The new automotive mandate: Moving from building products to building businesses

(7 pages)

Growth is everything in the automotive industry. It protects incumbents and propels start-ups into the winner’s circle. Furthermore, changes in business dynamics across industries suggest growth is becoming even more potent as other formerly key success factors like global supply chains falter in the face of the pandemic and other challenges.

McKinsey research has observed an evolving trend in corporate longevity, indicating a dynamic business landscape. In the late 1950s, companies on the S&P 500 enjoyed an average tenure of 61 years; by 2020, this had decreased to 20 years, showcasing the rapid pace of innovation and market adaptation. Looking ahead, we anticipate this trend to continue, reflecting the opportunities for new businesses to emerge.

New business building is a top-five agenda item

Corporate leaders are increasingly focused on building and scaling up new businesses, with eight in ten executives considering it a top five agenda priority. They’re right to prioritize it: companies that focus on building new businesses significantly outperform their peers. They outgrow their markets more often and by greater amounts than competitors pursuing organic growth strategies. In fact, over 45 percent of them outperform the market, while only 30 percent that don’t make new businesses a top three priority do the same. McKinsey’s research suggests that if made during early periods of turbulence, these kinds of investments can have an outsize impact on a company’s recovery later on.

We believe now is the time for industry incumbents to embark on business building strategies. A variety of mobility trends indicate that the industry has reached an inflection point that fosters growth due to the accelerated changes to the ecosystem that have occurred over the past few years. Major elements of this growth opportunity include autonomous-driving innovations, connectivity enhancements, shared-mobility breakthroughs, and fleet decarbonization efforts. In the United States, these and other mobility growth opportunities could cause emerging mobility solutions revenues to expand faster than both GDP per capita growth and traditional mobility revenues associated with vehicle, parts, and maintenance-services revenues.

Automotive leaders plan to build new businesses

Our research reveals that 70 percent of automotive and assembly business leaders prioritized new business building in 2022, up from 61 percent in 2021 (exhibit). By committing to building new businesses, incumbents are entering a race with the many start-ups that are attacking the mobility space. Known for fostering innovation, start-ups typically exhibit five key strengths that distinguish them from incumbents: they adopt agile ways of working, develop innovative value propositions, nurture cultures that attract talent, cultivate greenfield solutions, and provide a safe environment for rapidly trying, failing, learning, and trying again. While adopting these hallmarks poses a challenge for most incumbents, they nonetheless can accomplish it, given the right levels of commitment, ambition, incentives, and freedom to act.

Seventy percent of leaders prioritize new business building.

Incumbents enjoy advantages

The companies that currently inhabit the automotive industry have little in common with the incumbents of yesteryear. They have weathered the combined challenges of a pandemic, global supply chain disruptions, fickle economic winds, changing technology archetypes, and much more. In addition, they have arguably navigated through the current macroeconomic environment better than many mobility disruptors who had initial public offerings within the past five years.

Faster moving and leaner than their predecessors, these incumbents have opportunities to leapfrog disruptors given their extensive existing customer bases, strong balance sheets capable of funding new ventures, and cash flow to remain competitively viable.

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Unlike start-ups, incumbents have many years of experience in the industry. An incumbent typically has an existing customer base, a balance sheet to fund new ventures, cash flow that provides working capital, a strong brand to reach wide audiences, and subject-matter experts with deep knowledge. Incumbents can also capitalize on their experience with managing physical products—since an estimated 70 percent of new automotive business will likely center on a physical product—something start-ups struggle with, and incumbents can exploit to outdistance their rivals.

While the physical product is important, it’s only one part of the greater mobility ecosystem. Incumbents must build ecosystem products and employ their market presence in terms of credibility and relationships to build a differentiating ecosystem for their new ventures. The world’s largest companies in terms of market capitalization build ecosystem economies focused on new integrated hardware, software, and service offerings.

Business building for incumbents is not easy

While long-time industry players enjoy some key advantages over start-ups in understanding the automotive “lay of the land,” our analysis shows that many will likely fail to build successful new businesses that scale for several key reasons. These include failing to exploit the incumbent’s core business strengths in the new enterprise, failing to secure the needed capital or talent, and short-circuiting longer-term success to capture near-term profitability. Other reasons involve dragging down the new business with bureaucracy and failing to instill a risk–reward culture.

