IBM Global Services Automobility: Winning a Different Race
by Gerhard Baum, Vice President of the Global Automotive Industry Practice within IBM Global Services and Michael Jedlicka, Managing Principal of the IBM Business Innovation Services Automotive Industry Practice across Europe, the Middle East, and Asia

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Introduction

Anna - a recent high school graduate - is preparing to enter college in the fall. Her parents have decided to celebrate this milestone by giving Anna a new car. While her parents are interested in safe, reliable, and affordable transportation, Anna would like something sporty. She finds a model she likes, but some safety features (insisted upon by her parents) are custom options, which translate into a 10-week delivery time. She decides to wait. It takes 19 weeks. Once she has her vehicle, Anna investigates a few new electronic services. She signs up with a two-niche service provider - one that offers local navigational services (extremely useful as a newcomer in her college town) and another that provides digital-quality radio stations accessible from anywhere in the nation (entertainment for long drives home). Unfortunately, a few weeks into the school year, Anna's "reliable" transportation begins to stall. After three trips to three different dealerships, someone finally pinpoints the problem - a programming error that is draining the battery. When her lease ends, Anna selects a different brand.

While automotive companies struggle with slowing sales and a battle for market share, technological advances are making possible features and services never before imagined - and creating a few challenges along the way. At the same time, customers are demanding customized products from an increasingly complex manufacturing process. Automotive companies must find new ways to provide customer value, to accommodate the connectivity inherent in today's mobile lifestyle and, in the process, establish lifelong relationships with customers - in short, become an "automobility" provider, not simply an automobile maker. This is a new race.

Road Hazards
As auto companies shift gears for this new race, there are four key obstacles or inhibitors that stand in their way:

Limited Interaction Opportunities
Go-to-market models that focus primarily on the sale of a vehicle - and sales that happen through a network of dealers - leave little opportunity for direct interaction between automotive companies and their customers. The dialogue that does occur between automakers and auto buyers usually centers around determining what customers want in a vehicle - not necessarily what they want from their transportation, or "automobility," experience. Sometimes, important questions go unasked, like: What do customers want to be able to do while in their cars? What do they expect now that they manage their lives with a cadre of digital devices? Should these devices be integrated into the car? If so, how? No one is certain which types of electronically delivered services the marketplace will embrace - but nearly everyone foresees a future full of them. Without increased levels of interaction, automakers will find it difficult to answer these types of questions. Plus, customer information - when present - is not always easy to reach. Like most large enterprises, automotive companies have data that's segregated in silos across the organization - in call centers, marketing departments, and financing divisions, just to name a few. Other companies own pieces of the puzzle too - such as repair records at dealerships, mileage, and driving data inside insurance companies or mobile phone-usage information with cellular service providers. To remain competitive, automotive companies need to hone their ability to understand what individual customers want and act accordingly. The insights gained can provide inspiration for continuous innovation - which, in turn, can help earn customer loyalty, forming a virtuous circle that leads to market leadership.

Innovation Biases
Despite the growing importance of electronics in cars, it's difficult for automakers to shake loose the grip of today's mechanical bias. Innovation, and the processes and systems that support it, remain centered primarily on the car itself - its styling, safety, performance, even its new electronic features - with less focus on innovating the customer's transportation experience through a world of electronically delivered services.

IBM research suggests that, within five years, 90 percent of all automotive innovation (and 50 percent of a car's cost) will be in on-board electronics and software. As automobiles assume more and more of the characteristics of consumer electronics products, innovation speed becomes a pivotal issue. Rapid-fire product and service introductions do not come naturally to an industry that's calibrated for three- to four-year development cycles. Unless automotive companies trade their mechanical mindsets for digital ones, they may not be able to keep pace with marketplace expectations. Advanced innovation capabilities will become a necessity as auto companies pursue customer-centered innovation in features and services, and attempt to deliver this new value quickly and profitably.

