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innovation A seismic shift in the car industry: The management challenge and responsibility By: Christoph Loch and Fabian Sting The car industry is facing one of its most dramatic shifts in the last 50 years. The pressures associated with fuel consumption have intensified and now coincide with the emergence of the environmental protection issue and the rise of alternative technologies in the form of hybrid and fully electric engines. Predictions indicate that growth in the industry will originate exclusively from Asia, not the USA and Europe. “ Winning will require decisive moves in new directions. Time is of the essence, particularly because it takes two to four years to bring new models to the market. ” Christoph Loch, professor at INSEAD, Technology and Operations Management. Western companies will have to address the tastes and needs of Asian consumers. Even the invincible knight, Toyota, has felt the pain of reduced demand in its largest markets. Where it once had the lead in hybrid technologies, it has been slow to expand and is now vulnerable to being overtaken. This is a time of great peril and great opportunity. Porsche – swallowed up by Volkswagen – has already disappeared as a standalone manufacturer; Saab was on the verge of closure, and the American car companies are retreating in global markets. Those who do not act quickly to address the triple industry shift will be left behind and may be permanently replaced by emerging Asian players. Winning will require decisive moves in new directions. Time is of the essence, particularly because it takes two to four years to bring new models to the market. For example, Toyota has revised its strategy to become a leader in “sustainable mobility”. Its innovative fuel technologies converge with an environmental commitment that extends to product life-cycle footprints and all operations. BMW’s “efficient dynamics” strategy still focuses on driving pleasure in premium cars, but emphasizes the fact that every drop of fuel must also be saved. Top management needs to show leadership and align companies along new paradigms; however, this does not imply that top managers can act like generals and order their companies to follow. Uncertainty is simply too high. The uncertainties derive from many questions: Will hybrids take a large market share or not? (This question is open only in the medium term as their inherent disadvantages compared to fully electric engines will be highlighted when the next breakthrough in battery technology happens). Might hydrogen finally begin to deliver on its promise? Or will high-efficiency diesels achieve another leap and push electric engines back another few years? How fast will the Asian markets grow, and how effective will local competitors be? No one knows, and market tastes will evolve. The only thing we know for certain is that the markets will be very different in China, India, and central Asia. 70 to read full version of AI stories go to www.ai-online.com
“ The problems are clear and can be articulated by top management, but the solutions reside in different parts of the organization, and middle and frontline management must be invited to propose them. ” Christoph Loch and Fabian Sting, professors at INSEAD, Technology and Operations Management. In the face of such uncertainty, no one can simply decide what strategy to take. This would entail a hit-or-miss approach, or require such long term analysis that one would risk falling behind. A “command and control” of a fixed direction simply will not work. Companies should therefore undertake strategic experiments. Large players will not be able to avoid parallel trials, for example, having a fuel cell and a hybrid and a high efficiency diesel; launching cars for the global market and experimental locally designed cars in Asian markets. This is illustrated by the experiments that Honda is showcasing in order to appeal to new users of cars. Pursuing such parallel technologies, models and market approaches will be expensive and should be done with deliberation – trials should not necessarily target short-term “success” but rather be used to learn about the market. In addition, companies will have to experiment in an iterative fashion; for example, by launching a hybrid and seeing how it does, or launching a low cost car in India and learning about its weaknesses and strengths. Again, this is an expensive business, but when the market is moving so fast with many new consumers – indeed many of them have never owned a car before – you can’t rely on old market research. You have to “probe and learn”. This context requires a different leadership style from classic top-down management because the top team alone cannot steer this amount of experimentation, and it cannot know enough about opportunities for innovation and market requirements. Hence the situation requires using the entire organization as a problemsolving resource. The problems are clear and can be articulated by top management, but the solutions reside in different parts of the organization, and middle and frontline management must be invited to propose them. Top management can put a portfolio together that fits with resource constraints, has the breadth to ensure appropriate exploration, and brings together initiatives that are complementary rather than conflicting. All this requires that the troops are briefed on the strategic challenges and the logic of the strategy initiatives chosen. For example, R&D may propose prototyping certain promising technologies; local sales companies, the development of models with certain key features; and manufacturing, the use of local sites, platforms and suppliers. Again, in a time of strategic turmoil, the value of such a portfolio of initiatives lies not in maximizing the traditional (short-term) financial return, but learning about which technologies will win, where the growth will come from, and what the needs in the various markets will be. When we studied manufacturing organizations across several industries in Germany to see how strategy was executed in companies that maintained global manufacturing competitiveness in a high-wage country, we found that 50% of strategic initiatives were generated bottom-up by middle and frontline management, rather than top-down. This could even go as far as questioning board-level goals based on exceptional bottom-up ideas and concerns. Admittedly, this was the exception rather than the rule, but the possibility exists. For example, in one organization the goal of the Business Unit was changed from a cost focus to a focus on reducing customer reaction time, based on input from middle management. The logic of the change rested on customer value and the fact that the response time reduction achieved by process improvements led to lower costs in the long run. Conversely, we found that overly tight “alignment” along a fixed strategy hampered the innovation and changeability of the organizations. So the leadership lesson in times of turmoil is this: A fixed strategy imposed from the top, no matter how brilliant, simply will not work because (a) it will probably be wrong when the markets as well as technologies are as uncertain as they are now, and (b) potential solutions to problems are distributed across the entire organization. Managers must become orchestrators rather than bosses, although this does not mean they can be weak – out of diverse ideas they have to select and craft a direction. Western car companies have both the technology and the manufacturing capabilities needed; yet the challenge ahead lies in generating a sufficient number of creative options from within the organization, experimenting to learn, and making the right selections to channel creativity. The composition of the auto industry in ten years will be decided by the quality of top management today. AI Christoph Loch and Fabian Sting are professors at INSEAD, Technology and Operations Management. INSEAD is one of the world’s leading and largest graduate business schools, with three campuses in Europe (France), in Asia (Singapore) and in the Middle East (Abu Dhabi), a research centre in Israel and an office in New York. Automotive Industries 71
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