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For years companies have been playing Tom Sawyer with us. We consumers have been doing their work and thanking them for the opportunity. ATMs pass the job of the teller to us, and we are thrilled because they are open at 10:00pm when our job to be done is “pay the babysitter.” Airlines encourage us to print our own tickets at home using our own ink and paper, and we jump at the chance in order to “save time” standing in long lines at the terminal. I have even seen kiosks cropping up at quick-serve restaurants where you enter and pay for your meal using the same system sitting up at the counter. 

But to pay for this privilege, that’s where this model breaks, right? We’re not that gullible, are we? The success of Build-a-Bear Workshops would say we are, and now GM is betting people will pay for the chance to assemble the engine for their new top-of-the-line Corvette Z06 or ZR1. Crazy? Not at all.

Admittedly, on paper a value proposition that states you are going to increase the cost of a new car by 5% to 8% with no additional features or performance improvements and require the customer to spend a week doing the labor you have already included in the sticker price shouldn’t be viable. And were we considering just the functional needs of the buyer, you would be right. But GM knows that the Corvette (and most exotic cars) represents an emotional purchase for most customers, as obviously there is no practical reason anyone needs 635 horsepower and a 0-60 time of 3.4 seconds.

This isn’t new information, and for years such cars have relied on these emotional cues to justify their price tags, but I think GM has hit upon a new angle with this innovative participatory business model. For people with a sincere passion for automotive performance (not those simply showing off their wealth), part of the joy comes from knowing all about the capabilities of the car and being able to share these insider details with an admiring public as you lean casually against your imposing go-fast machine. For decades, motor heads got this job done on their own by getting their hands dirty under the hood turning reputable rides into hot rods. However, as engines became more complex and electronically controlled, performance enhancements started to resemble systems-integration projects with a generation of “tweakers” simply bolting on turbos and nitrous tanks to small, high-revving import engines.

This trend left some old-school horsepower hogs cold. Many are older and now have the money to buy the performance parts they always craved but lack the time and skill to install them. GM saw an opportunity to delight these frustrated gear heads and introduced a $5,800 “option” that allows them to personally participate in the creation of their 7.0 liter monster. For those so inclined, they can now derive a real sense of personal accomplishment and pride of ownership that transcends a set of keys and a contract to purchase. This is truly “their” Corvette.

Only time will tell if GM’s Tom Sawyer move is a hit, but the cost to experiment is low -- a slight risk to production timelines for these few, hand-built units -- and the potential return is significant – a 5% to 8% price premium with no added cost and heightened customer loyalty.
 

A friend in the industry sent along word of an interesting business model innovation from electric car pioneer Tesla. The company is now offering to send roving mechanics, or “service rangers,” to its customers on house calls as needed for diagnosis, maintenance, and repair work at the rate of a buck per mile traveled. This "geek squad" for cars makes the experience of owning a (still extremely pricey) Tesla more convenient and more secure, and it keeps Tesla from having to build out a nationwide network of service centers. 

Tesla’s cars are pretty wired – a central computer monitors all systems and produces diagnostic reports – which should make on-the-spot service easier. Furthermore, electric cars are much simpler machines than their gas-powered brethren; the powertrain is much cleaner and more streamlined. There is no need for oil, spark plugs, hoses, pistons, etc, so there is less that can go wrong and less need for a full-on garage for many repairs. Finally, unlike the established automotive companies, Tesla is not encumbered by a pre-existing dealer / servicer network and therefore has the ability to innovate its maintenance model in interesting ways like this one.

Taking a step back, this is another in a series of intriguing moves by Tesla to go beyond simply providing a very cool but very expensive electric car to focusing on the customer’s entire experience of use. In addition to this servicing concept, the company has also started providing charging stations to its customers. We have long touted the comprehensive system of electric mobility that Better Place is constructing (most recently in the Harvard Business Review, here) as a key step towards enabling the electric vehicle revolution, and we have issued warnings about Tesla’s strategy of targeting the high end of the market out of the gate. But if Tesla can continue moving towards a Better Place-lite comprehensive value proposition, and if it can successfully launch lower-priced models as it promises, Tesla may find itself making an awful lot of house calls in the years ahead.

Purdue University researchers have made a breakthrough in designing cooling systems with highly efficient heat-transfer rates, reports CNet News. These researchers have developed and tested new mathematical formulas concerning the properties of boiling liquids in "microchannels," which are tiny channels through which fluid is directed in some types of high-power electronic cooling systems. The idea is that "allowing a liquid to boil in cooling systems dramatically increases how much heat can be removed, compared to simply heating a liquid to below its boiling point," according to the researchers' report. "Boiling occurs differently in tiny channels than it does in ordinary size tubing used in conventional cooling systems," lead researcher Dr. Suresh Garimella said in a statement. The results of this research could be used to improve cooling systems for computer chips and hybrid cars. 