Production and Distribution Limitations
Today's production processes - already complex, rigid, and asset-intensive - may not be capable of absorbing the fundamental changes required to manufacture automobiles loaded with electronics and software-driven components. Left unanswered, these new demands could mean higher costs, longer production cycles, and slower reactions to market shifts. Influenced by other industries, customers - whether buying or leasing - also expect faster delivery of the car they want - not the one the dealer wants to sell them… and they want it all at no extra charge. Building only to plan may alienate a growing population that wants individualized products and services. Automakers must establish flexible production and distribution methods that allow them to profitably provide personalized vehicles and services to tomorrow's drivers - whoever they might be.

Risky Business Mix
Currently, automakers shoulder the rising cost of vehicle design and production for razor-thin margins on new car sales and a small fraction of the post-sale revenues that their vehicles make possible. Car and truck sales are predicted to drop 11 percent from their peak by the end of 2002, leaving the average auto company managing a rather risky portfolio. Competition is fierce, gaining market share is critical, and new avenues for growth are mandatory.

As automakers seek to satisfy growing customer expectations, they will not have the time or the money to develop in-house all the capabilities they need. Although they've developed sophisticated relationships with suppliers over the years, automotive companies generally lack experience with partnership-oriented relationships, particularly with firms outside their industry. In order to meet sophisticated customer demands and capture new markets, automotive enterprises will need the ability to form coalitions and pool capabilities across a wide variety of partners.

New Race, New Competencies
To win a different type of race, one must have different capabilities. For automakers racing toward "automobility," this means developing new competencies and refining capabilities in four primary areas: customer value creation, product and services innovation, production and fulfillment, and value net management.

Customer Value Creation
To increase their customer value quotient, automakers must outfit their organizations with finely tuned "sensing" capabilities and build the means to "respond" to what they learn. Direct interactions with customers can provide valuable firsthand knowledge, but where should automakers search for those elusive contact opportunities? Look no further than their cars. Customers are spending more hours than ever in their vehicles. Why not take advantage of that time? In-vehicle information systems present enormous possibilities for collecting input, communicating directly with customers, and providing conveniences that help drivers make the most of time spent commuting.

To gain the privilege of increased interaction and more in-depth information, automakers will need to sharpen their tightrope-walking skills - balancing customer benefit with the desire for privacy. Incentives should be commensurate with the amount of privacy the company is asking the customer to forego. For instance, drivers may be willing to allow an automaker to electronically monitor their cars' performance if they receive a reasonable discount on an extended warranty. With the right combination of technology, data, and marketing savvy, automakers can escape a single-transaction frame of reference and start building lifelong relationships with customers that span multiple automobile purchases and produce ongoing streams of services revenue. The secret is discovering customer lifestyle and automobile life cycle "triggers" that change transportation desires or needs - such as a job promotion, a mileage milestone, the birth of a child, or the end of a lease. In order to "sense" those types of shifts, automotive companies need a more lifestyle-oriented perspective of the customer. However, this broad-angle view cannot be adequately built in a vacuum; it requires partnerships with others in the value chain that have the information needed to piece together a complete picture. Paying attention to a vehicle's life cycle can pay dividends as well. For example, automakers can spot opportunities - as cars pass from owner to owner - to pursue relationships with new customers.

With the right business intelligence capabilities and tools, automakers can integrate internally collected data with externally derived data and drive enhanced business value. Discoveries about the customers' lifestyles, their cars' performance or how they use their vehicles can be translated into new in-car features and electronically delivered services. Taken a step further, these capabilities can be extended to develop personalized offerings based on individual needs or actual usage. The first wave of custom offerings has already arrived. Some insurers are selling pay-as-you-drive coverage with variable premiums based on the amount of miles actually clocked on the insured vehicle.

Electronic pipelines to and from customers help build relationships. Every time the auto company adds new in-car features, upgrades remote diagnostic capabilities, downloads a movie, or navigational aid, the relationships grows stronger. And that continues throughout the car's entire life cycle. Breaking out of a rigid vehicle mold and adopting more fluid and adaptable ways of delivering customer value gives automotive companies the chance to enlarge their brand promise, increase customer loyalty, and achieve more revenues across a customer's lifetime.

