by Adam Hartung | Jul 11, 2012 | Current Affairs, Defend & Extend, Disruptions, Innovation, Leadership, Lock-in
The news is not good for U.S. auto companies. Automakers are resorting to fairly radical promotional programs to spur sales. Chevrolet is offering a 60-day money back guarantee. And Chrysler is offering 90 day delayed financing. Incentives designed to make you want to buy a car, when you really don't want to buy a car. At least, not the cars they are selling.
On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial. He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars. And its design with the Jaguar. And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.
There are no manufacturer incentives currently offered on the Tesla Model S.
What's so different about Tesla and GM or Ford? Well, everything. Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation. While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.
Tesla did not set out to be a car company, making a slightly better car. Or a cheaper car. Or an alternative car. Instead it set out to make a superior car.
Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling. Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car. Oh, and to make this happen they chose to make it all-electric, as well.
It was easy for Detroit automakers to scoff at this effort – and they did. In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company. Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical. Especially at the price Tesla was selling them.
Meanwhile, in 2009 Tesla sold 100% of its production. And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.
Like all disruptive innovators, Tesla did not make a car for the "mass market." Tesla made a great car, that used a different technology, and met different needs. It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet. All conditions the electric Tesla met in spades. It wasn't for everyone, but it wasn't designed to be. It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.
Now Tesla has a car that is much more aligned with what most people buy. A sedan. But it's nothing like any gasoline (or diesel) powered sedan you could buy. It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected. It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability. In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea.
Again, it is easy for GM to scoff. After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus.
But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ - which are the cars most closely matching size, roominess and performance.
And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages. The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.
In short, Tesla is demonstrating it CAN change the game in automobiles. While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution. The way, say, Apple did in smartphones compared to RIM.
Why didn't, and can't, GM or Ford do this?
Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla. Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.
Rather than build an electric car, traditionalists denounce the technology. Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine.
Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car. And, like most "hybrid" ideas it ends up being a compromise on all accounts. It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy. And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years. And that is all dependent upon gasoline prices.
Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name! Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid. How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose." Hard to have faith in that as a technological leap forward.
And GM gave the market Volt. Although billed as an electric car, it still has a gasoline engine. And again, it has all the traditional trade-offs. High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy. The car Tesla-hating Bob Lutz put his personal stamp on. It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria.
Investors are starting to "get it."
There was lots of excitement about auto stocks as 2010 ended. People thought the recession was ending, and auto sales were improving. GM went public at $34/share and rose to about $39. Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started.
But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all. GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.
Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why? Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company. It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation.
Like Apple changed perspectives on cell phones. And Amazon did about retail shopping.
Tesla set out to make a better car. It is electric, because the company believes that's how to make a better car. And it is changing the metrics people use when evaluating cars.
Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines. They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition.
The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)
Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford? One went bankrupt, and the other barely avoided it. Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value. For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology. And fins went out of style in the 1960s – about when the value of these companies peaked.
by Adam Hartung | Aug 3, 2009 | Current Affairs, In the Swamp, Innovation, Leadership, Lock-in, Openness
"Honda's New CEO is Also Chief Innovator" is the recent Businessweek headline. Think of the contrast with GM. Both companies have seen their auto sales hurt this year. Although the downdraft at GM is about 130% of that at Honda. But the reactions to the weakness could not be different.
GM kept trying to sell more of its existing cars until it finally declared bankruptcy, dropping half its models and all its obligations. Then the same people that lead GM into bankruptcy remained in place. While the Chairman was forced out of a job in order to obtain government loans to stay alive, he was replaced by his own #2 who is just as Locked-in as the old Chairman was. Even worse, to me, was bringing back a 77 year old industry veteran to head marketing. He may have been one of the more creative of the "old guard" but he was every bit as much "old guard" as anyone — to the point of belittling Tesla and those succeeding today with electric and hybrid vehicles.
Honda reacted by replacing the CEO of Honda Motors. But the person put into the job comes from a background in R&D. Rather than trying to do more of the same, Honda's approach is to get product developers closer to customers — even at the very top job. Honda isn't leaving the same people in charge, nor even people with the same backgrounds. Honda is planning, from the outset, to use product innovation (rather than financial engineering) to get Honda Motors back on track.
And this aligns with Honda's approach to business. Where GM was once a company with multiple businesses (IT in its ownership of EDS and aviation electronics in Hughes) GM leadership sold off those assets, using profits to subsidize the ailing auto business. Comparatively, Honda has thriving businesses in robotics, factory automation, motorcycles, small yard equipment and new ventures in aircraft and elsewhere. GM reacts to market shifts by ignoring them, and trying to do what it's always done better, faster and cheaper. GM behaves as if its returns will do better if it can just do what it has always done – but more. Honda reacts to market shifts by entering new markets, developing new products and getting itself aligned with market requirements. Honda develops new solutions to changing market needs.