• Tide Turns 'Basic' for P&G in Slump, By Ellen Byron - WSJ.com

  Interesting story of how P&G learned to "love the low end" not by introducing a new low-end brand but by the riskier bet of introducing a low-end version of a premium brand.

• A123Systems Awarded $249m Federal Grant, by Sean Sposito - The Boston Globe

  Federal stimulus money finds its way to a Boston-area electric battery company, but the batteries will be made in Michigan. Story notes that another Boston start-up, Boston Power, which had planned to manufacture batteries in Massachusetts, got none of the stimulus money.

• Culture at Netflix | SlideShare.net

  Lengthy slide deck released by Netflix offers insights into its recruiting and talent management, optimized for innovation. Example: "We're like a pro sports team, not a family. Coach's job at every level of Netflix is to hire, develop, and cut smartly, so we have stars in every position."

• Le Whif: Inhaled Chocolate

  Inhaled chocolate -- a new product meant to offer benefits of chocolate without the calories. Illustrates the principal of "de-featuring"!

  
  

Is it possible that the electric vehicle story isn't actually about the vehicles themselves, but about battery suppliers and business model innovators?

For generations, manufacturers like Toyota and General Motors earned most of the profits in the automotive industry. While manufacturers are struggling today, suppliers and distributors are in just as bad, if not worse, shape.

A recent Wall Street Journal article described how assembling electric vehicles is relatively simple. "Electric cars use only basic motors and gearboxes, and have relatively few parts," the article notes. "Aside from perfecting the battery itself, they're far easier and cheaper to build -- and that makes for a level playing field."

What impact would a simpler-to-produce product with a key performance-defining component have?

Read the rest at Scott's Harvard Management blog.

In the January 14 issue of Strategy & Innovation, we offer up our annual Year in Preview story (free reg. reqd.) by Scott D. Anthony. This year we've added a new feature to this feature — we asked Innosight partners to write short industry specific predictions of the industries in which they have expertise.

Some overall themes:

• The darkening economic climate is good news for innovation — after all, abundance is at the root of many corporate struggles with innovation.
• It has never been easier to develop and scale an idea. Innovators can draw on high-quality, low-cost tools to develop, test, and begin to commercialize ideas without tens of millions of dollars of investment.
• Innovation has never been more important. Success in what we are calling the Great Disruption requires mastering perpetual transformation.
• Companies that are partially disrupted (such as print media) and those that are innovation novices will have a tougher go of it, as the current economic climate isn't favorable for their challenges.
• On-the-brink disruptive attackers and companies that have progressed in their efforts to make innovation systematic will be more likely to find their efforts paying off.
• Companies that demonstrate an ability to love the low end will find that strategy effective if they are able to master business model innovation and gain a deep understanding of how the low-end consumer measures value and develop unique offerings tailored to key value drivers.

Those industries for which uncertainty in the markets and uncertainty regarding potential governmental policy and regulations changes will struggle this year until the economy settles down and the policies of the new U.S. presidential administration begin to take shape. Finance and healthcare are two such industries.

Here are some of our partners' industry-specific predictions:

• Media: A strong likelihood of continued bankruptcies among media companies.
• Defense: A push toward decentralization and away from aircraft- and ship-specific platforms.
• Manufacturing: A shift toward innovation and away from strict reliance upon Six Sigma and cost-cutting.
• Automotive: No automakers will fold, but we will see consolidation of vehicle models in the saturated marketplace as a better linkage develops between customer requirements and available models.
• Retail: Growth among retailers targeting the low-end as well as those that can add high-level services that high-end consumers will pay for.
• Consumer products: CPG companies that do well will be those that strive to push the boundaries of their innovations, looking beyond just new products to new categories, new business models, and new channels.
• Finance: Reduced scope and size among financial global financial services firms, and an opportunity for low-cost tools and data providers.
• Healthcare: Widespread implementation of Electronic Medical Records, as proposed in the forthcoming economic stimulus package, could radically shift the balance of power between physicians, healthcare provider organizations, and insurers. 

It’s not often that a TV ad stops me in my tracks and causes me to rewind the DVR so I can see it again. But that’s exactly what happened this Sunday when I saw the ad introducing Hyundai Assurance — a new program that promises that if you buy a new Huyndai and, in the next year lose your income, you can simply return the vehicle.

Wow. A car with a return policy.

Impossible? No. Innovative? Yes.

Given the current economic climate, consumers are (understandably) scaling back spending on essential and luxury items alike. We are delaying major purchases and trying to squeeze every bit of usefulness out of the products we currently own.

In response to this, and given the long development and production lead times in the auto industry, car makers are relying on business model, rather than product, changes. Most are focusing on changing the Profit Formula (for more information on the Business Model Innovation framework, go here) by offering significant rebates and discounts. Hyundai is the first (and so far only) car company to change its value proposition.