Product and Services Innovation
To stand out from the competitive field, automakers must expand expertise beyond hardware and mechanics and develop a keen understanding of software and electronics. Through software, market leaders will be able to profitably deliver the types of custom features and services consumers desire with the speed and frequency they've come to expect. To encourage innovation, front-runners will embrace open platforms for in-vehicle information systems. They'll align themselves with strategic partners who share their vision. Their products will be designed, simulated, and tested virtually - before any metal is cut. These leaders will maintain control through digital platforms that sit on top of their current mechanical ones. An emphasis on understanding and managing the complexities of a software-driven transportation experience will permeate every unit of the organization from manufacturer to dealership and every function from design to repair. Quality-control processes that are tuned to detect software inconsistencies, for example, could pick up subtle changes to microcode imbedded in supplier-provided parts that might otherwise go unnoticed.

In this new race, the electronics industry is the pace car. Automakers will need to accelerate product innovation - perhaps as much as tenfold - to meet heightened expectations. Designing for modularity, flexibility and reuse must become second nature, and electronic collaboration among far-flung team members and external suppliers must be commonplace. To consumers surrounded by electronic devices that morph every six months, vehicles start feeling older much sooner. Automakers need to find ways to keep their product fresh; customers who frequently receive new features or services that add value to their current transportation experience are more likely to remain brand loyal when making their next vehicle purchase.

Rewards won't come from sheer innovation, though. As everyone knows, the market doesn't respond to technology for technology's sake. Take for example cellular phone support: Consumers did not flock to telephones built into cars; instead they preferred a way to plug in their existing phones and a hands-free way to use them while driving. In the end, customers are looking for vehicles and services that provide value - a transportation experience that melds with the rest of their lives… their homes, offices, and entertainment venues. By marrying new development competencies with newly acquired customer insights, automakers can produce a constant stream of customer-centered innovation that truly differentiates their brand.

Production and Fulfillment
To be a contender in the "automobility" race, automakers need to overhaul production and fulfillment with four factors in mind: integration, simplification, digitization, and customization:

• Integration - Race leaders will shed assets. They will successfully reduce manufacturing depth and become an architect and integrator of supplier-built components and subsystems.
• Simplification - Complexity is costly. Automakers must find ways to simplify their processes as well as their products. Engineers should question whether the company really needs thirty different dipstick designs. Reusable, adaptable parts and modules - often bought in bulk at a discount - mean less time spent on design, testing, and production ramp-up… and less cost overall. Adaptations accomplished through software can significantly expand what is possible in this arena.
• Digitization - A digital mindset should seep into every area of the business. While a product is still in development, the production process can be designed and tested digitally, in parallel with the product. Once a vehicle is in service, enhanced functions and features can be delivered electronically through software upgrades. Plus, in-vehicle services can be digitally delivered on an ongoing or on-demand basis.
• Customization - By migrating toward software-driven functions and features, automakers create more opportunities for customization. Automakers can take advantage of these possibilities in product development and production by "customizing" a programmable component mass-produced by a supplier. Personalizing a car for an individual driver becomes more feasible as well. Sporty versus smooth ride, quicker versus slower acceleration, and tight versus loose handling could all be software options selected by the customer.

By adapting production and fulfillment processes to fit the new race, automotive companies can bring products and services to market quicker with better quality at lower cost.

Value Net Management
Today's traditional value chain is giving way to a value network - a complex set of interrelated businesses all focused on creating value. Automakers may soon find themselves playing a variety of roles and entering into new types of relationships that have yet to be imagined.

To meet dynamic marketplace demands, particularly in the services arena, automotive companies must learn to form partnerships quickly - establishing relationships both inside and outside their industry and perhaps even with competitors. Successful value net managers will also be comfortable dissolving relationships when business situations change. They'll learn to craft win-win arrangements with flexible terms and conditions. Their organizational cultures, business processes, systems, and management frameworks will be easily adapted to integrate with a revolving set of business partners. When 75 percent of the profits come from areas other than traditional car sales, speed and agility will be key.