There is no doubt which approach is more sensible, and into which you might consider investing. Honda uses its scenarios about the future to help it develop new products and solutions. Honda obsesses about competition, offering new products for almost every niche opportunity and learning how to be profitable across the market spectrum. Honda is very open to Disrupting its old Success Formula, getting into new businesses that will help it grow even when not "core" to the company's history or its current capabilities. And Honda gives its new business leaders the White Space to succeed, with permission to do what the market requires even if different that the past and the resources to develop new solutions through ongoing market tests.
If you have any doubts about who will grow share over the next 5 years, and who will lose share, check out the free new ebook "The Fall of GM: What Went Wrong and How to Avoid Its Mistakes." Pay attention to the results of America's "Cars for Clunkers" program to see who comes out a winner. It will be important to see if this raises sales at the American companies – or elsewhere.
by Adam Hartung | Jul 17, 2009 | Current Affairs, Disruptions, General, Innovation, Leadership
Business leaders too often react to a recession by cutting costs, stopping spending, discontinuing new product launches — and waiting. The theory is that the market is bad, so it's an uphill slog to try doing anything new. Supposedly, a smart leader waits until things improve before spending again.
An example of this thinking is at GM. The retired executive brought back to head marketing, Bob Lutz, supports killing off the Pontiac brand to make GM smaller and leaner. But he realized this week that there was a car in the Pontiac lineup called the G8 which was selling pretty good. Designed in Autralia, this 2 passenger sports car had sales up 56% from last year – something no other GM car could boast. So Lutz said he'd find a way to keep making and selling the car. But now, Lutz has reversed position and in "GM's Lutz Makes another U-Turn" from the Wall Street Journal he says "upon further review and careful study, we simply cannot make a business
case for such a program. Not in today's market, in this economy, and
with fuel regulations what they are and will be." In other words, we can interpret these comments as "we at GM want to save money and try selling the cars we've got – whether you like them or not – rather than move forward with a car you may really want." This kind of thinking is not the way to grow out of a recession.
On the other hand, we have Tesla Motors. The company Mr. Lutz laughed at a few months ago claiming it wasn't a serious car company. Tesla has one car for sale today, a superfast 2 seater sports car that is 100% electric. Today in Marketing Daily we read "Tesla Plugs Dealership into Manhanttan's Chelsea". Tesla is selling 100% of its production, and it is supporting that by opening a new, stylish dealership in Manhattan. While GM is eliminating a hot seller, Tesla continues to promote theirs. While GM closes dealerships, Tesla opens a new one. Tesla is making a car, albeit a low production model, that people want. It is going where the market is shifting. That's how you get out of a recession, you give customers what they want.
I met another great example last week at Morgan Aircraft. You've never heard of this company unless you've been to an air show. While the makers of private aircraft like Cessna and Gulfstream are shutting down production, Morgan has raised millions of dollars while developing a new aircraft slated for market introduction in about 4 years (flying in tests today, still needing FAA approval). But the Morgan isn't a typical plane as you know it – what's called a "fixed wing" aircraft. The Morgan is able to take off vertically, like a helicopter, then fly horizontally like a plane. This dramatically improves the use of a plane by eliminating airport runways, and thus the commuting requirements to/from airports for business flyers. Morgan has identified the early users of their aircraft, which will allow successful introduction as it expands the market for its technology. Morgan brings to market something new, something different, something that gives buyers a reason to buy – better economics and improved ease of use. That's how you raise money and build a business in a recession – by offering something new that creates demand for your product.
Perhaps even Starbucks' new leadership is getting the idea. After months of doing "the wrong stuff" (as reported in this blog), The Seattle Times reports "Starbucks Tests New Name for Stores." Only this is way beyond a name test. The new stores have a different menu, including liquor, a different ambiance, and even different coffee making equipment. This is something new. Will it matter? We don't yet know, because (a) we haven't heard of any Disruptions in Starbucks to make us think this is a really serious initiative that could displace the earlier commitment to "coffee", (b) we don't know how much permission the developers of the new idea have to really do something new – like maybe not sell coffee at all, and (c) we don't know if there are any significant resources committed to the project. So it's too early to know if this is really White Space. But at least it's not another flavor of coffee or repackaging of coffee or more of the same – which was killing Starbucks. If the leadership really starts creating some White Space projects to develop new stores then even the beleagured Starbucks has the opportunity to grow itself out of this recession.
