How Daimler is Dealing with Challenges and Disruptive Innovation Confronting the Automotive Industry
STRATEGY | CHANGE MANAGEMENT | ARTICLE
This article is part of an ongoing series that describes the concept of ‘’CHANGE MANAGEMENT & DISRUPTIVE TECHNOLOGY TRENDS’’ and how companies are coping with them.
You may have noticed in the past 20 years, there have been substantial changes across the automotive industry. Development and sales of electric cars have recorded unprecedently growth and major car manufacturers and tech giants are in a race to develop next-generation autonomous cars, fostered by fast-growing technology and the change in preferences and buying behaviours at the consumer’s end. The rise of the automotive market in China have brought further disruption in terms of manufacturing and sales. In this article we will examine the challenges Daimler is enduring, the key elements in their approach to leading and managing change, and the first steps you can take when managing change within your organisation.
Key industry trends and their impact on Daimler
On a mission to reduce emission of exhaust fumes and environmental noise pollution, over the past certain automotive brands have paid greater attention to developing electric cars. Tesla launched the first highway-legal mass-production all-electric car in 2006, which can be driven for more than 200 miles per charge. Since then, electric cars have been no stranger to the general public and they have gained huge popularity, with sales hitting the 2 million units in 2018 worldwide. The rapid development of electric cars has been enabled by the maturity of electric vehicle engine technology and increasing awareness with regards to the harmful effect on the environment created by traditional combustion engines. Governments have also shown huge support by providing tax benefits, buyer incentives and building free electric vehicles charging spots. With almost every automaker in the world following suit and more electric cars become available in the market at a lower cost, total sales of electric vehicles are projected to reach 11 million in 2025 and 30 million by the end of 2030.
Another key trend that has disrupted the automotive industry is autonomous driving technology. It enables cars to drive independently even in the most complex traffic environment. Rapid maturity of technologies including computer learning, artificial intelligence and GPS have driven the development of autonomous vehicles. It brings benefits such as reduction in the number of accidents due to human error and aggressive driving, enhancement of quality of life and increase in productivity for drivers. Although there are public concerns over its safety and reliability, especially after the first fatal accident involving a self-driving Uber in 2018, as well as tight government regulations, the concept of autonomous driving will continue to gain momentum as major automakers, tech giants and financially backed start-ups seek to be at the forefront in the breakthrough of this revolutionary driving experience.
Ignited by the penetration of digitalisation in our daily lives, ridesharing has gained huge popularity in the last 10 years, especially with the launch of Uber in 2009. Ridesharing allows people to request rides on their smartphones, which reduces the cost of owning a car. The licensed taxi industry has shrunk ever since and is projected to only hold around a quarter share of the ride-sharing industry in the world by 2030. Car sharing allows individuals to use a vehicle for a flexible period, without having to return to a rental office or station. These services have made travelling easier, more convenient and flexible from the customers’ point of view.
Rise of China in the automotive market
China has become the largest automotive market and car manufacturer around the globe, with 28 million cars being sold in 2018 and being responsible for manufacturing nearly 34% of the world’s cars in 2016. The rise of China’s automotive industry not only provides huge opportunities in traditional car sales, but also electric cars and other mobility services.
There has been demand for increased connectivity while in a car, not only in the form of enabling car owners to be able to check fuel remotely, but to have the digital capability to connect with the outside world and perform day-to-day tasks like office work, making a restaurant reservation, etc. while on the move.
Customer profile and consumer behaviour
Our research shows purchases of new cars have dropped amongst customers aged 18-34 over the last few years. Increasing convenience and affordability due to a wide range of available transportation means today has decreased the perceived value of a car ownership amongst this demographic, especially in urban areas.