Most importantly, leading auto companies will be cognizant of where the value actually is within the network - and how to leverage that knowledge to their advantage. Who has key information on the customer's lifestyle? Who should be the primary interface with the customer for a particular service? Who has the capabilities to deliver what's required? Automakers should also think through who has the most to gain from a potential electronic service opportunity - because it may not be the customer. For example, a customer may not see any value in the ability to send an instant message when a car's airbag is deployed, but their insurance company might. With real-time notification, the insurer could put their designated wrecker service en route to the accident and bring the damaged vehicle to a preferred repair shop, where they've negotiated special rates. Those companies that can successfully manage a complex industry value net will push brand value well beyond the car itself - and pave a path toward profitable growth.

Time for a Tune-Up
Michael's parents notice a colorful brochure from their car company in the mail. It describes an interesting package of features and services designed especially for soon-to-be graduates - with reliability, safety, and sporty drive in mind. The company's timing amazes the couple because they're currently shopping for a new car to give Michael as a graduation present. Many of the features can be temporarily downloaded into their existing car so families can try out the functions and services before buying. Dad tries them all - including the sports car handling - before selecting the functions and services for Michael's brand-new set of wheels.

A month later, when Michael is away at college, his car company advises him of an available electronics upgrade. The upgrade corrects a programming error that could potentially drain battery power and cause the car to stall intermittently. Thanks to data obtained from monitoring over 5,000 cars in day-to-day operations, the defect has been detected early and solved before most owners ever experienced a problem. Michael elects to install the upgrade right away - he doesn't want to miss any classes… or dates. After four successful years at school, Michael's lease draws to an end. Both parents and student realize just how reliable - and enjoyable - his driving experience has been. New job in hand, Michael remains brand loyal and orders the next of many future purchases from his favorite car company.

Most automotive companies would admit the need for a tune-up to realistically compete for lifetime customers like Michael. But where should your company start? What should you do right now to help sharpen your competitive edge? Here are four strategic imperatives to help guide your initial moves:

• Know as much as possible about your customers - Combine information from internal and external sources to perform intelligent, proactive lifestyle analysis.
• Connect customers to your company through their cars - Build intelligent vehicles that can serve as a conduit for two-way communication with customers. Learn from each interaction. Feed what you learn into every corner of your business. Pick partners that can help you deliver value and thereby, earn lifelong relationships with customers.
• Develop what the customer wants quicker - Fuel continuous innovation through direct customer interaction. Migrate to a digital platform to cut time, reduce costs and improve quality. Recast yourself in the roles of chief architect and lead integrator, pushing asset-intensive manufacturing processes further down the supply chain. Embrace software and electronics as an avenue to provide more personalized products and services.
• Deliver when customers want it - Establish streamlined order-to-delivery processes - ones that can accurately predict when vehicles will be delivered. Encourage end-to-end electronic collaboration across the supply chain to deliver on commitments. Leverage intelligent cars to electronically deliver new features and services directly to the customer.

Substantive business practice changes like these can occur only if underlying organizational attitudes and behaviors shift as well. Without new skills and the motivation to use them, teams will likely revert to old habits. Strategic use of information technology will also be necessary to move the organization to a new operating plane. To succeed, organizational and technological change must be wrapped around each strategic business initiative.

Are You on the Pole, a Qualifier or just a Provisional Starter?
Your race position depends on how quickly you can adapt to changing conditions. As you reflect on the transitions taking place in your industry, consider what they might mean for your business and ask yourself the following questions:

• How well can you connect with your customers right now and are you learning from them?
• Are you using the automobile's electronic components to gain strategic advantage? Do you use them to gain cost advantage as well?
• Build-to-order plans and in-car electronics add complexity, which adds cost. Is your supply chain able to deliver profitably?
• Are you using technology effectively to streamline product design, development, and deployment?
• In electronics cycle times, innovations become old quickly. How are you going to keep your product fresh?
• The business of in-car services is uncertain. Do you have the strategy and skills to become a player? If not, what stands in your way?

"Automobility" is a high-stakes race. Shrewd automotive companies recognize the fundamental shifts underway and are busy preparing their organizations for a new level of competition. IBM stands ready to assist. Their consultants understand the industry issues at hand and the challenges involved in such major organizational transitions. They would welcome the opportunity to help map out your new race plan and put it into action. Contact them at insights@us.ibm.com to learn more about how IBM can support your strategic change efforts. To browse through other resources designed for business executives, visit their Web site at: ibm.com/services/insights.