Surface 3 and Apple Watch – Red Oceans v Blue Oceans

Surface 3 and Apple Watch – Red Oceans v Blue Oceans

Microsoft launched its new Surface 3 this week, and it has been gathering rave reviews.  Many analysts think its combination of a full Windows OS (not the slimmed down RT version on previous Surface tablets,) thinness and ability to operate as both a tablet and a PC make it a great product for business.  And at $499 it is cheaper than any tablet from market pioneer Apple.

Surface 3

Meanwhile Apple keeps promoting the new Apple Watch, which was debuted last month and is scheduled to release April 24.  It is a new product in a market segment (wearables) which has had very little development, and very few competitive products.  While there is a lot of hoopla, there are also a lot of skeptics who wonder why anyone would buy an Apple Watch.  And these skeptics worry Apple’s Watch risks diverting the company’s focus away from profitable tablet sales as competitors hone their offerings.

Apple Watch

Looking at these launches gives a lot of insight into how these two companies think, and the way they compete.  One clearly lives in red oceans, the other focuses on blue oceans.

Blue Ocean Strategy (Chan Kim and Renee Mauborgne) was released in 2005 by Harvard Business School Press.  It became a huge best-seller, and remains popular today.  The thesis is that most companies focus on competing against rivals for share in existing markets.  Competition intensifies, features blossom, prices decline and the marketplace loses margin as competitors rush to sell cheaper products in order to maintain share.  In this competitively intense ocean segments are niched and products are commoditized turning the water red (either the red ink of losses, or the blood of flailing competitors, choose your preferred metaphor.)

On the other hand, companies can choose to avoid this margin-eroding competitive intensity by choosing to put less energy into red oceans, and instead pioneer blue oceans – markets largely untapped by competition.  By focusing beyond existing market demands companies can identify unmet needs (needs beyond lower price or incremental product improvements) and then innovate new solutions which create far more profitable uncontested markets – blue oceans.

Obviously, the authors are not big fans of operational excellence and a focus on execution, but instead see more value for shareholders and employees from innovation and new market development.

If we look at the new Surface 3 we see what looks to be a very good product.  Certainly a product which is competitive.  The Surface 3 has great specifications, a lot of adaptability and meets many user needs – and it is available at what appears to be a favorable price when compared with iPads.

But …. it is being launched into a very, very red ocean.

The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks.  Low cost, scaled back yet very useful Microsoft-based PCs which can be purchased at prices that are less than half the cost of a Surface 3. And although Surface 3 can be used as a tablet, the number of apps is a fraction of competitive iOS and Android products – and the developer community has not yet embraced creating new apps for Windows tablets. So Surface 3 is more than a netbook, but also a lot more expensive.

Additionally, the market has Chromebooks which are low-cost devices using Google Chrome which give most of the capability users need, plus extensive internet/cloud application access at prices less than a third that of Surface 3.  In fact, amidst the Microsoft and Apple announcements Google announced it was releasing a new ChromeBit stick which could be plugged into any monitor, then work with any Bluetooth enabled keyboard and mouse, to turn your TV into a computer.  And this is expected to sell for as little as $100 – or maybe less!

ChromeBit

This is classic red ocean behavior.  The market is being fragmented into things that work as PCs, things that work as tablets (meaning run apps instead of applications,) things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both.  And prices are plummeting.  Intense competition, multiple suppliers and eroding margins.

Ouch.  The “winners” in this market will undoubtedly generate sales.  But, will they make decent profits?  At low initial prices, and software that is either deeply discounted or free (Google’s cloud-based MSOffice competitive products are free, and buyers of Surface 3 receive 1 year free of MS365 Office in the cloud, as well as free upgrade to Windows 10,) it is far from obvious how profitable these products will be.

Amidst this intense competition for sales of tablets and other low-end devices, Apple seems to be completely focused on selling a product that not many people seem to want.  At least not yet.  In one of the quirkier product launch messages that’s been used, Apple is saying it developed the Apple Watch because its other innovative product line – the iPhone – “is ruining your life.

Apple is saying that its leaders have looked into the future, and they think today’s technology is going to move onto our bodies.  Become far more personal.  More interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption.  They see a future where we don’t need a keyboard, mouse or other artificial interface to connect to technology that improves our productivity.

Right.  That is easy to discount.  Apple’s leaders are betting on a vision.  Not a market.  They could be right.  Or they could be wrong.  They want us to trust them.  Meanwhile, if tablet sales falter…..  if Surface 3 and ChromeBit do steal the “low end” – or some other segment – of the tablet market…..if smartphone sales slip….. if other “forward looking” products like ApplePay and iBeacon don’t catch on……

This week we see two companies fundamentally different methods of competing.  Microsoft thinks in relation to its historical core markets, and engaging in bloody battles to win share.  Microsoft looks at existing markets – in this case tablets – and thinks about what it has to do to win sales/share at all cost.  Microsoft is a red ocean competitor.