Recessions dramatically bring home market shifts. Those clinging to old Success Formulas are exposed as very weak (like GM) and are targets for failure. Those who reach out to provide solutions to new market demands can not only grow during the recession, but upstage older competitors. They can change market competitiveness to favor themselves, and grow dramatically by overtaking the Locked-in competition. Recessions end when businesses launch new products and services that meet the needs of a shifted market. So if you're waiting on the recession to end – just keep on waiting. When it ends you just might find you are so out of the market you aren't competitive any longer. Instead, get with moving toward the new market needs today so you strengthen your business and become a leader in the near future.
by Adam Hartung | Jul 13, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Is Bob Lutz the right guy to run GM Marketing?" is the question headlined on Advertising Age. I'm sure you know I think the answer is a resounding "NO."
I'll never forget a few months when Mr. Lutz, being interviewed for a national magazine, said the Tesla sports car and the company that developed it was a joke. He said it wasn't a real car, nor was Tesla a real car company. He said the leadership at Tesla didn't know what it meant to be a professional auto company, and to be professional auto executives. He was condescending and rude as to the future of Tesla.
Let's see, Tesla has made a 100% electric car, sold 100% of its output, has investors that aren't the federal government, has never been bankrupt and has never asked for a bailout to stay in business. Meanwhile, the former vice-chairman of GM was a stanch critic of the electric car, saying it would never meet the driving needs of the American public, and fully supported GM killing its electric car program. While he was a leader at GM, the company couldn't even keep 100% of its capacity in operation, much less sell 100% of the output, the company begged the federal government for money to keep it in operation when private investors would no longer invest, and then wiped out the equity holders entirely – and over 80% of the value of bondholders, by leading the company into bankruptcy.
Mr. Lutz was an executive at GM. But that doesn't make him a good executive. In fact, given the performance of GM since 1975 (nearly 35 years) it might be more of a disqualifier than a qualifier. Why would anyone want to hire an executive who stayed in one industry for over 40 years, during which the companies he worked for lost share, saw their margins decline, led in no new technology categories, was perennially late introducing new products, saw their costs spiral out of control, had the lowest job satisfaction in the industry by its employees, had some of the lower quality scores among consumers in the industry and and eventually had to declare bankruptcy?
America loves to glorify, make heroes even, of business executives. Usually of large companies. But few of these executives actually made a significant positive impact on their companies, employees, investors or suppliers. Executives rise because they are very good at supporting the Success Formula, not because they produce significantly better results. As long as the manager turned director turned V.P. keeps reinforcing the Success Formula, in fact many mistakes can be overlooked. Especially if the executive's style is similar to the top brass at the company (same school, same degrees, same geographic origin, same religion, same politics, same views.) What gets an executive promoted at GM (and most large companies) is simply not results. It is consistent reinforcement of a Success Formula, burnishing and amplifying it, even in the face of deterioriating results. Like Mr. Lutz.
There is no popular election of executives. In this case, perhaps there should be. Given how disgusted most people are with GM, I doubt many people would vote to keep the original management in place. And I doubt fewer still would vote to place a 77 year old executive who was part of the long term industry decline and recent failure in a top position. And even fewer would say that a 77 year old is prepared to take on marketing leadership in a world where traditional advertising has declining value, and the best companies are creatively using all kinds of internet marketing programs. Not just because of his age – but because he's never developed the remotest skill to do the work. Many 30 year olds could explain in deep detail how to get viral campaigns working – while all Mr. Lutz could say is he's seen a YouTube! video and read a blog or two. And he gets to manage the 4th largest ad budget in the USA? Isn't that how GM got into this mess – having people in top jobs who were out of step with current market realities?
Businesses exist to put resources to effective use. We measure that effectiveness with cash flow and profits. We ask that the leaders who borrow money from investors (equity and debt) return that principle with a positive rate of return. And we ask that the executives honor their commitments to the employees and vendors. In the case of GM, the executives eliminated the investments made by investors, reneged on the employee commitments and left vendors holding the bag on long-term contracts the company will no longer honor. Even old customers can no longer hold the company accountable for its defective products. By all measures, these leaders failed. And yet someone thinks it's a good idea to keep the same people running this company?
GM needs new leadership. Leadership willing to Disrupt old Lock-ins and use White Space to develop a new Success Formula. Asking Mr. Lutz to be the head of marketing is not a Disruption. It is an action specifically intended to remain Locked-in to the old Success Formula and maintain the re-invention gap between GM and the marketplace. With this kind of decision making, GM will find itself back in bankruptcy court a lot faster than any of the experts even think.
Don't miss the new ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
