by Adam Hartung | Apr 8, 2014 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership
“Car dealers are idiots” said my friend as she sat down for a cocktail.
It was evening, and this Vice President of a large health care equipment company was meeting me to brainstorm some business ideas. I asked her how her day went, when she gave the response above. She then proceeded to tell me she wanted to trade in her Lexus for a new, small SUV. She had gone to the BMW dealer, and after being studiously ignored for 30 minutes she asked “do the salespeople at this dealership talk to customers?” Whereupon the salespeople fell all over themselves making really stupid excuses like “we thought you were waiting for your husband,” and “we felt you would be more comfortable when your husband arrived.”
My friend is not married. And she certainly doesn’t need a man’s help to buy a car.
She spent the next hour using her iPhone to think up every imaginable bad thing she could say about this dealer over Twitter and Facebook using various interesting hashtags and @ references.
Truthfully, almost nobody likes going to an auto dealership. Everyone can share stories about how they were talked down to by a salesperson in the showroom, treated like they were ignorant, bullied by salespeople and a slow selling process, overcharged compared to competitors for service, forced into unwanted service purchases under threat of losing warranty coverage – and a slew of other objectionable interactions. Most Americans think the act of negotiating the purchase of a new car is loathsome – and far worse than the proverbial trip to a dentist. It’s no wonder auto salespeople regularly top the list of least trusted occupations!
When internet commerce emerged in the 1990s, buying an auto on-line was the #1 most desired retail transaction in emerging customer surveys. And today the vast majority of Americans, especially Millennials, use the web and social media to research their purchase before ever stepping foot in the dreaded dealership.
Tesla heard, and built on this trend. Rather than trying to find dealers for its cars, Tesla decided it would sell them directly from the manufacturer. Which created an uproar amongst dealers who have long had a cushy “almost no way to lose money” business, due to a raft of legal protections created to support them after the great DuPont-General Motors anti-trust case.
When New Jersey regulators decided in March they would ban Tesla’s factory-direct dealerships, the company’s CEO, Elon Musk, went after Governor Christie for supporting a system that favors the few (dealers) over the customer. He has threatened to use the federal courts to overturn the state laws in favor of consumer advocacy.
It would be easy to ignore Tesla’s position, except it is not alone in recognizing the trend. TrueCar is an on-line auto shopping website which received $30M from Microsoft co-founder Paul Allen’s venture fund. After many state legal challenges TrueCar now claims to have figured out how to let people buy on-line with dealer delivery, and last week filed papers to go public. While this doesn’t eliminate dealers, it does largely take them out of the car-buying equation. Call it a work-around for now that appeases customers and lawyers, even if it doesn’t actually meet consumer desires for a direct relationship with the manufacturer.
Apple’s direct-to-consumer retail stores were key to saving the company
Distribution is always a tricky question for any consumer good. Apple wanted to make sure its products were positioned correctly, and priced correctly. As Apple re-emerged from near bankruptcy with new music products in the early 2000’s Apple feared electronic retailers would discount the product, be unable to feature Apple’s advantages, and hurt the brand which was in the process of rebuilding. So it opened its own stores, staffed by “geniuses” to help customers understand the brand positioning and the products’ advantages. Those stores are largely considered to have been a turning point in helping consumers move from a world of Microsoft-based laptops, Sony music products and Blackberry mobile devices to new iDevices and resurging Macintosh popularity – and sales levels.
Attacking regulations sounds – and is – a daunting task. But, when regulations support a minority of people outside the public good there is reason to expect change. American’s wanted a more pristine society, so in 1920 the 18th Amendment was passed prohibiting alcohol. However, after a decade in which rampant crime developed to support illegal alcohol production Americans passed the 21st Amendment in 1933 to repeal prohibition. What seemed like a good idea at first turned out to have more negatives than positives.