Some examples of these struggles include a major technology company’s launch of smartphones and a firearm manufacturer’s expansion to off-road cycling. The former struggled with identifying clear customer needs. Their smartphones focused on flashy features the company assumed would be desired by customers, though they often lacked the compatibility and simplicity of competitors’ phones. For the firearm manufacturer, off-road cycling equipment seemed far-fetched. The company’s branding efforts failed to build a clear connection to the core offering, resulting in an unsuccessful product launch.

Where to begin

Success stories

A tier-one auto supplier had created two business ideas based on customer needs, unearthed via extensive interviews about their mobility journeys. The supplier realized its typical way of operating wouldn’t work with the new businesses because it was too slow, too focused on core products, and too encumbered with political considerations. It decided to move the new enterprises outside of the core business to enable better agility and more independence. This move included a new governance structure that gave the businesses greater autonomy via stage-gated funding rounds. The businesses developed milestones tied to the release of additional funds over several funding rounds. Between funding decisions, the businesses would freely make operational decisions that were right for them, thus increasing agility and enabling them to build their own cultures unincumbered by the mother company.

A leading tier-one auto player that followed this recipe realized the benefits of the minimum viable product approach, which it initially considered unsuitable for physical products. By taking stock of its internal contacts and customers, the company realized it could quickly test key assumptions of its offerings with early prototypes before making significant capital investments. One major learning was to start building the team as rapidly as possible, as several necessary capabilities were new to team members, and because finding the right talent takes time.

The good news is that incumbents have access to a proven approach to innovative business building (see sidebar “Success stories” for examples). We refer to it as the five B’s:

Breakout: generating and prioritizing new business ideas
Blueprint: defining the minimum viable product (MVP) and road map
Build: bringing the MVP to market
Boost: hyperscaling the business
Branch: maximizing enterprise value from the business

In this article, we’ll offer suggestions for incumbent leaders to approach the first three elements, as these are often the areas where incumbents face the toughest challenges.

Breakout: Generating and prioritizing new business ideas

How it’s done: A case study

When developing a business, most incumbents tend to go in reverse order, starting with a product that is already technically complete and seeing if a market is big enough or attractive enough for its introduction, then asking marketing to develop messaging that will help it resonate with target consumers.

A leading OEM took the opposite approach, and in the space of five weeks was able to define two major businesses outside of its core operations that it plans to pursue further. Even though this company had a suite of designers, R&D engineers, and business development personnel, it realized how different the design thinking approach was from anything it had done in the past. The company deliberately moved away from its typical approach to new product development, which involved R&D first creating a product that could be interesting, then business groups determining what customer segments would be most appropriate, and then relying on marketing to push interest forward. Instead, it started with dozens of exploratory user interviews and synthesized the common themes that emerged from the conversations.

From those themes, initial concepts emerged through workshops comprised of cross-functional company employees. It then tested these concepts again through exploratory interviews to further refine and iterate the results. To satisfy the data-backed nature of the incumbent, the team complemented the qualitative findings of the interviews and workshops to test interest at a much larger scale, while also testing willingness to pay. Through this process, the team quickly built conviction in its business concepts, first on the desirability of the concept and second on its business viability. The conversation then shifted to, “How can we build this?”—a question the incumbent had plenty of tools at its disposal to answer.

There’s a saying that a great business is 10 percent idea and 90 percent execution, but even identifying, and more important, prioritizing, new business concepts can be early stumbling blocks for incumbents. Below are some suggestions for how to be successful in making this critical first step in the business building journey (for more information, see sidebar “How it’s done: A case study”):

Use your company’s overall strategy to scope out the ‘idea’ space. Starting from an entirely blank sheet of paper for new business ideation can be a pretty daunting task that can lead to stalled momentum, or worse, an idea that is too far afield from the core that there’s no “right to win.” Our research and experience show that the best new ventures are rarely a 90-degree turn from the core; they are most often found in adjacencies that leverage an existing strength of the business in a new way.

