Digital Disruption in the Automotive Industry - Nov 2016

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  • Digitalization Disruption in the Automotive Industry By Bill Forquer, Priiva Consulting Nov 2016

    BACKGROUND This paper was first presented at Stage-Gate Internationals Voice of the Ecosystem Summit in June

    2016. Stage-Gate is the most widely recognized product development process in use. Practitioners of

    Stage-Gate manage their new product and existing product extensions using a structured sequence of

    gate criteria to pass to an additional round of internal funding in the next stage. Culturally, these

    organizations celebrate the funding stoppage of products that dont pass their own criteria to funnel

    precious investment dollars to those products that optimize their gate criteria.

    When companies launch products, that launch will incite a reaction from the ecosystem of stakeholders

    namely, current and future customers, competitors, and collaborators. And each of their reactions in

    turn incites additional reactions creating a cascading effect. This is comparable to an N-player chess

    match with each player eyeing the moves of the others, executing their own offensive attack while

    concurrently playing defense based on observations. Just as in chess, codifying and communicating the

    cascading and exponential possible outcomes quickly becomes unwieldy. Consequently, efforts tend to

    focus on current-state and lack a substantive forward looking view.

    Conference delegates were challenged to make their gate criteria more robust by moving beyond

    competitive analysis to scenario based competitive response using Priivas game-theory process for

    scenario modeling. This Auto Industry Digital Disruption Case Study was used to illustrate Priivas

    process and delegate reaction was quite favorable. Delegates provided additional input and validation

    for the model which held up to be quite robust.

    WHAT ARE WE SOLVING FOR? Game-theory scenario models are the most instructive when designed to optimize specific (not general

    not every) strategic decisions. Forward thinking organizations may actually model a market from

    several perspectives to achieve the deepest insights. In this particular scenario model on the

    automotive industry, we are solving for the following strategic questions

    1. Do car manufacturing incumbents (aka Automotive OEs) stay focused on that manufacturing

    and/or become transportation service providers? Using air transportation as an analogy, should

    Ford, GM, and others focus their efforts on manufacturing like Boeing or being a transportation

    service provider like United Airlines? Or can they be both effectively?

    2. Can car manufacturing incumbents create sustainable differentiation by developing and

    controlling their own Car Operating System (Car OS) that is the heartbeat and central nervous

    system of the autonomous features in a driverless vehicle? Such incumbents are already

    managing complex systems of electronics and sensors is a Car OS any different? Or are

    incumbents better off licensing or partnering with technology providers that provide operating

    http://stage-gate.com/

  • systems for mobile devices, namely Google (Android) and Apple (iOS)? Or with other 3rd parties

    having the experience to integrate various forms of sensor technologies?

    3. How important is the consumers pre-existing mobile device or home automation operating

    system in the selection of an autonomous vehicle operating system? This consumer sentiment

    establishes if autonomous vehicles come pre-configured with a Car OS via exclusive licensing

    arrangements (i.e., limited consumer choice similar to the brand of tires that are pre-equipped

    on a new model) or if the consumer has full choice in choosing and configuring any Car OS?

    4. Apple has backed off their manufacturing ambitions. Tesla has not. Google continues to

    position their intention to own and control the full stack of the Car OS and to manufacture cars

    as well. Is this real or just credible signaling on their part as they complete testing and fully

    determine their strategy?

    INITIATING A GAME THEORY PROCESS At the core, game theory scenarios encompass a relatively simple three-step process that identifies who

    the key players are, the things that they each can do, and the things that they each want to happen.

    THE NATURAL OUTCOME AND ITS INSIGHTS The Natural Outcome is an output of Priivas simulation software. The Natural Outcome is the first

    stable outcome achieved when all players pursue their natural interests as expressed in the preference

    trees. Priivas software revealed a Natural Outcome that aligns well with the interests of the Tech

    Player, Car-as-a-Service provider, and Federal Government. The interests of the Car Manufacturing

    Incumbent, GM, and Car Disruptor are not well aligned with the Natural Outcome. The Natural

    Outcome and some of its insights are listed below

    1. Disruption Prevails Over Status Quo. Incumbents are unable to hang on to the status quo as two

    forces dramatically disrupt the auto industry. Firstly, the decline of personal car ownership

    driven by digital players like Uber and Lyft who are ushering in a new era of on-demand

    transportation as a service much like the airline industry is shaped today. Secondly,

    autonomous driving features elevate the role and influence of Car OS Providers and diminish the

    power and influence of traditional manufacturing incumbents. Expect more commoditization,

    consolidation, and partnerships amongst these traditional players.