Apple, on the other hand, pioneers new markets.  Nobody needed an iPod… folks were  happy enough with Sony Walkman and Discman.  Everybody loved their Razr phones and Blackberries… until Apple gave them an iPhone and an armload of apps.  Netbook sales were skyrocketing until iPads came along providing greater mobility and a different way of getting the job done.

Apple’s success has not been built upon defending historical markets.  Rather, it has pioneered new markets that made existing markets obsolete.  Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched.  Questionable.  And it has cannibalized its own products as it brought out new ones (remember when iPods were so new there was the iPod mini, iPod nano and iPod Touch? After 5 years of declining iPod sale Apple has stopped reporting them.)  Apple avoids red oceans, and prefers to develop blue ones.

Which company will be more successful in 2020?  Time will tell.  But, since 2000 Apple has gone from nearly bankrupt to the most valuable publicly traded company in the USA.  Since 1/1/2001 Microsoft has gone up 32% in valueApple has risen 8,000%.  While most of us prefer the competition in red oceans, so far Apple has demonstrated what Blue Ocean Strategy authors claimed, that it is more profitable to find blue oceans.  And they’ve shown us they can do it.

Alligators Gal

 

Why Microsoft Windows 10 Really Doesn’t Matter

Yesterday Microsoft conducted a pre-launch of Windows 10, demonstrating its features in an effort to excite developers and create some buzz before consumer launch later in 2015.

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By and large, nobody cared.  Were you aware of the event? Did you try to watch the live stream, offered via the Microsoft web site?  Were you eager to read what people thought of the product?  Did you look for reviews in the Wall Street Journal, USA Today and other general news outlets?

Windows10_1

Microsoft really blew it with Windows 8 – which is the second most maligned Windows product ever, exceeded only by
Vista.  But that wasn’t hard to predict, in June, 2012.  Even then it was clear that Windows 8, and Surface tablets, were designed to defend and extend the installed Windows base, and as such the design precluded the opportunity to change the market and pull mobile users to Microsoft.

And, unfortunately, that is how Windows 10 has been developed.  At the event’s start Microsoft played a tape driving home how it interviewed dozens and dozens of loyal Windows customers, asking them what they didn’t like about 8, and what they wanted in a Windows upgrade.  That set the tone for the new product.

Microsoft didn’t seek out what would convert all those mobile users already on iOS or Android to throw away their devices and buy a Microsoft product.  Microsoft didn’t ask its defected customers what it would take to bring them back, nor did it ask the over 50% of the market using Windows 7 or older products what it would take to get them to go to Windows mobile rather than an iPad or Galaxy tablet.  Nope.  Microsoft went to its installed base and asked them what they would like.

Imagine it’s 1975 and for two decades you have successfully made and sold small offset printing presses.  Every single company of any size has one in their basement.  But customers have started buying really simple, easy to use Xerox machines.  Fewer admins are sending even fewer jobs to the print shop in the basement, as they choose to simply run off a bunch of copies on the Xerox machine.  Of course these copies are more expensive than the print shop, and the quality isn’t as good, but the users find the new Xerox machines good enough, and they are simple and convenient.

What are you to do if you make printing presses?  You probably need to find out how you can get into a new product that actually appeals to the users who no longer use the print shop.  But, instead, those companies went to the print shop operators and asked them what they wanted in a new, small print machine.  And then the companies upgraded their presses and other traditional printing products based upon what that installed base recommended.  And it wasn’t long before their share of printing eroded to a niche of high-volume, and often color, jobs.  And the commercial print market went to Xerox.

That’s what Microsoft did with Windows 10.  It asked its installed base what it wanted in an operating system.  When the problem isn’t the installed base, its the substitute product that is killing the company.  Microsoft didn’t need input from its installed base of loyal users, it needed input from people who have quit using HP laptops in favor of iPads.

There are a lot of great new features in Windows 10.  But it really doesn’t matter.

The well spoken presenters from Microsoft laid out how Windows 10 would be great for anyone who wants to go to an entirely committed Windows environment.  To achieve Microsoft’s vision of the future every one of us will throw away our iOS and Android products and go to Windows on every single device.  Really.  There wasn’t one demonstration of how Windows would integrate with anything other than Windows.  And there appeared on intention of making the future an interoperable environment.  Microsoft’s view was we would use Windows on EVERYTHING.