Auto dealer regulations hurt competition, and consumers
Today Americans do not need a protected group of dealers to save them from big, bad auto companies. To the contrary, forced distribution via protected dealers inhibits competition because it keeps new competitors from entering the U.S. market. Small production manufacturers, and large ones in countries like India, are effectively blocked from reaching American customers because they lack a dealer base and existing dealers are uninterested in taking the risks inherent in taking these new products to market. Likewise, starting up an auto company is fraught with distribution risks in the USA, leaving Tesla the only company to achieve any success since the dealer protection laws were passed decades ago.
And that’s why Tesla has a very good chance of succeeding. The trends all support Americans wanting to buy directly from manufacturers. At the very least this would force dealers to justify their existence, and profits, if they want to stay in business. But, better yet, it would create greater competition – as happened in the case of Apple’s re-emergence and impact on personal technology for entertainment and productivity.
Litigating to fight a trend might work for a while. Usually those in such a position are large political contributors, and use both the political process as well as legal precedent to protect their unjustified profits. NADA (National Automobile Dealers Association) is a substantial organization with very large PAC money to use across Washington. The Association can coordinate election contributions at national and state levels, as well as funding for judge elections and contributions for legal defense.
But, trends inevitably win out. Today Millennials are true on-line shoppers. They have no patience for traditional auto dealer shenanigans. After watching their parents, and grandparents, struggle for fairness with dealers they are eager for a change. As are almost all the auto buyers out there. And they are supported by consumer advocates long used to edgy tactics of auto dealers well known for skirting ethics and morality when dealing with customers. Those seeking change just need someone positioned to lead the legal effort.
Tesla wins because it uses trends to be a game changer
Tesla has shown it is well attuned to trends and what customers want. When other auto companies eschewed Tesla’s first entry as a 2-passenger sports car using laptop batteries, Tesla proceeded to sell out the product at a price much higher competitive gas-powered cars. When other auto companies thought a $70,000 electric sedan would never appeal to American buyers, Tesla again showed it understood the market best and sold out production. When industry pundits, and traditional auto company execs, said it was impossible to build a charging grid to support users driving up the coast, or cross-country, Tesla built the grid and demonstrated its functionality.
Now Tesla is the right company, in the right place, to change not only the autos Americans drive, but how Americans buy them. It’s rarely smart to refuse a trend, and almost always smart to support it. Tesla looks to be positioning itself as much smarter than older, larger auto companies once again.
by Adam Hartung | Mar 11, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
I don't know the source of the phrase, but since a young boy I've heard "Nero fiddled while Rome burned." The phrase was used to describe a leader who was so out of touch he was unable to do the necessary things to save his city and the people in it. Lately, it seems like General Motors is ancient Rome.
"General Motors to launch the 'un-Dealership" is the Mediapost.com headline. Trying to leverage auto shows, GM is going to open minimally-branded brick-and-mortar locations in 3 or 4 cities where customers can test drive Chevrolet and other cars. The idea is that with less pressure from salespeople, customers will come use the internet cafe and hang out while occasionally test driving a car. Then they'll be fired up to go buy a GM product.
If that isn't fiddling…… well…… When will leaders admit GM is in seriously dire trouble? The company has lopped off complete product lines (Saturn, Hummer, Saab and Pontiac) and whacked away large numbers of dealers. Their cars are uninteresting, and losing market share to domestic (Ford) and foreign manufacturers. Design cycles are too long, products do not meet customer needs and competitors are zeroing in on GM customers. Product sales, and even dealerships, are being propped up using government subsidies. The best news in the GM business has been all the troubles Toyota is having.
During this malaise, the new GM Board agreed to appoint Ed Whitacre as the permanent CEO (see ABCnews.com article "GM Chairman Ed Whitacre Named Permanent CEO.") Great, just what GM needed. Another 70 year old white male as CEO who developed his business experience in the monopoly of the phone industry. Who's primary claim to fame was that after Judge Green tore AT&T apart to create competition he was able to put it back together – only after the marketplace for land-line phones had begun declining and without growth businesses like mobile data.