    2. Two Power Players. The majority of power sits firmly in the hands of the federal governments

    and Tech Players providing the Car OS. All other players are highly sensitive to the actions of

    those two.

    3. Incumbents Must Act Quickly. Those two largest power players both exert their own options

    early and without much sensitivity to others. Their assertiveness establishes the long-term

    The

    Pla

    yers Who is involved?

    Which players can affect the outcome of this game?

    Pla

    yers

    ' Str

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    Op

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    What can they possibly do? What range of potential options is under their control?

    Pla

    yers

    ' P

    refe

    ren

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    What each player wants to happen? What are the individual player's preferences for the available options?

  • structure and relationships for the market. Incumbents need to act quickly, double down on

    their primary plan, revalidate their contingency plans, and ensure their primary or contingency

    plans including alignment with the power players, AV sensor suppliers, and other market

    disruptors.

    4. No market slow-down. There are no standoffs or deadlocks where this market will slow-down

    or freeze. All players execute their own strategic options in due time across four cascaded

    waves. The market will move as fast as autonomous vehicle technology becomes available

    including the requisite government regulations that accompany it.

    5. Short-Term Innovations Could Stave Erosion of Personal Car Ownership. Consumers have a love

    affair with their automobiles. Incumbent manufacturers can use near-term innovations to keep

    that love affair fully in heat and not giving consumers a reason to give up their personal vehicles

    entirely.

    6. Got Deals? Federal government has lots of tradeoffs with various players to negotiate deals

    related and unrelated to autonomous vehicles.

    TRACKING PREDICTED OUTCOMES Events are the chessboard moves in any market. Events, often overlooked as a strategic metric, are

    fundamental to tracking assumptions about players, preferences, and predicted outcomes. Priiva

    always works with its clients to track actual events against its models.

    This model was completed in June 2016. Time obviously marches on and events have occurred that

    validate two key insights, namely, that the market is moving fast and that disruption will prevail over

    status quo.

    July 6, 2016 BMW Promises Fully Driverless Cars by 2021 in Partnership with Intel and Mobileye Aug 18, 2016 Ubers First Self Driving Fleet of Volvo XC90s Arrive in Pittsburgh for Testing Aug 31, 2016 Google Takes on Uber with its Own Car Pooling Service Based on Waze Oct 17, 2016 Apple Scales Back Ambitious Plans to Build Vehicles Oct 30, 2016 GMs OnStar to Integrate with IBMs Watson Oct 31, 2016 Ford Expands Commitment to Blackberrys QNX as their Car OS

    THE CURRENT STATE The current state of the market is modeled in the formulation of players and their future options.

    Strategic choice by a player that has already occurred is never included in the model as a Player Option.

    Rather, that is now part of the core fabric of the player and the players future strategic options. The

    Priiva team, without any unique knowledge of the automotive market, began by monitoring market

    events to formulate the scenario model. Below are some material events that shaped that model and

    provided context around the current state. Many more earlier events are cited here in Wikipedia which

    provides an excellent overview.

    May 20, 2013 - Federal Highway Transportation Safety Agency Establishes Classifications for Vehicle Automation Jun 3, 2015 - Google Announces It Has Surpassed 1M Test Miles by its Autonomous Vehicle Fleet Nov 20, 2015 Microsoft and Volvo Announce Partnership to Co-Develop Autonomous Vehicles Jan 20, 2016 - GM Invests $500M in Lyft

    https://en.wikipedia.org/wiki/Autonomous_car

  • Mar 11, 2016 GM Acquires Cruise Automation for $1B to Accelerate Autonomous Vehicles Apr 27, 2016 - Ford and Google Lead Lobbying Coalition Apr 28, 2016 Google and Fiat-Chrysler Nearing Tech Agreement May 5, 2016 Ford Invests $182M in Pivotal to Strengthen Mobility Software May 14, 2016 Apple Invests $1B in Didi May 24, 2016 Uber & Toyota Confirm Strategic Investment and Leasing Deal

    These events clearly show technology providers entering the automotive market either directly or via partnership and incumbent car manufacturers securing a toehold against future technology disruption.

