Digitalization is changing today’s business world, and merely following Porter’s rule does not seem to be enough to stay competitive in the future. Automotive is an excellent example of an industry in which OEMs have chosen a strong positioning as well as incrementally optimized production, quality and cost in the past accordingly.
However, the industry is being disrupted by digitalization, and Original Equipment Manufacturers (OEMs) are required to transform themselves to get ready for the future. So how can companies whose present success can primarily be attributed to investments in their core business simultaneously devote the same effort to identifying tomorrow’s groundbreaking digital trends and new fields of business?
Companies that do not have a plan ready for their transformation are threatened to be replaced by more agile and innovative competitors in the short or long term. Examples can be found in several industries: Nokia has overslept the technology shift to smartphones, Kodak collapsed during the transition to digital cameras.
Since 2000, 52% of the Fortune 500 companies have been bought up, have declared insolvency or simply do not exist anymore. What if OEMs miss out on the tremendous potential electric and autonomous vehicles propose? They are increasingly challenged by new market entrants such as Tesla, technology giants such as Google or start-ups like Mojio in these business fields.
Ambidexterity: the key to long-term success
To ensure long-term success or even survival in the stormy times of digitalization, business leaders must think beyond the boundaries of their daily core business and dedicate the same attention to the identification of new business models and digital innovations. Thus, they must be ambidextrous.
The term ‘organizational ambidexterity‘ has been coined by the Professors Tushman (Harvard) and O’Reilly III (Stanford), referring to the ability of companies to pursue exploitation and exploration simultaneously. ‘Exploitation’ refers to the ability to compete in mature markets based on efficiency, cost savings and optimization, whereas ‘exploration’ describes entrepreneurial agility, curiosity and risk-taking, opening up new business models and markets.
OEMs have been focusing on exploitation for decades, increasing their efficiency and optimizing their daily business to meet their existing customers’ requirements. The production process was steadily refined by introducing lean management and Six Sigma approaches, and costs were minimized by just-in-time manufacturing and platform production.
The structure, processes and corporate culture of established OEMs reflect this efficiency focus to a high degree, leaving little room for agility, risk-taking and experimentation with new technologies. Therefore, the exploration part, which is crucially important for the company’s future, can oftentimes not exceed some isolated lighthouse projects (read our first article on the topic).
How can OEMs become ambidextrous?
The existing structures and hierarchical organization of OEMs results in reduced responsiveness, which represents a serious barrier for innovativeness. To foster explorative activities while leveraging the benefits of exploitation, following approaches can be fruitful:
Establishing a unit focusing solely on exploration
One approach to encourage agility, creativity and innovativeness within OEMs is the establishment of a unit that is entrusted with exploring new technologies and business models. Such an innovation unit requires freedom to experiment, and failures should be tolerated or even encouraged by the KPIs. Examples of such units can already be found in the automotive industry in the form of innovation labs such as Volkswagen’s digital and data lab, or BMW’s “Future Lab”. As these internal exploration units are strictly kept apart from day-to-day operations, future digital trends and corresponding business models can be identified in a focused manner.
Building up an innovation network
External innovation stimuli can be provided by the company’s network. One way to capture external knowledge and new perspectives is to integrate start-ups into the early phase of the innovation process. Another way is to establish strategic alliances for the exploration of new technologies and business models, combining complementary (digital) assets of the partners and sharing risks.
Furthermore, customer voices can lead to innovation impulses especially in the field of customer experience, successfully illustrated by BMW’s project “Customer Innovation Lab”. BMW actively integrated customers in the development of new technologies (f.ex. regarding driving assistance systems) and successfully produced market-ready ideas.
Setting-up new structures and processes
Matthias Müller (CEO of Volkswagen) has presented the “TOGETHER Strategy 2025” this year, which has been referred to as a “revolution” by voices of the press containing striking impulses to foster the company’s ambidexterity. The target picture aims at organizationally transforming the group: decentralizing the structure, shortening decision-making processes and implementing interfaces between departments to make more use of synergies promoting exploration and exploitation.
Similarly, Capgemini Consulting’s Change Management Study 2015 concludes that reorganizations and restructures are the most common occasions for change projects and are vital in times of digitalization.
Including and supporting employees
Employees are the most important innovation resources of companies and should consequently be equipped with enough freedom to independently decide about devoting their time to exploration or exploitation. Doing so, OEMs can drive the development of more innovative solutions, for which there would be no time in the daily business. Therefore, KPIs of employees should equally allow for and value explorative and exploitative activities.
Finally, digitalization opens up new work models that can promote ambidexterity: mobile, remote working and virtual teams make the everyday working life more efficient while allowing for freedom and room for creativity.
As we have also seen in the other articles of our blog series, it is of utmost importance that OEMs in the automotive industry holistically transform themselves beyond isolated digitalization projects, as existing structures and processes act as barriers to innovation.
In times of digitalization, managers are facing the challenge to keep an eye on their daily core business, but to devote the same effort to identifying technological innovations and new business models to lay the foundation for their company’s future success. The concept of ambidexterity can provide valuable insights on how companies can simultaneously stimulate their exploration and exploitation efforts, placing bets on both: red and black.