We had to submit an article review for our GB&S course. I had chosen the subject article. Authors are from A T Kearney - Automobile Domain. I found that very interesting. Sharing the same with you all.
Abstract:
In the larger sense the authors talk about six new thinking tools which can help a company to realign your business needs & be very successful in a declining market. The article sites the examples of Retail giant Tesco, computer maker Dell , low cost airlines like Southwest Airlines & Ryanair.
Specifically the article talks about the hassles faced by the customers of auto industry & their real needs that have not been satisfied. It also details the current scenario of the global auto industry & what ails the auto industry. Authors finally suggest a new business model for auto industry that will give a ROI that is way above the current industry average.
Gist:
Today’s car owners spend considerable time & effort to maintain / service / repair their cars. Considerable time is also wasted in finding finance / insurance options. Deeply analyzing, basic needs of car owners are mobility & service. AT Kearney’s new car concept promises that car owners won’t need to undergo these hassles & would provide enhanced mobility economically than the current cars available in the market. The car concept has been named as Indego. The concept also has potential to bring in more ROI than compared to the ROIs of existing car makers.
Auto industry today suffers from huge fixed costs covering engineering, manufacturing , distribution infrastructure & HR activities. In fact health care costs are around in US$1400 in every General Motors car that is produced. Add to that the cut throat competition in the industry, which results in lower profitability from the core car making business.
Two interesting developments need to be looked at closely. The first one is about the Southwest & Ryanair. These two airlines clearly understood that the basic customer needs are low cost travel & they came up with a radical business model which addressed this need. Both the airlines were very successful. Similar case is with Dell computers. The real basic need of customers was a customized computer. The same was delivered to customers with the help of a flexible supply chain model & Dell was very successful.
Auto customers too look out for low cost mobility on road & don’t want to go through the hassles of maintaining the car. AT Kearney’s new concept Indego is a new idea, which focuses on the above needs. Indego would not sell cars but lease them out to customers for anything between US$7 to US$16 ( US$2700 to US$ 5800 per year). In the process the company returns a return on sales of 22% when compared to the industry average of 6%. In essence, Indego would sell mobility, not motor cars.
The concept of leasing, gives the company access to the performance parameters of the car during its whole life. Approximately Indego will be using cars for 8 years before scrapping. During the 8 years of maintaining the car, the company would be able to garner most of the revenues from servicing / spare parts / insurance / accident repairs. Today the revenues from these streams flow out to many other members on the value chain.
Most important part of the business model is the fact that most of the design, manufacturing & distribution were outsourced. As a result, Indego’s cost base would be more of variable costs than fixed costs. Additional services like onboard telemetry, traffic alerts, navigation assistance, roadside assistance would increase the revenue flow.
The investment required would be around US$2 billion over four years. Hence true startups would really not get into this industry. Rather established players like Microsoft, Wal-Mart & GE who are looking for diversification might enter & create a successful venture.
Existing car manufacturers could not change themselves into the new model because of the fixed costs heavy legacies. They might as well try getting into it slowly. They might first start with Dealers to capture much of the aftermarket revenues. They could then reduce their manufacturing costs by adopting flexible manufacturing / lean manufacturing. Companies from India & China would be in the best position to implement this concept when they star their operations in Western countries.
There are six principles that help develop Indego strategy. On a general note these six principles help to rethink the existing business models & come out with a radical one which is far more profitable. They are take the best from other industries , capture lifetime revenue streams, create adjacent revenue streams from products & services , capture & exploit customer information , periodically assess the impact of technological innovations & guard against future legacy.
These six principles can be applied to any industry , either by incumbents wishing to protect and grow their market share or by new entrants who wish to challenge the existing industry dynamics.
Critque of the article:
Authors mention that by outsourcing most part of manufacturing, design & distribution, the cost structure will become more of variable than fixed. This is not correct as authors fail to understand that the high technology cars can not be assembled by anybody & everybody in many places, all over the country. Authors also forget that to note that the ROI for such people would not be good, as there would not be scale & hence they would not come forward to take up manufacturing alone.
Authors assume that the cars can be run for 8 years on lease. One important thing that was left out was the fact that there won’t be any takers for older cars &this might severely affect the revenue estimates.
Leasing as a concept is already present in Global auto industry. Maruti has promoted its leasing services through Lease Plan Ltd for around 5 years now. But actually leasing has not taken off because of the high costs involved. So it is doubtful that Indego will work out successfully.
Outsourcing most of design , manufacturing & distribution systemmight make a company vulnerable. By not having full fledged operations, it might be susceptible to easy take overs by suppliers / competitors etc.,
Name of Authors:
Philip Dunne – Vice President – A.T.Kearney – Global Automotive Practice
Steve Young – Vice President – A.T.Kearney – Global Automotive Practice
Book’s Name:
Executive Agenda
Volume VII No 4
Fourth Quarter 2004
Publisher’s Name:
A.T.Kearney , Inc
Marketing & Communications
222 West Adams Road ,
Chicago
Illinois – 60606
USA
How did you find my review ? Do drop in your comments !! C U Later !!
What strikes me is the Indian analogy of Tamil Vs Hindi. Very very similar case. In late 60s politicians vehemently opposed the entry of Hindi in TN & hence have halted its reach in Tamil Nadu. Politicians like Karunanithi , Ramadass , Thiruma & Vaiko all are here to ensure that Hindi doesn’t catch up fast in Tamil Nadu. They do it by stirring up the Tamil love among Tamils, the way Chirac does it for the French.