How these challenges affect Daimler
These trends and key challenges have several implications on Daimler as the company seeks to stay ahead of new trends of the automotive industry in multiple fields. The powerhouse would need to fight to acquire the limited talent which are experts in the new technology and attuned with the changing trends. At the same time, they would need to retain their trained personnel to continue manufacturing existing combustion engine models to remain profitable. The company would also need to invest hugely in research and development and open a new manufacturing plant to divert from the existing traditional business model, which is a financial burden. They would also rethink and potentially switch their focus from internal combustion engines to electric vehicles, which is harder than a tech start-up such as Tesla, who only had to focus on developing electric and autonomous vehicles.
The rise of ridesharing and car-sharing will lead to fewer people purchasing cars, but this alone should not become a predictor that the demand for new cars is likely to decline dramatically. Target customers would switch from individuals to service providers, and the higher-than-average mileage of these provided vehicles means these cars would be replaced (purchased) more frequently. This means Daimler would need to switch part of its car production to more homogeneous models that can transport the highest proportion of riders at the lowest cost, while preserving its luxury identity.
The rise of China as a target market creates tremendous opportunity to capture value, but it will be a hurdle for Daimler to operate in a new market where social and commercial context, as well as regulatory policies and the political environment, are different. These new trends would force Daimler to find the right balance and strategy between existing production of combustion engine vehicles and innovation, but without having the financial freedom and distractions of competing on multiple fronts, like Tesla.
Daimler’s initiatives; strengths and weakness of Daimler’s approach to leading and managing organisational change
Facing the threats of new trends including electric cars, autonomous driving, connectivity and ridesharing, Daimler has opened a new business unit in 2016 to study and develop strategic solutions to help the automaker to stay at the forefront in these new areas. Wilko Stark, the CEO of CASE at that time would report directly to Dr. Zetche, the chairman of Daimler. Talents were invented to join the core team of CASE from other business groups were generally younger and more familiar with the fast-changing trends.
Daimler launched its own operating system called Mercedes Me, which offers software with functions such as music and TV streaming and performing office tasks in cars have brought convenience for their customers. Daimler’s decision to develop its own operating system allows the company to take full control in delivering a more sophisticated experience to its customers, as well as retaining initiatives to exploit profitable connected services in the future.
In an effort to secure a leading position in the autonomous driving sector, Daimler is working towards providing more value to its customers in combined terms of hardware, services, and software. In 2017, Daimler started partnering with Uber where Uber provided their ride-sharing platform and Mercedes supplies its autonomous driving technology. Nevertheless, Daimler still partnered with competitors like Audi and BMW in developing an independent mapping system to be used in self-driving vehicles.
Daimler’s first move is the development of a car-sharing service, car2go, in Europe, North America and China. Users can make point-to-point rentals with cars exclusively provided by Daimler. In 2018, Daimler formed a partnership with BMW to combine both of their car-sharing platforms. This increases the quantity, variety and availability of cars and takes advantage of the 60 million customer base the two platforms enjoyed, while bringing in more revenue due to the increased usage of customers. It provides bases for the integration of autonomous cars and electric cars as technology matures. Other efforts in gaining a share in the shared mobility market include founding Moovel in 2013, an app allowing users to compare and book rides offered by various transportation providers, as well as acquiring Mytaxi in 2014, which helps taxi drivers and app users to connect through its mobile app.
To facilitate Daimler’s aim at launching more than 10 electric vehicles by 2022, the company has invested more than €10 billion in the development of electric cars and an electric intelligence project, which seeks to form an integrated chain for Daimler, from the supply of cars to services and recycling. Daimler has also invested heavily in establishing battery factories, with the latest one in Jawor, Poland, its ninth worldwide.
Daimler is also developing its online channels to facilitate direct sales, after Tesla’s success with this model. It is currently testing its online sales channel in China and if successful, Daimler could potentially seek to implement it in other areas around the world. This allows the company to have total control of its supply chain.
Daimler recognises the need for transformation in its corporate culture to be ready for innovation and adaptation to new shifts in the automotive industry. They have the Leadership 2020 program in place, which seeks to bring in new leadership and adopt new management approaches moving forward. Ola Kallenius, the new chairman, will be the first non-German and non-engineer executive at Daimler in history who will adopt different approaches and management styles to support Daimler’s cultural change.
