Friday, December 30, 2016

Why Aren’t Automakers Embracing Digital Business Models?

Below is my most recent post on Harvard Business Review:
BMW is one of the best car makers on the planet. It is also thinking seriously about what digital transformation means for the car business.
Its cars now have Connected Drive, a platform that allows drivers to purchase apps for traffic, messaging, and for starting the the engine from a distance. The new BMW is also packed with electronics that allow the user to experience different driving modes, from sporty to gas-saving, substantially changing the feeling of driving the car.
And yet BMW is still not making full use of digital business strategy – nor are any other car makers.
Consider: BMW charges €360 to unlock the ability to access the apps on the Connected Drive. Some apps (e.g. Remote Services) cost €80 and others (e.g. Real Time Traffic Information) can be rented for €45 over 6 months. If one spends a hefty amount of money on a new car, paying €80 or €45 for an app doesn’t seem too expensive, but needing to pay €360 to just activate the ability to download the apps seems totally wrong.
Contrast this with the approach taken by Apple. Making money on complementary products is one of the features of Apple’s business model. How does the model work? You sell the hardware and then you sell low priced apps (some of them are even free) to increase the value of the hardware. The apps represent a complement to a car and the Connected Drive is a store to sell complements, but why does the user need to pay to enter the store?
Imagine buying an iPad (especially in the early days of this product) and then having to pay €100 (or even €50) to access the App Store. This would have been a serious barrier. Following Apple’s logic would encourage BMW to make Connected Drive free, something that would make sense given the low marginal cost to BMW of doing so. The bigger lesson here is that you should always allow the customer a free entry into your digital store and then charge small amounts for the products sold there.
Here’s another way digital business principles might play out differently for BMW and other carmakers: renting engine capacity.
If you look under the hood of BMW’s Series-3 vehicles, for example, you can get horse power of either 110, 150, or 190, depending on whether you’ve purchased a 316, a 318, or a 320. However, you might be surprised to learn that BMW uses the same 4-cylinder engine in all 3 models, except the electronic components don’t allow the engine that is sold in the less expensive model to get to the higher levels of horse power.
Why couldn’t the company make a car that allows a driver to either upgrade or rent the engine power? Say you buy a 318 model with 150 horsepower for casual driving, but then you rent the 190 HP to go on a road trip? Alternatively, could you buy a car with 150 HP but after a 3-year period pay to unlock additional horsepower permanently? If the hardware is an issue, this unlocking could happen in a dealership.
We see these free-premium-rent models all the time in other digital businesses. When you download a fitness app, for example, you can try a free version first, and then can pay to unlock premium functionality later on. Or you can rent some functionality, such as a €9.99 a month subscription to an app that gives you a personalized training program.
When I talk to auto industry executives, the reason why they don’t want to systematically offer engine upgrades is that they want the customers to sell their old car and buy a new, more powerful car. Fair enough. But they may be missing out on both new customers and new revenue opportunities. Clearly, when commuting to work or driving in the French countryside, one doesn’t need 190 horsepower engine (not only because of the high fuel consumption, but because of the high probability of getting a speeding ticket). But on a vacation to Germany, where there are no speed limits on the autobahns, 190 horsepower could come in handy. As the car already has the different driving modes that are controlled electronically, it seems that the HP control is also possible.
There are also possibilities for automakers like BMW to combine user data, software upgrades, and digital business models to “nudge” customers to try new features they’ve not used before. Consider that your Connected Drive apps might know that you’re planning an upcoming trip to Cote d’Azur, where the speed limit is 130 kilometres per hour. The car itself could ask you if you’d like to implement a temporary, over-the-air engine upgrade.  Perhaps automakers could even offer a “vacation bundle” – additional traffic, weather, and events information along with an engine upgrade that lasts the length of your trip.
Tesla does now offer a self-proclaimed “ludicrous” mode upgrade to Model S that allows reducing the acceleration time of your car by 10%, and you don’t need to sell your old Tesla to get this upgrade. However, Tesla still asks you to buy the upgrade (about $10,000), not to rent it, although the rental of additional power should be at least technologically feasible.
Clearly, the makers of physical products (like cars or home appliances) understand that digital convergence is the next frontier. However, they often don’t look carefully or creatively at the business models this might inspire. The physical asset itself is just the beginning

Friday, May 22, 2015

How does your Company Measure up to the Talent Factories in the Luxury Industry?

I just published an article in Harvard Business Review on the best practices of talent management in the luxury goods industry. Below is a small excerpt, and you can read more by following the link below. HBR allows to read up to 5 articles, like mine, for free!

"Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the world’s leading brands and labels belong to one of a few groups, of which the biggest by revenue is LVMH, the owner of Moët & Chandon and Louis Vuitton. Two other groups—Richemont, the owner of Cartier and Chloé, and Kering (formerly PPR), which owns Gucci and Saint Laurent—give LVMH fierce competition.
When we analyzed the drivers of performance for more than 350 fashion houses from 2000 to 2010, we found that producing successful, creative fashion collections was positively correlated with being part of a business group. On average, retailers and wholesalers of high-end clothing judged collections made by group-affiliated brands to be three times as creative as collections made by independent competitors.
Being a part of a business group generates costs savings by centralizing support functions such as operations and logistics, finance, and real estate management. Another advantage of group membership is the relatively efficient internal market for capital that luxury groups provide by identifying promising brands and supporting them with the capital they need to grow. But our research suggests that the real source of the groups’ value is the way they exploit their diverse business portfolios to offer rich learning opportunities to both managers and creative talent. This is why their brands excel at design and business innovation.
To understand just how the groups developed this talent advantage, we conducted detailed case studies, which involved more than 50 in-depth interviews with senior executives. What we saw was that within their boundaries, the three groups have all created a vibrant circulation of talent that allows them to spread knowledge and best practices, despite the sometimes intense rivalry between their brands."

Thursday, January 22, 2015

Creativity in Organizations: Look at Your Network

Here is my recent video interview with Canadian Globe and Mail on creativity and networks in organizations

Friday, December 5, 2014

Philips' Alliances Will Save Your Health (and Money)

We all know that alliances with customers, competitors, and suppliers are important to any company’s ability to compete. As I write in my latest post for Harvard Business Review, that ability is compromised by the way we manage those relationships: all too often, each alliance is “owned” by one team or business unit. Thus, companies often miss out on opportunities for innovation that would result from transferring ideas and resources from small silos to other aspects of the business.

I set out in my book, Network Advantage: How to Unlock Value from Your Alliances and Partnerships, that a more holistic approach to managing alliances allows companies to create innovative new lines of business. A recent collaboration between customer relationship management and analytics company and Dutch electronics giant Philips provides a case in point.

The collaboration between two companies began as a simple buyer-supplier deal: Philips used Salesforce software to enhance its customer relationships. But somewhere along the line, executives in these two companies started asking: if Salesforce knows how to manage CRM data, can it also manage the clinical data from some 190 million medical patients that are treated each year with Philips-made equipment?

The two partners have decided to build a platform to connect healthcare providers, insurance companies, and patients to deliver clinical monitoring solutions. The Philips Digital Healthsuite Platform, as it is called, will collect and analyze data drawn from medical devices to enhance clinical decision making by professionals and allow patients to take a more active role in managing their personal health.

As a first move, the partners have created two applications — “eCareCompanion” and “eCareCoordinator.” The eCareCompanion is installed on a patient’s smartphone (or tablet) and connects to their health monitoring equipment, such as weight scales, pill dispenser units, blood oxygen measurement devices, and thermometers. Imagine John, a patient with obstructive pulmonary disease, often caused by smoking. John lives at home. To monitor his condition, John’s weight, blood oxygen, and body temperature data are constantly uploaded to the platform. The eCareCoordinator then analyzes the data feed from the devices worn by the patients. If the data pattern from a particular patient becomes worrisome, the eCareCoordinator can inform a nurse, relative, or doctor.

How can Philips and Salesforce persuade hospitals to start using this platform? How can the hospitals be sure the system is reliable and can lead to tangible cost savings? This is where an alliance between Philips and Radboud University Medical Center in the Netherlands comes into play. The two partners work very closely to develop and test new equipment, including the wearable devices that can collect patent data for the Digital Healthsuite Platform. The use of these devices on Radboud’s patients helps Philips develop a business case for using them in other hospitals. Furthermore, in the process of building the wearable devices, developing the apps, and analyzing patient data, Philips,, and Radboud develop valuable know-how to share with future partners who want to build their own apps or devices.

This innovation was made possible by the way Philips manages its alliances. Philips has created an Alliance Management office, made up of a small team of professionals who help Philips executives run individual alliances. The team helped negotiate the contracts with Salesforce and with Radboud Medical Center, obtained agreement on the key performance indicators, and developed tools to evaluate the partners’ perspectives on the evolution of the alliance. They also manage regular meetings in which the Philips executives in charge of the alliance can learn about what is going on in the alliance with Radboud and vice versa. This helps build multi-billion market opportunities across the three partnerships.

There are two lessons here for your company. First, get more out of your alliances as drivers by thinking of them as a network. And second, build a team inside your company to manage this network, especially where knowledge and resources overlap. There is huge potential in collaborating with customers, suppliers, or even competitors.

Wednesday, September 17, 2014

Collaborate to Innovate: Learning to Unlock Value from Your Alliances and Partnerships

How can you achieve competitive advantage using your alliances and partnerships?