Microsoft’s insular view is that all of us have been craving a way to put Windows on all our devices.  We’ve been sitting around using our laptops (or desktops) and saying “I can’t wait for Microsoft to come out with a solution so I can throw away my iPhone and iPad.  I can’t wait to tell everyone in my organization that now, finally, we have an operating system that IT likes so much that we want everyone in the company to get  rid of all other technologies and use Windows on their tablets and phones – because then they can integrate with the laptops (that most of us don’t use hardly at all any longer.)”

Microsoft even went out of its way to demonstrate how well Win10 works on 2-in-1 devices, which are supposed to be both a tablet and a laptop.  But, these “hybrid” devices really don’t make any sense.  Why would you want something that is both a laptop and a tablet?  Who wants a hybrid car when you can have a Tesla?  Who wants a vehicle that is both a pick-up and a car (once called the El Camino?) Microsoft thinks these are good devices, because Microsoft can’t accept that most of us already quit using our laptop and are happy enough with a tablet (or smartphone) alone!

Microsoft presenters repeatedly reminded us that Windows is evolving.  Which completely ignores the fact that the market has been disrupted.  It has moved from laptops to mobile devices.  Yes, Windows has a huge installed base on machines that we use less and less.  But Windows 10 pretends that there does not exist today an equally huge, and far more relevant, installed base of mobile devices that already has millions of apps people use every single day over and over.  Microsoft pretended as if there is no world other than Windows, and that a more robuts Windows is something people can’t wait to use!  We all can’t wait to go back to a exclusive Microsoft world, using Windows, Office, the new Spartan browser – and creating documents, spreadsheets and even presentations using Office, with those hundreds of complex features (anyone know how to make a pivot table?) on our phones!

Just like those printing press manufacturers were sure people really wanted documents printed on presses, and couldn’t wait to unplug those Xerox machines and return to the old way of doing things.  They just needed presses to have more features, more capabilities, more speed!

The best thing in Windows 10 is Cortana, which is a really cool, intelligent digital assistant.  But, rather than making Cortana a tool developers can buy to integrate into their iOS or Android app the only way a developer can use Cortana is if they go into this exclusive Windows-only world.  That’s a significant request.

Microsoft made this mistake before.  Kinect was a great tool.  But the only way to use it, initially, was on an xBox – and still is limited to Windows.  Despite its many superb features, Kinect didn’t develop anywhere near its potential.  Cortana now suffers from the same problem.  Rather than offering the tool so it can find its best use and markets, Microsoft requires developers and consumers buy into the Windows-exclusive world if you want to use Cortana.

Microsoft hasn’t yet figured out that it lost relevance years ago when it missed the move to mobile, and then launched Windows 8 and Surface to markets that didn’t really want those products.  Now the market has gone mobile, and the leader isn’t Microsoft.  Microsoft has to find a way to be relevant to the millions of people using alternative products, and the Windows 10 vision, which excludes all those competing devices, simply isn’t it.

There was lots of neat geeky stuff shown.  Surface tablets using Windows 10 with an xBox app can now do real gaming, which looks pretty cool and helps move Microsoft forward in mobile gaming.  That may be a product that sets Sony’s Playstation and Nintendo’s Wii on their heels.  But that’s gaming, and historically not where Microsoft makes any money (nor for that matter does Sony or Nintendo.)

There is a new interactive whiteboard that integrates Skype and Windows tablets for digital enhancement of brainstorming meetings.  But it is unclear how a company uses it when most employees already have iPhones or Samsung S5s or Notes.  And for the totally geeky there was a demo of a holographic headset.  But when it comes to disruptive products like this success requires finding really interesting applications that otherwise cannot be completed, and then the initial customers who have a really desperate need for that application who will become devoted users.

Launching such disruptive products has long been the bane of Microsoft’s existence.  Microsoft thinks in mass market terms, and selling to its base.  Not developing breakthrough applications and finding niche markets to launch new uses.  Nor has Microsoft created a developer community aligned with that kind of work.  They have long been taught to simply continue to do things that defend and extend the traditional base of product uses and customers.

The really big miss for this meeting was understanding developer needs.  Today developers have an enormous base of iOS and Android users to whom they can sell their products.  Windows has less than 3% share in mobile devices.  What developer would commit their resources to developing products for Windows 10, which has an installed base only in laptops and desktops?  In other words, yesterday’s technology base?  Especially when to obtain the biggest benefits of Windows 10 that developer has to find end use customers (companies or consumers) willing to commit 100% to Windows everywhere – even including their televisions, thermostats and other devices in our ever smarter buildings?

Windows 10 has a lot of cool features.  But Microsoft made a big miss by listening to the wrong people.  By assuming its installed base couldn’t wait for a Microsoft-exclusive solution, and by behaving as if the installed base of mobile devices either didn’t exist or didn’t matter, the company showed its hubris (once again.)  If all it took to succeed were great products, the market would never have shifted from Macintosh computers to Windows machines in the 1990s.  Microsoft simply doesn’t realize that it lacks the relevance to pull of its grand vision, and as such Windows 10 has almost no chance of stopping the Apple/Google/Samsung juggernaut.