As the ABC article notes, Mr. Whitacre sees his role running GM as "a public service… I think this company is good for America. I think America needs this." Just the kind of enthusiasm we all like to hear from a turnaround CEO.
GM needs to get aggressive about change if it is going to survive in a flat auto business with global competitors. The company has no clear view of how it will be part of a different future, nor any keen insight to competitors. It is floundering to manage its historical products and distribution, with no insight as to how it will outmaneuver tough companies like Honda, Kia and Tata. It has not attacked its outdated product line, nor its design cycle, nor its approach to manufacturing. It has very little R&D, and is behind practically all competitors with innovations. A caretaker is NOT what GM needs.
I blogged months ago that GM needed a leader who was ready to change the company. Ready to adopt scenario planning, competitor obsession, Disruptions and White Space to drive industry change and give GM a fighting chance at competing in the future. It's going to take a lot more than 4 test drive centers with internet access and latte machines to make GM competitive. But given what the new Board did, putting Mr. Whitacre in the CEO role, the odds are between slim and none the right things will happen.
To survive you have to BEAT the competition. Read more about "The 10 ways to Beat the Competition" at BusinessInsider.com
by Adam Hartung | Nov 19, 2009 | Current Affairs, General, Innovation, Leadership, Lifecycle, Lock-in
According to Marketing Daily "Electric Cars Set to Tiptoe Into Showrooms." Nissan is supposed to introduce the Leaf. Chevrolet, Toyota and Ford are all supposed to begin offering a plug-in hybrid. None have announced prices, but all indicate they intend to price them at the high end – more costly than a like-sized traditional gasoline powered automobile. One reason for the higher price is that dealers normally expect to make 20% of a traditional vehicle's price in high-margin maintenance and repairs, and because these electrics won't provide that revenue and margin the manufacturers believe the dealer has to make more on the initial auto sale – or they won't sell them.
The manufacturers themselves are not optimistic about sales. They are targeting wealthy early adopter consumers for whom climate change and environment are critical issues. Citing a lack of infrastructure for recharging, and battery technology that takes too long to recharge, the manufacturers are non-committal on how many cars they will make – preferring to wait and see if demand develops.
Sort of sounds like a self-fulfilling prophecy, doesn't it? This approach is very unlikely to succeed, because they manufacturers are trying to sell electric cars to people who are already well served by existing petroleum powered traditional and hybrid cars. These people have little or no reason to pay extra for new technology, so will be a hard sell. And with built-in excuses for the technological limits, the manufacturers aren't being promotional. Simultaneously, the manufacturers are more worried about the impact on dealers than the success of the vehicles.
It's not the product that's wrong, its the approach. These manufacturers are trying to launch a very different product, that really needs to appeal to very different customers. But they are trying to do it in the totally traditional way. Same brand names, same distribution, same sales people, same marketing, same financing – same everything. They are trying to have the existing organization, with all its Lock-ins, do something very different. And that never works.
Electric cars are ideal for White Space team introduction. White Space projects are given permission to do what it takes to make a project succeed. They are given permission to operate outside the Lock-ins. It's that permission to find the right answer, to find the market-based solution, which allows the innovation to develop a new Success Formula that meets market needs.
Electric cars are not a solution for the way automobiles have been used in the past. To succeed requires appealing to different scenarios about the future. Electric cars need to appeal to people for whom a traditional auto has limitations they don't like, and instead the electric auto is something they want. People who are underserved by the current products. The electric car will succeed with buyers who have reasons to want one. For whom the electric car is the solution to their problem – not a second-rate, overpriced solution to an old need.