The value proposition is composed of the target consumer, that consumer’s job(s) to be done, and the offering that satisfies the job(s). Hyundai realized that people haven’t stopped buying cars because their jobs to be done – “get to and from work,” “be financially secure,” “feel prepared for any situation,” “provide for my family” – have changed. Rather the “hiring criteria” (or, in our JOBS methodology, the “objectives”) used to select an offering has changed. For example, consider a consumer with the job to be done of “be financially secure.” Before the crisis, she might have used hiring criteria like “…in 20 years” or “…by maximizing investment returns.” However, in the face of economic uncertainty and increasing unemployment, she may look for offerings that meet criteria like “…in the next 12 to 24 months” and “… by minimizing financial obligations.” Hyundai Assurance directly addresses these objectives while the profit formula changes (rebates, discounts) that other car makers are offering target a different set – “…at purchase” (because down payments are reduced or eliminate), or “…during ownership” (because monthly payments are reduced) and, as a result, fall short of satisfying her job to be done.

Ten years ago, in response to skepticism about the quality of its cars, Hyundai introduced America’s first 10 year/ 100,000 mile warranty. People thought they were crazy. But it worked. Hyundai’s sales grew and the other car companies follow suit. People probably think Hyundai Assurance is crazy but, because it’s grounded in and understanding of consumer jobs and hiring criteria, I think it will work. After all, not many things make me stop in my tracks and say, “Wow.” 

Shai Aggasi, founder and chief executive of Better Place, spent a couple of hours last night telling his story before a crowd of several hundred at the Boston Museum of Science. I was lucky enough to attend and left admiring his vision and the work Better Place is doing, but also feeling skeptical about Better Place’s approach to answering the electric car question.

Better Place is a venture-backed company that plans to eliminate obstacles to electric car adoption through the use of swappable batteries that extend the range of electric vehicles. It plans to own and operate a network of battery-charging spots and battery exchange stations that would give “subscribers” the feeling of infinite range; all, Better Place claims, for less than the cost of driving an internal combustion engine car.

I’ll say upfront that I’m a believer in the electrification of the automobile, so my skepticism of Better Place doesn’t come from any lack of faith in the electric car’s eventual prospects. Rather, Better Place gives me pause because I disagree with a premise that lies at the core of its approach.

Better Place’s strategy is founded on a premise that electric vehicles can’t succeed today because the technology available (namely, the electric range afforded by batteries) isn’t good enough. Consumers, Better Place would say, won’t buy a vehicle with a short range, especially when it takes hours to recharge.

I have two problems with this premise:

1. It has a limited shelf-life that depends on technological stagnation. Millions, if not billions, of dollars worth of research is being conducted to improve battery capacity, safety, charging time and longevity. Better Place is betting against it. (Perhaps they should ask Iomega, Earthlink, Digital Equipment Corporation, or any other of a thousand dead or dying companies how similar bets worked out…)
2. It ignores the tens of thousands of consumers for whom today’s electric vehicles are already “good enough.” Th!nk, GEM, ZENN and as many as two dozen other companies are building business that sell electric vehicles to consumers in circumstances for which today’s technology works, like retirement communities and urban / commuter environments. They are sewing the seeds of disruption, much like Sony did once upon a time with the first transistors (used them for portable radios that were, by most measures, pretty cruddy — unless you were a teenager who didn’t have any other option or you needed something small and portable).

So, while it is true that today’s technology — heavy batteries that provide limited range and take hours to charge — isn’t good enough for the mainstream, tomorrow’s technology might be. In fact, plenty of people are betting that it will be. And when it is, those medium-ranged, quick charging EVs made by a growing automotive manufacturer will make Better Place’s network of $500,000 battery swapping stations obsolete.

And that, I think, is a better way.

PS. During Q&A I asked Shai to give his assessment of the risks that improving technology might present to Better Place. I wasn’t too satisfied with his answer. His explanation that a “magic battery,” which goes 400 miles on a 3-minute charge, is not physically possible, is a long way off, and won’t work with the grid infrastructure anyway, seems like a straw-man argument that dodges the question. He didn’t acknowledge the middle ground between the “magic battery” and today’s technology, which is where I think the risk to Better Place lies.

But you can listen to his complete response to my question here. 

Kevin Bolen co-authored this post.

It seems that everyone wants to know what the automakers will do differently in the increasingly unlikely event that they receive a massive Congressional bailout. Leaders suggest they'd like automakers to "be more innovative" and "reinvent their business model." But what exactly does that mean? And how would government officials monitor progress against these goals to see if the bailout is being well spent?