What is "Network Advantage" and how can your company benefit from its collaborations with customers, suppliers and competitors?

How do giants like Philips and Samsung achieve profitable growth using their alliances?

I recently gave a 7 min TEDx-style talk for INSEAD Alumni reunion to answer these questions.

Monday, September 1, 2014

Yves Carcelle--the former CEO of Louis Vuitton-- Has Died

I recently wrote a blog post and posted a video of my interview with Yves Carcelle, the former Chairman and CEO of Louis Vuitton. We discussed the talent strategy of LVMH, its foreign expansion and the experiences with top designers such as Marc Jacobs. Yves and I were planning to meet for a follow up in July.

Unfortunately, this was the last interview he gave.

Yves Carcelle passed away on Sunday August 31, 2014.

I knew Yves only briefly, but I was really surprised by his eyes. They were curious, interested and full of wisdom. These were not the eyes of a person in the last stages of battling with cancer. These were the eyes of a young man who was planning to go to the Middle East to prospect new markets for LVMH.

After the interview, Yves offered new ideas for INSEAD's development. He wanted to continue involvement with INSEAD's community.

INSEAD family just lost a great friend.

Our thoughts and prayers are with his family.

Saturday, August 30, 2014

When to Partner and When to Acquire: Louis Vuitton Style

A few weeks ago, I was fortunate to sit down with Yves Carcelle, a former CEO of Louis Vuitton. He is a humble man with penetrating brown eyes. An INSEAD MBA, he is credited with transforming Louis Vuitton (LV) from an old trunk maker into a luxury powerhouse throughout his 23- year long tenure as CEO. Now he is a self-declared “fixer” for the top management team and Vice President of the LVMH Foundation. His own modest handyman-like image is in stark contrast to the venerable leader he is considered both inside and outside of LVMH.

When he became CEO in the early nineties, he knew that LV had grown very quickly across the world without having all the management resources it needed to maintain global leadership positions. This meant that LV had to form alliances with distributors in most of the countries it operated in. These distributors played an active role in the company’s business operations.

Yet, 100% reliance on global business partners was not Carcelle’s philosophy. One of his earliest initiatives at LV was to take control of 100 percent of the distribution of LV’s products in almost all geographies. “With 100 percent distribution, you can have a good database…every morning you see the sales product-by-product, store-by-store, clientele-by-clientele all over the world,” he told me in a recent interview.

Partnerships and alliances are valuable drivers of competitive advantage, but if everyone in your industry relies on partnerships, there might be opportunities for achieving competitive advantage in a different way, i.e. when you integrate everything under one roof.  Carcelle was willing to go against the grain, and now he remains surprised that no other luxury brand considered such a move. Even now most of LV’s competitors have a lot of distribution partnerships worldwide.

But why did LV decide to go against the industry’s majority opinion? During the 1990s, business revolved around the concept of outsourcing and many luxury goods companies moved many of their operations overseas. Carcelle argues that LV’s key source of competitive advantage was its know-how of product making. Success doesn’t always come from “manufacturing everything yourself, but from understanding and controlling the know-how and having your experts in-house,” he explains.

Does vertical integration always make sense?

Over time, LV bought out all of its partners, but there was one exception. “The only partners I decided to keep were our partners in the Middle East.  This was not only because their values were the same as ours. Friendship and value-sharing is not enough. [A big reason for keeping them was that] the Middle East is complicated, legally and culturally,” he said.

As I explain in the new book Network Advantage: How to Unlock Value From Your Alliances and Partnerships, LV decided to stick with a Middle Eastern partner - Chalhoub Group. As Yves Carcelle commented, “Decision-makers [in the Middle East] speak Arabic and I decided it was important for us to continue to work with partners that opened doors, be our advisers and we were the first one to organise a joint venture for the whole Middle East market”. However, to still ensure as much consistency across regions as possible, LV decided to work with Chalhoub Group across several Middle Eastern markets, and not to try and find a separate partner for each country.

The lesson from Yves Carcelle’s experience is clear. The more unique your assets are and the greater the control you need to exercise over the value chain to extract competitive advantage from these assets, the more vertical integration makes sense. However, the higher the uncertainty and complexity in your markets, the more you should think about partnerships. LV’s key assets were a unique brand and long term experience in luxury goods. By vertically integrating, LV has ensured a highly consistent image all around the world. If you face a situation when you have unique assets, control over the value chain helps you extract value from them. Yet when you are dealing with complex and uncertain markets, then you need to find a single partner with expertise in most of these markets.

You can watch this clip for more insights on networks, innovation and creativity from Yves Carcelle--  one of the most experienced executives in the world of luxury goods.