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Why Tesla is Right, and GM and Ford are Not

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.

White Space for Electric Cars – Nissan, Chevrolet, Ford, Tesla

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.

Learning the Right Lessons – Saturn and GM — and Harvard

"Saturn Done in Four Months" is the Autoweek.com headline.  The next time somebody brings up the short life cycle of tech products, remember Saturn.  GM started the company, grew it, and now is shutting it down on a timeline that roughly corresponds with the life of Sun Microsystems.  Clearly manufacturing companies can do just as poorly as techs.

When Penske lost itsmanufacturing deal, the purchase of Saturn fell through.  And GM leadership can't wait to clear out inventory.  Production has already stopped.  Soon, the products and dealers will disappear.  Along with the brand name.  Another experiment that failed.  So it is very important our post-mortem teaches us the right lessons from Saturn.

I was appalled when Harvard Business School Publishing posted "Why Saturn Was Destined to Fail."  According to the author, Saturn was an anchor that drug down a hurt GM!!!!  Reporting that the successful Saturn launch came at the loss of $3,000 per car sold (a new factoid I've never before heard), he claims that GM should have been more focused on fixing its old business.  The implication is that GM wasn't trying to fix its old business, instead being diverted by the very successful operations at Saturn!  Pretty illogical.  GM was doing everything it could to compete, but improving its old Success Formula simply wasn't enough given the market shifts already in place.  To meet changing market requirements GM needed to develop a new Success Formula, and that was the purpose of Saturn!

Saturn was the best chance GM had to succeed!  The Success Formula at Chevrolet and the other GM divisions had been created in the 1950s when GM dominated the industry.  But by 1980 the market had shifted dramatically Design cycles had dropped, customer tastes had changed, production methods had moved from long assembly lines to just-in-time, quality requirements were redefined and rising, and impressions of auto dealers had tanked.  Saturn was established to teach GM how to compete differently.

The reason Saturn lost money had everything to do with accounting.  GM forced all kinds of costs onto GM – which were not representative of a normal start-up.  Without those costs, Saturn would have been much leaner and profitable.  Further, after Saturn proved it could move faster and outsell expectations, GM quickly moved to force Saturn to act like other GM divisions.  Forced sharing of components severely hampered the design cycle and flexibility.  Union contract consistency pushed Saturn into old employee agreements which the union had previously agreed to wave.  And forcing Saturn to allow traditional GM dealers to sell the Saturn brand tarnished the changed customer relationship Saturn worked hard to create. 

When Roger Smith created GM he set it up seperately.  His scenario of the future demanded GM figure out a new way to compete.  Saturn, was a White Space project with permission and resources to figure out that new way.  But Chairman Smith did not Disrupt the old GM auto management.  He did not replace the Division presidents with leaders from EDS or Hughes (businesses he had acquired) who were willing to move in a new direction.  He did not change the resource allocation system to give Saturn more clout over its own decisions and those at other divisions.  Thus, when he left the larger divisions moved fast to change Saturn into their mold – rather than vice-versa.  Instead of Chevrolet learning from Saturn, Saturn managers were forced to adopt Chevrolet practices.

Saturn proved that even a stodgy, Locked-in company can use White Space to develop new solutions.  And it also proved that if you aren't willing to Disrupt the old Success Formula – if you aren't willing to attack old Lock-ins – White Space (regardless of its success) is unlikely to convert the company into a better competitor.  The lesson of Saturn is NOT that it diverted GM's attention, but rather that GM was unwilling to Disrupt its Success Formula to learn from Saturn.

As investors, the question is pretty easy.  Would you rather own Saturn, Pontiac and Hummer – the divisions of GM that had loyal customers and some reputation for innovation, quality and customer satisfaction – or Cadillac, Buick and Chevrolet?  Would you rather have businesses that are looking forward with early plans for hybrids, and exciting cars like the G8, or a high volume business in cars that most people find ho-hum, at best?  Do you want designers that take chances and bring out cars quickly, or that move slowly seeking the "lowest common denominator" in design?  If you were an entrepreneur, would you rather be given pemission to lead Saturn, or Chevrolet?

Learning the right lessons from Saturn is important, or else our business leaders are doomed to repeat the GM mistakes.  If you don't challenge your Success Formula, White Space project will be met with great resistance by the organization.  They will be saddled with unnecessary costs and requirements that strip them of permission to do what the market demands.  And they will not achieve the goals which they established to accomplish, including acting as a beacon for migrating a business forward.

For a deeper treatment of this topic please download the free ebook "The Fall of GM:  What Went Wrong and How To Avoid Its Mistakes."