CENTI’s Insight on Organisational Change
Paradoxes of change
In the past, many dominant companies have enjoyed huge success during their prime but have stumbled to adapt to change, which in certain cases has led to a complete downfall, Kodak being one of the most stand-out examples.
We believe prolonged success these companies enjoyed might have a negative psychological impact on the executives. They were more reluctant to investigating and adapting to new trends as well as developing new strategies due to being complacent with their past and present performance and existing strategies. This can be labelled as ‘the paradox of success’. Another factor that is that the core capabilities that these once-successful companies enjoyed could be core rigidities for them to adapt to changes in the industry. These developed capabilities, which may be useless in aiding the development of new capabilities, might prove to be difficult and costly to replace. We see that a common problem amongst these established companies was that they were phenomenally successful in handling evolutionary changes in the industry but fell short in adapting to or initiating revolutionary. The good practices the management team adopted in these once-dominant companies might be a hurdle as well, as they would reject disruptive technologies which have a low profitability due to low customer demand at an early stage but were too late to compete when demand increases later on. The balance between exploitation and exploration in terms of how an organisation operates would be crucial for them to maintain their success in their current capabilities, but at the same time develop new capabilities to initiate and compete with new trends and demands at the consumer’s end. This could be difficult though as they share different mindsets and compete for resources, including talent, funds and customers.
There are certain strategies for how companies can adapt to change and stay competitive in light of rapid technologic advancements and innovations. These strategies allow them to embrace breakthrough innovations while retaining stability in their existing business. Being ambidextrous is one of them. Ambidextrous organizations can create new exploration units which are separated from their traditional exploitation units, which embrace different ideologies, skills, structures, cultures, and goals, while a tightly integrated executive team overseeing the operation enables cross-fertilization between the two units and sharing of resources, including talents, finances, and market information. We see from our research that more than 90% of the ambidextrous organisations successfully met their targets in the long term and survives through market uncertainties and industrial disruptions.
The creation of a specific culture within an organisation is a dynamic learning process, and that culture is a pattern of basic assumptions people create to deal with external adaptation and internal integration. Culture, a set of assumptions and basic values which a particular group shares, is hard to change, especially when the values are firmly established. A force for change may lead to increased organisational cost. However, when the pressure subsides, it is not unusual for everything to revert to its previous state.
First steps you can do to manage change
As your company is going through a transition process to adapt to the changing climate of the industry, your management team should adopt a bottom-up approach which you are transparent about your plans within your organisation, reason behind any radical changes and involve everyone as much as possible in the process. You should, especially let your core business unit feel although major changes are necessary in aid of adapting to the new trends, the company is still relying on their contribution for growth, and their ownership and responsibility during the transition. In achieving future goals, needs, and perspectives of all stakeholders including partners, managers, employees, and customers should be considered thoroughly before implementing action plans. You should keep a close eye on the impacts on individuals and provide assistance during the change, whether they are set to leave due to the change of structure at your company, or they are trying to innovate along with the company’s future objectives.
Electric cars & Autonomous driving
Despite efforts in adapting to and initiating new trends, you should not lose focus on your core business in combustion engines until technology and skills required fully mature and regulatory issues have been resolved. Your management team should still concentrate on other areas like customer services and experience which you deemed as a core value of your company. In the short term, your core business should remain as the backbone to provide steady revenue to support its innovation projects. Motivating employees in its existing manufacturing plants will be crucial as they will witness the expansion of a competitive organisation and they will fear for future job security.
Good things take time to happen
While it is a positive move to develop a different culture in the company in your bid to adapt and initiate new changes and trends in the automotive industry, you should be aware that change takes time, and you should not expect results to be delivered overnight. As seen from the Daimler’s initiatives, their reputation was built on providing vehicles of the very highest quality, but now they are competing in the new automotive industry with companies who are some more experienced players, i.e. Tesla for electric cars and Google for autonomous driving. Your company should have the correct mindset to realise and accept your may no longer be an industry leader on certain fronts, and that it will take time to once again become a market leader.