the definition of quality has moved on from traditional objective measures (such as reliability, durability, noise) to criteria that are more subjective, experiential and emotional.

• •

  Cost/value – the price of an auto has decreased due to the declining real cost of goods (competitiveness has forced automakers to take out costs and pass saving on to consumers), and the margin shrinkage that is the result of information transparency. Internet sites are offering retail prices, dealer invoices, rebates, financing, online buying services, etc.; this has enhanced consumer power.

• •

  Timeliness – bringing a product to market quicker than the competition will mean that an OEM can nimbly translate market trends into products eagerly sought by buyers. Attractive products require fewer incentives to move them over their lifetimes.

The implications of how automakers approach and execute differentiating strategies are framed in these facts:

• •

  attributes are continually being redefined by creative designers and engineers, new materials, and new technology;

• •

  a greater focus is being placed on features that are useful and valued by consumers;

• •

  experiential attributes are increasingly significant as sources of differentiation;

• •

  customer handling excellence (while important) will always be outweighed by product attributes;

• •

  competitive benchmarking is useful only up to a point.

For all automakers, the foundation for competitiveness needs be built upon these premises:

• •

  invest in fresh, attractive, affordable, consumer-driven products rather than incentives that push product to consumers;

• •

  nimbleness must be achieved through accelerated product development;

• •

  push for the use of intelligent platform, subassembly and component sharing;

• •

  target flexible manufacturing and work practices;

• •

  optimize order to delivery processes;

• •

  cap production of individual car lines to control supply; and

• •

  focus on key developing markets (the last "battlefields'').

No automaker can afford to rest on its laurels. "Good enough'' simply is not good enough anymore. An automaker can either be proactive or pay later. "Proactive'' means investing wisely upfront in high-quality, differentiated products that truly mirror what consumers value, and then managing their supply, in return for better margins and profitability. The consequences of the alternative, "pay later'', will be even higher incentives to move segment-uncompetitive products through profitless consumer and fleet sales, withering residuals and depleted profitability. One course sets the automaker on a virtuous circle of mutually reinforcing outcomes; the other, on a vicious spiral toward weakened financials and marginalization.

Page 31What strategic investments should you make during a recession to gain competitive advantage in the recovery?Keith Roberts

Research into the profit performance of over 1,000 businesses on the PIMS (Profit Impact of Market Strategy) database that had experienced a market recession shows that investing aggressively in marketing, innovation and customer quality pays off during the recovery. For strong businesses, such bold strategies enable the firm to continue thriving, and for weak businesses they are the best hope for survival.

A "market in recession'' is defined as experiencing two years decline in volume followed by two years of growth. This excludes markets in terminal decline. The definition also applies to the total market demand of a type of product/service, not the sales volume of a single business.

The research focus was on which investments pay off during a recession and which don't. The evidence distinguishes between "good costs'', "bad costs'', and "it depends costs''. "Good costs'' are those that should be increased and intensified during recession, such as those costs associated with marketing, quality and new products/services. "Bad costs'' are those that need to be pruned hard in recession; these include high manufacturing and administration costs and high working and fixed capital. "It depends costs'' are those where the right actions are dependent upon the strategic position of an individual business as the time recession begins.

The measures used to distinguish between successful and unsuccessful strategies were:

• •

  average profitability during recession, defined as Return on Capital Employed;

• •

  change in profitability (ROCE) during the first two years of recovery; and

• •

  change in market share during first two years of recovery.

Bottom line findings of the research:

• •

  Marketing spend does not damage ROCE significantly in the recession and helps set the platform for strong recovery. Furthermore, businesses which increased marketing spend in recession, gained market share three times as fast as "cutters'' once recovery began.

• •

  Improving, from your customers' viewpoint, the quality of your offering relative to competitors during recession pays off in better profits and growth initially and during the recovery.

• •

  R&D spent in recession, both in absolute terms and relative to competition, pays off handsomely. This is because new product introductions during recession are crucial to strong recovery in profitability and growth.

• •

  Investing in new fixed assets during recession (to improve cost competitiveness and productivity) does not usually bring positive benefits. This is because the benefits of the new assets get competed away in the form of lower prices and profit margins in an attempt to fill capacity.

• •

  Market leaders can lose out in a recovery if they chop too much capacity in the recession.