    PLAYERS AND OPTIONS

    A fundamental decision in model design is the decision to include or not include a player. A simple

    litmus test to include a player (or not) in the model is to evaluate if that player has the ability to impact

    the behavior of another player already in the model. If a players own actions can influence the

    behavior of other players, they warrant being in the model. If that same player doesnt influence the

    behavior of others, then that player can confidently be omitted from the model. Design experience has

    shown the most instructive models are those having 7-10 players and less than 30 total options across

    all players. For larger models, the mathematical algorithms hold up just fine but often the domain

    experts providing input dont.

    A technique to validate model completeness is to formulate the best, likely, and worst case outcomes as

    three data points along a spectrum of outcomes (there could be 2**n possible outcomes where n is the

    total number of player options in the model). If the model expresses all three of those outcomes, then it

    passes the simple test for completeness.

    Another technique to simplify the model, particularly for a macro-view of a scenario, is to introduce the

    concept of a composite player whereby a single player in the game model actually represents two or

    more actual players whose strategic abilities and interests are identical or similar. For example, our

    model uses the composite player Car Manufacturing Incumbent to represent Ford, Toyota, Honda, etc.

    Priiva verified that the use of composite players didnt over-simplify the model simply by developing a

    preference tree for Ford, Toyota, and Honda. If those preferences are identical or highly similar, then

    the use of composite players doesnt degrade the model design. Note that our model calls out GM

    individually and doesnt include GM in the composite player definition of Car Manufacturing Incumbent.

    The thinking was that the GMs investment in Lyft and its Onstar customer base were strategic toeholds

    that that separated them from the rest of the pack of Car Manufacturing Incumbents.

    In fact, GM is the only individual player in our model. All other players are actually composite players.

    Each of the players, their high level persona, and the strategic questions relevant to our model are listed

    below.

    Player Persona Strategic Questions

    Tech Player (Google, Apple, MSFT)

    Aggressive technology disruptor that currently provides software

    Since the mobile device market is saturated, are automobiles as devices our next competitive frontier?

    Do we manufacture our own automobiles to drive adoption of our Car OS? E.g., with the Mac, iPod, and iPad, Apple has always controlled the hardware. Whilst Google/Android is far more open to hardware players. Will their historical behavior continue?

  • operating systems

    Regardless of the hardware decision, if and how should we license our Car OS to other car (hardware) providers? How exclusive should be become to any given manufacturing incumbent?

    Do car manufacturing incumbents have the ability to develop their own Car OS that interoperates with mobile devices thereby cutting us out of this new market?

    Will the federal government under- or over-regulate our efforts to deploy our technology?

    Car Mfg (Ford, Daimler, BMW, Audi, Toyota, Honda, Kia, et al)

    Incumbents from USA, Germany, Japan, Korea, etc.

    Will the Tech Players manufacture their own vehicles as a hardware device and thereby become a new, formidable, direct competitor?

    Incumbents are already accustomed to integrating sensor technology in their vehicles. Is a Car OS supporting AV features just an evolution of that? Can we win with our own Car OS? Should we continue to develop our own or hedge our bet? Should we exclusively license a Car OS from a Tech Player or one of our existing sensor technology providers? Should we non-exclusively license? Will consumers care about their Car OS the same way they care about their mobile device?

    Car-as-a-Service (CaaS) providers want to end personal car ownership thereby decreasing demand. How can we block, forestall, or join their ambition?

    If Car-as-a-Service providers are successful, how do we adjust our business model to align to fleet buyers rather than individual consumer buyers?

    Will the federal government provide regulations that favor us given the economic impact of our industry?

    GM Incumbent with connected car toehold via OnStar

    All the same questions as the Car Mfg incumbents above apply equally to GM. How do we best leverage the brand and customer base of Onstar? Is it the basis for a future

    Car OS or is it an advanced infotainment system?

    Car Disruptor (Tesla, Faraday Future)

    Disruptive with autonomous features as well as electrification, business model, and driver experience

    All the same questions as the Car Mfg incumbents above apply equally to the Car Disruptor. How do we best leverage our most disruptive features?

    Car as a Service (Uber, Lyft, Car2Go et al)

    Disruptor wanting to end personal car ownership

    Will consumers indeed give up their love affair for the automobile? Can our CaaS model extend to more than personal transportation? For example, for home

    delivery, long-haul of goods and services, etc. What backlash will occur when we cancel contracts with all our 1099 drivers once driverless

    vehicles are generally available? Will the federal government provide regulations that inhibit our efforts given the economic impact

    CaaS could have on the automotive industry?

