Thinking beyond 4000 pounds of steel

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 !!

Adieu to Term 3 !!

We had Optimisation Techniques , Business Communication, Strategic Management,
Financial Management II & Chinese in Term 3. Dr. TAS Vijayaraghavan of XLRI took Optimisation Techniques for us. TASV’s teaching style was different. He was a very hands on teacher. We would have asked him to do the chairs & tables simplex problem at least thrice & he readily taught us again & again. He also used a lot of chalk. Other Profs generally stay away from chalk & use the whiteboard. The global oil case & Maharashtra Cement Corporation case were all just too good & he demystified those tough problems. However his mid term & end term question papers were real terror & proved us that we had a lot of ground to cover up in OT. He used funny caricatures in the OT question papers, which were in a way embarrassing to all of us.

We had Dr.Ram Sriram from Georgia State University, Atlanta teaching us Financial Management II. He had very matured approach of handling our classes. He told us that he has no interest in teaching volumes , but he wanted us to understand whatever he taught. His focus was on learning rather than teaching. His classes used to be more of debates than of one way lecturing. His classes on Risks & Return , IRR & NPV methods were particularly interesting.

Strategic management was taught by our beloved Prof. S Sriram, who has been leading Great Lakes in the last three years. His classes were very interactive with many of us participating. Memorable cases include the Honda case (crafting strategy – Henry Mintzberg ), GE case , Crown Cork case , Coke Vs Pepsi case, Michael Porter - P&G Video , Wal Mart case were really good & helped us understand the overall strategy employed by all these firms.

Business Communication classes were hugely awaited. This could because of the faculty Prof. Lalitha Maheswaran who handled the classes with élan & her own unique style. The course was very interactive & she made us speak & also participate in Group Discussions. Her feedback sessions were good & generally gave us scope to evaluate ourselves against our classmates.

Lighter stuff :

My birthday party celebrations on 21st Aug were really memorable. Kamal & Satya did a great job in ensuring that this birthday will remain very close to my heart. Friends smeared the cake all over my face & though embarrassing it was a different feeling. After that , I had the tough time, got the birthday bums. One friend was holding me by my arms, tucked under his shoulders, another friend held my legs at the other end. Friends who were singing Happy Birthday charged in & showed their real love by kicking bums. I had to beg guys to stop their pyara bum kicks. It has been a tradition at Great Lakes , that everybody gets innumerable bums during his birthday, so that it remains an unforgettable experience……

We had a get together arranged by Senthil Prakash on 15th September. We had it in Hotel Savera. We could occupy the cornermost table in the roof top the 10 / 12 floor building , which gave a wonderful view of Chennai. I met SP , Anbu Maran , Mahesh , Karuppaih, Nanda after 5 years & it was a wonderful feeling. We shared our goals in life, about our future life partners & about what we did in the last 5 years etc., It was real good fun. The most important part was the fact that the next day Balaji’s birthday & we were in Savera till 12:00 & wished Bals happy birthday & then we dispersed.

Term 4 is currently in progress. The term has a strong HR focus because of the fact that it has HRM Systems , Business & Society, Re engineering Human Potential , Market Research & IT for Managers.

We had lot of fun doing our Market Research Project. After the I stage of designing the questionnaires, we were out to the field to collect responses. We chose Spencers & we had spent around 2 hrs the first day in Spencer & got valuable feedback from lot of strangers. It gave us an understanding on the types of issues that interviewers face. After the first session of data collection we had our debriefing session , wherein we changed quite a number of questions. We could collect only 10 responses in Spencers. We had a lot of interesting experiences , I had met up with the Guy who was actually the security manager at Spencers & the guy actually started asking me whether I got the permission my Information Desh before starting the data collection. We silently slipped to the second floor & started the job. After the debriefing session , we went to Odessey & spent around 2 hours & got some 20 odd responses. It was because of the special efforts of Ipsita. Last day of data collection we had been to Besant Nagar ATMs today. We got around 20 questionnaires. In total we expect to collect around 100 responses before we sit for the analysis. Totally it was a great experience meeting people & understanding the different opinions people have on the same issue…..

Now its time for me to wind this lengthy post & will catch you up with the reflections on Term 4 later !!!