First, let's look at what it would take to "be more innovative." Our research and field work suggests watching whether automakers:

1. Place the customer at the heart of the innovation process: Firms that succeed in innovation are obsessed with learning more about the customer and, more specifically, the jobs they need to get done. Clayton Christensen likes to describe how millions of people use their car as an office, but no auto manufacturer has designed a car with desk space, power options for laptops and phones, Wi-Fi connectivity, and other features that would help get this job done. Looking for important, unsatisfied jobs-to-be-done could help auto manufacturers identify attractive growth segments and avoid commoditization. One sign that auto manufacturers have appropriately shifted their attention: an increase in the ratio of market research spending to advertising spending.

 

2. Have senior leaders actively engage in innovation: Leaders in many of the firms we work with and admire participate daily in innovation efforts. And this is not passive involvement. They join focus groups, observe behaviors, review project plans, help set prioritization parameters, evaluate funding requests, and develop and oversee unique organizational models to incubate the best concepts. Innovation is not simply a budget item for these leaders; it is second only to talent development on their personal to-do lists.

 

3. Create a diversified portfolio of ideas: No one can accurately predict what market demands will be five to 10 years from now. No one knows what the energy situation will look like. No one can predict the economic climate. No one knows precisely which early-stage ideas will take off and which will stagnate. Pinning a firm's future on a single breakthrough is unrealistic. A broad, diversified innovation portfolio can help companies withstand shocks and respond to market shifts. The freedom to fail in one area because of emerging opportunities in another is the hallmark of an effective innovation program.

Second, what would it really mean for the U.S. automakers to "reinvent their business model"? Our colleagues Mark Johnson and Clayton Christensen have an article with this very title in the latest Harvard Business Review.

One of the fundamental problems the article highlights is that many companies are held captive by their capabilities....

Read the rest at Scott's Harvard management blog.

The GM Volt blog posted an interview yesterday with Chevrolet brand manager Ed Peper in which he discussed work Innosight is doing with GM for the Volt launch. When asked, Do you have a plan on how to educate the public to understand the car since its so unique in order to make it more readily salable? he answered:

"We're actually doing a lot of work right now to understand in general who the consumer is for this product. We're working with a group that’s based out of Harvard and there a company called Innosight. What their working with us on is developing a jobs-based positioning for Volt. Which means what are the jobs that Volt really needs to handle for the consumers that buy them. On an emotional level, on a social level, on a functional level, what are the jobs that this vehicle must perform and must do well. Were in the process right now. We’ve done a couple of focus groups. We have a lot of data that you and others have provided us. And its going to help us from a marketing standpoint, what things should we talk about, what things shouldn’t we talk about. And how to we best present the category buster. How do we present this in such a way that consumers who are interested will know this is the first of its kind and this will be the best of its kind and it will be the only one of its kind when it hits the market place in 2010."

It is a widely known fact that thousands of people die in car accidents every year. It is more dangerous to drive than to fly, we say. To mitigate this, car manufacturers are investing millions in R&D programs that increase safety in vehicles. Of course, "death prevention" is a noble goal - but taking a step back, are cars overshot on safety?

A recent business week article "Cars That Brake When You Don't", highlights new technologies from Honda Motor Co. that prevent accidents by essentially usurping control of the braking mechanism. These cars sense the imminent safety risk, and initiate braking, tighten safety belts, and alert the driver, all in an effort to avoid the accident. One Toyota GM is quoted as saying "The ultimate aim is to create a car that cannot crash."

Again, I must reiterate that this goal is noble. However, is it necessary? From the rollout plans, it seems these high end safety systems (at a cost of $4300 per vehicle) can only be included in luxury vehicles. While it is unlikely that consumers will turn down safety features, how many would pay extra for them? Evidently, at this price tag, very few.

And, isn't that the mark of an overshot product?

Chapter 10 of The Innovators Dilemma uses the principles of disruptive innovation to discuss the disruptiveness of the electric car to traditional automobile manufacturers. While the current hybrids such as the Toyota Prius are not that disruptive they have gained in popularity and their future is looking bright. This week I received a newsletter from my VW dealership with what could be an even more disruptive product. The article discussed the Bio-Beetle, a car fueled by 100% recycled vegetable oil, also known as bio-diesel. The technology is simple; the fuel consists of recycled animal fats and restaurant greases. Bio-diesel may not be cheaper than gasoline (the industry currently only produces 50 million gallons annually) but it is renewable. The performance certainly is not better than gas-powered cars but probably good enough for non-demanding customers (such as tourists putzing around Maui).

This car is currently only available for rental in Hawaii. Is this something that could pose a threat to car manufacturers? The signs are pointing in that direction. It is unclear whether VW will pursue bio-diesel for mainstream use in their vehicles. Other car manufacturers are bound to ignore this alternate fuel while they concentrate on building better gas-powered and hybrid cars. And, if nothing else, it makes me feel better about ordering fries.