Cell phones didn't succeed because they were purchased by people who already had wired phones with long distance. Early cell phones, for all their expense and weakness, were bought by people who had a real need for mobile telephony. For years, mobile phones were used only by a small group of people. It took years for cell phones to become commonplace. We all now know younger generation people who have no land line phone – for whom the mobile phone has displaced a traditional phone. But the cell phone didn't succeed by trying to be a high-priced alternative to the existing solution, it was a product that was desired by people for the advantages it offered – even when it was expensive, big and had limited range. Only over time did the cell phone evolve to a new Success Formula that is making traditional phones obsolete – and leaving traditional phone companies with a very hard transition.
Electric cars need an entirely "greenfield" start. Those responsible need to be chartered to "make this work" in an environment where failure is not an option for them. They need to believe their careers depend on finding the right solution, and developing it. And they need permission to do what the market requires. They need to be able to have a stand-alone brand, and its own distribution system, and unique marketing. They need the White Space with permission to do what it takes, and the resources to accomplish the task. Free from worrying about dealer reaction, marketing impact on traditional autos in the brand, or requirements to solve "infrastructure issues."
Imagine urbanites who want cars just for short hauls. Think about the ZipCar business in most major U.S. cities as the target buyer, rather than selling cars to individuals. Or think about other markets – outside the USA. How about places like Taiwan or Malaysia where distances are short and traffic is bad and much fuel is wasted just sitting. Towns like Tel Aviv. Maybe as delivery vehicles in urban areas where traveling is rarely more than 200 miles in a day because most time is spent sitting at lights – or making the delivery. There are places for which an electric car could be an ideal solution – just as they are today. Where a head-to-head match-up favors the electric vehicle.
Secondly, who says a traditional dealer is the right way to sell this vehicle to these people? Maybe it should be sold on-line, with somebody delivering the vehicle to the buyer and offering personalized instruction? Maybe it should be sold out of a Home Depot, or Staples, or Best Buy like an expensive appliance or computer? It's not clear to me that people, or companies, have much value for auto dealers – so perhaps this is the time to change the distribution system entirely — and perhaps take a lot of cost out of auto distribution.
There is a market for electric cars. Today. Just as the technology exists. And if White Space teams were allowed to find and develop that market, we could have a robust electric car industry in just a few years. But it won't happen via traditional approaches, from companies Locked-in to their traditional ways. Those companies only see obstacles, not opportunity. Without White Space, this will be just another example of a technology delayed.
But it does leave the door wide open for a company like Tesla. Tesla is a stand-alone company pioneering the electric car market. They are operating in White Space. Easy as Tesla is now to ignore, they may prove to be the upstart like Southwest Airlines that succeeds and makes money while the traditional industry players keep struggling.
by Adam Hartung | Jun 2, 2009 | Current Affairs, In the Whirlpool, Leadership, Openness
How appropriate. "GM strikes deal to sell Hummer" headlines a Marketwatch.com article. A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China. It seems everything about GM is iconic – including its movement of an operating auto businesses to China.
Is this bad for America, or good? I'd rather say it's inevitable. In a global economy, industrial production will move to the lowest cost location. And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list. Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.
But that doesn't equate to high value.
America is the world's largest agricultural nation. But has that made America wealthy? Not since the 1800s has it been true that land ownership for agricultural uses made Americans – and the nation – wealthy. As the value of agriculture declined – largely due to dramatic increases in production – America's wealth shifted to industrial production. It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.
But now, industrial production has razor thin margins. Much like agriculture. Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost. Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base. The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. – GM's bankruptcy.)
In the great battle for economic leadership, the next wave is about information. How to obtain, use and manipulate information is where value is now created. Steel traders can make more than steel producers today. If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?"
For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars. Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else. They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors. Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra). These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs. Even if it means launching products not traditional to their "core" – like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.
In the industrial era, people sought scale advantages and tried to build entry barriers against competitors. In the information economy flexibility is equally (or more) important than size. Recognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups. Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition – rather than trying to Defend & Extend your "core."
For the industry, having Hummer production in China could turn out to be a good thing. It will lower product cost. If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer. If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price — then they won't create value and margins will stink. There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy. You can follow GM – or you can try to be like Cisco.
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