    Federal Govt

    Regulates transportation and safety

    Can we help our home team incumbents gain competitive advantage during this period of disruption?

    How safe is this technology?

    STRATEGIES AND INTERESTS OF EACH PLAYER ARE EXPRESSED AS

    PREFERENCE TREES Lexicographic preference trees (see definition) were used to codify the interests and reverse engineered

    strategies of each player in the model. A small number of technology and automotive domain experts

    were consulted to develop each such preference tree. The preference trees are used as input to Priivas

    proprietary simulation software which generates the sequencing of outcomes and insights on player

    behavior. The syntax of those preference trees is intentionally omitted from this paper but a more

    human-friendly narrative matching each players preferences is in table below.

    Player Persona Strategy Narrative

    Tech Player (Google, Apple, MSFT)

    Aggressive technology disruptor that currently provides

    Wants every car depending on their Car OS. Wants government to impose light regulations. Will manufacture cars (ie, the full stack) if that is the pre-requisite to winning every car. Doesnt want incumbents or Car Disruptors developing their own OS, but are not overly sensitive to that because they believe those players will fail doing so.

    https://en.wikipedia.org/wiki/Lexicographic_preferences

  • software operating systems

    Car Mfg (Ford, Daimler, BMW, Audi, Toyota, Honda, Kia, et al)

    Incumbents from USA, Germany, Japan, Korea, etc.

    Favors status quo and fears disruption. Fears Tech Players entering with a full stack. Fears that govt will be light handed but wants them to be heavy handed to slow down others giving themselves more time to develop their own Car OS. Needs to win new car sales of CaaS fleets. Does not view Onstar as a viable Car OS. Tech Players need to fail at manufacturing so they become more amenable to partnering for the Car OS should their own Car OS dev efforts fail to be differentiating.

    GM Incumbent with connected car toehold via OnStar

    Not as fearful as Car Mfg incumbents as Onstar and Lyft investment provide disruption toeholds. Fears the government will be light handed but wants them to be heavy handed to slow down others and would like others to fail at their own Car OS efforts falling back to OnStar partnerships triggering more aggressive Onstar development.

    Car Disruptor (Tesla, Faraday Future)

    Disruptive with autonomous features as well as electrification, business model, and driver experience

    Fears Tech Players entering with a full stack. Fears heavy regulations and wants light regulation to favor autonomous features and electrification. Wants to win new car sales of CaaS fleets and is prepared to develop their own OS to do so. Not fearful of the actions by Car Mfg incumbents, GM, and does not view Onstar as a viable Car OS.

    Car as a Service (Uber, Lyft, Car2Go et al)

    Disruptor wanting to end personal car ownership

    Wants government out of the way and all parties to succeed getting genuine driverless cars to market which triggers their purchase of a fleet of driverless vehicles from multiple vendors and eliminates their expense of drivers.

    Federal Govt Regulates transportation and safety

    Wants all their own national players to be successful achieving driverless status as a means for their home team to regain worldwide dominance in the auto industry. Especially true for the USA. Will exert moderate regulations so as to not stifle innovation and not compromise safety.

    NEXT STEPS AND FOR MORE INFORMATION The model as developed is robust and provides an excellent high-level perspective of disruption in the

    auto industry. Priiva is seeking either exclusive or a syndicate of sponsorships to develop additional

    variations and simulations. Possibilities include

    1. Perform sensitivity analysis by varying the preferences of key players, in particular the Federal

    government, to determine if and how that changes the outcome.

    2. Expand the set of players likely to slow down this innovation, namely insurance industry.

    3. Expand the set of new entrant tech players beyond just the Car OS to include players providing

    hardware and sensors like Intel and Mobileye.

    4. Consider if any car manufacturing incumbents warrant being called out as individual players (like

    GM is now) instead of being lumped inside the composite player definition.

    5. A specific focus on product liability and the free pass that new entrants have received thus far

    contrasted with the litigious operating environment for incumbents.

    For further information about this report or sponsoring additional models, please contact:

    Bill Forquer Priiva Consulting Email: bill.forquer@priiva.com Twitter: @billforquer Web: bio

    mailto:bill.forquer@priiva.comhttp://www.priiva.com/company/principals/billForquer/

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