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
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
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
yers Who is involved?
Which players can affect the outcome of this game?
What can they possibly do? What range of potential options is under their control?
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
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
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
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
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
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?
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)...