Monday, January 04, 2016

When the business models shift, innovators rejoice

There's news today that GM, that historic dinosaur of a car company, has seen the future and decided to hedge its bets.  Watching Google try to create a self-driving car, and observing the potential power of the sharing economy that Uber and Lyft have defined, and recognizing that millennials and others seem less interested in car ownership, GM has decided to place a substantial bet on Lyft.  The sound you heard in Detroit is the sound of a business model shifting, and thousands of businesses gasping in response.  Yes, it's possible a major tsunami has started, and no one is sure what things will look like when it is over.

The reigning champion

For close to 100 years, GM has had one prevailing business model:  they create cars and the American consumer acquires them.  After all it was Billy Durant who developed the idea of a model family, so that consumers could own progressively more elaborate automobiles all from the same manufacturer.  He is also responsible in part for planned obsolescence, encouraging people to continually upgrade their cars every 3-5 years.  The whole basis of GM through the 1970s and 1980s was to build more cars for more US buyers.  Then, of course, the entire US automotive industry shifted its model, from a manufacturing model to a financial model.  In the last 20 years most US manufacturers made more money on the financial aspects of the automotive industry (loans, leasing, etc) than they did on building and selling, you know, their main product.

But the financial crisis created great concern about the long term profitability and viability of that model.  So the industry is groping for a new, viable, sustainable model, just as a new generation of buyers seems less interested in car ownership, more adaptable to mass transit, and more interested in the "sharing" economy.  GM and the other manufacturers are making bets that the old days of car ownership (at least at historic rates) are over.

The new contender

What does a monolithic company based on either manufacturing or financing do when neither of those models seems particularly attractive in new market conditions?  It aligns itself with a potential business model innovator that seems more in touch with new customers and new models.  Strange to see that GM is aligned with Lyft, since it is a distant second in the marketplace to Uber.  Further, it seems strange that GM will be forced to compete to some extent with Google, in terms of the self-driving or self-navigating vehicle.  After all, GM's one real, successful information innovation is OnStar, but it hasn't been put to the full use that it could be, and GM has fallen behind Google and others in self-driving technology.

What does an innovator do when the reigning business model tumbles?  He or she starts to figure out not only what the behemoths are doing, but what the secondary and tertiary implications of the new model will be.  For example, if cars really become autonomous, we can park them in lots far from our houses and gain more living space by doing away with garages.  After all, we can simply schedule the car to pick us up (whether it's driven by Uber/Lyft or autonomously) when we want.  No longer do we need to provide a space for the car to rest in the house.

Or, we can change and expand auto maintenance and repair.  Self-driving cars can schedule their own maintenance appointments, during the day while office workers are at work, or during the evening when people no longer need transportation services.

One could easily imagine an entire new HOV lane of traffic, full of cars with no occupants driving to pick up a passenger to take them to work, or to pick up a kid from school.

The social impact

But what about the social impact of this shift?  Car companies today engage us with the idea that a car is part of your personality.  A BMW or Mercedes says something about who you are and what you appreciate.  How does the idea of a car as a social ornament translate when you no longer own a car?  Will it be more socially sophisticated to not own a car, to only Uber or Lyft?  Will that enhance social status?  And if so, what will people do with the money they save?

The shift shouldn't be a surprise

The fact that GM is making this investment may be surprising, but the conditions that drove them (ha) to this conclusion have been evident for quite some time.  Cars are under attack from a number of sources:
  • Cities are congested, traffic is terrible and it's everyone else that's to blame
  • Cars are expensive and constantly require fuel and maintenance
  • Parking is at a premium
  • Cars emit pollutants
  • The vast majority of cars are used less than 10-15% per day.  The vast amount of time of a car's life it sits in a parking stall
Beyond the car itself, the model is breaking down, financially, economically and socially:
  • Younger generations aren't as interested in car ownership
  • Uber and Lyft are ubiquitous among the younger generations
  • The companies themselves aren't certain which business model is most attractive

These and other trends have been evolving (and relatively evident) for years.  Adding the constant flow of information, ubiquitous networking and real-time analysis capabilities mean that companies like Google are fascinated by completely automating the transportation network, meaning that disruption will occur based on a competitor with different skills that suddenly become more valuable.  GM, say hello to Blockbuster, another "giant" disrupted by the internet.

Why didn't GM do this first?

Another question, relevant to GM but extendable to every company in every industry that considers itself a "leader":  why didn't you do this first?  Why didn't GM, back when it had 60% market share, innovate solutions in a range of alternatives - low cost, high quality cars that would have defeated the Japanese entry.  New ownership or drivership models (OK they did leasing).  What I still wonder is why no modern automobile manufacturer doesn't realize that none of us who own cars wants to be responsible for maintenance.  Offer us a car or service that has dealer managed regular maintenance for the life of the car, standard.  Don't make me think about whether or not the oil should be changed or the tires rotated!  Treat the car as a service rather than a discrete sales relationship.

But GM, like Sony and Tower Records (in the iTunes saga) never saw that customers were frustrated by the fact that they had to work to integrate all components of the life cycle of their products.  In fairness, some of the automotive manufacturers are beginning to move toward more sustained maintenance, but here's my ultimate dream:  fractional ownership, in which I can use a sedan during the week, a pickup or SUV on the weekends, and a sports car for that special getaway with my spouse on special occasions.  The cars could be delivered to me, properly maintained on a schedule I establish.  I don't worry about depreciation, or maintenance, or potentially even insurance, and as the cars start to drive themselves I don't have to even worry about passing the driver's test!

The canary in the coal mine?

So the question for innovators is:  Is GM the canary in the coal mine?  Are they the first major metal bender to shift to a new business model, signalling that others should begin to innovate around business models?  Does GM doing it allow others to do it?  Once a large, venerable corporation makes this kind of commitment, it appears to be either done out of panic or out of astute strategic thinking.  What will other manufacturing companies do?  More importantly, will other companies, not in the automotive sector, recognize the fact that business models are now the place to innovate, and start to innovate before their model shifts?
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posted by Jeffrey Phillips at 7:06 AM


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