Spend time understanding unmet customer needs in the market. Take a customer-centric approach from the outset to identify where there are unmet needs in identified markets and themes. This will require incumbents to learn about the audience for whom they are designing and ask what customer needs and behaviors are important through quantitative and qualitative approaches.

Prioritize at the intersection of desirability, viability, and feasibility. The most successful businesses sit at the intersection of three separate but interrelated spaces: desirability (does it solve a pressing need for customers), viability (is the opportunity space large enough to deliver that value proposition, and can it be profitable), and feasibility (can you be successful in building and executing, and do you fundamentally have a right to win). Evaluating business ideas against all three of these criteria will help to create clarity on which ones have the highest potential to be successful down the road.

Blueprint: Defining the MVP and road map

Blueprinting the business before it is built: A case study

Most incumbents approach a future endeavor, be it a new product or new market, with a heavy reliance on the past—templates, project plans, budget requests, and numerous other documents. These items often form the foundation of future projects and, if unchecked, can lead to a reliance on incrementalism rather than examining what the art of the possible could truly be.

A leading OEM was confronted with this same dilemma when developing the plan for the launch of a new business that was adjacent to its core, but with elements (business model, go-to-market approach, organizational structure) that were very different from any initiative this OEM had ever undertaken. The team leading this effort took two deliberate steps that underpinned its success.

The approach to building the business blueprint leveraged an investor lens in every aspect of the plan, for example, the OEM considered the concepts and proof points that it would need to demonstrate to an investor to build credibility in the business. This focused the project team on what truly mattered and drove a sharp focus on clean-sheeting how to maximize the odds of success rather than relying on the methods of the past.
The project team was deliberately segregated into two sections: a core team that would form the nucleus of the new business, aided by an “outer ring” team of subject-matter experts who were backstopping the core team with information, expertise, and acceleration support to drive the effort forward. This way the core team was responsible for driving the business building plan right from its inception, could be kept to a lean level of resourcing, and at the same time, benefitted from the best expertise that the parent company had to offer.

Once the incumbent has prioritized a business concept, it needs to rapidly and iteratively plan how to build, measure, and learn to bring the product vision to life. Three suggestions can help. (To see these steps in action, see sidebar “Blueprinting the business before it is built: A case study.”)

Define and prioritize your customer segments, then deeply understand them. Establishing focus and attention for a specific segment of the customer base is critical to create capacity to go deep in really understanding the targeted value proposition, feature set, and willingness to pay for a new product. Start by developing a clear understanding of how customer segments break down and where the intersection of desirability, viability, and feasibility is strongest. Then use this specificity to inform your go-to-market strategy, including understanding purchase decision journeys, engagement points, and marketing/brand strategies.

Work backward from the vision to a first MVP. Speed to market is paramount to get products in the hands of real customers and accelerate the iteration and feedback loop—and it is the best way to determine planning and development. Typical issues include what are the quickest MVPs that can test the key assumptions of the offering, how can the incumbent rapidly prototype and test the MVPs and scale them over time, and what is the product road map (for example, user stories, feature backlog).

Scale operations and technology to fit the product road map. Although speed to market is a priority, a forward-looking approach is necessary to plan for scale in the iterations ahead. The optimal solution for low-volume prototyping is different than that for manufacturing and sourcing needs at scale. Common questions to consider are: What are the technology, infrastructure, and systems integration requirements for building the product? Are there opportunities to partner, make, or buy, and can they accelerate speed to market?

Build: Bringing the MVP to market

Once the company has defined the MVP and its rollout plan, it is time to build and launch the business, which should include the following considerations.

Establish new ways of working. Moving at speed will often mean creating a significantly different mindset and process for product development and business building than exists traditionally for incumbents. Creating separation from the core so that the new team can operate independently is critical, balanced by clear governance and funding mechanisms that create transparency and derisking along the way.

Mix existing and new talent. Beyond filling identified critical capability gaps that likely exist in the core to deliver new ventures (for example, software engineers, product managers), bringing in new talent from outside the company also helps to inject new energy and establish a new identity/culture for the team. Attracting and retaining this new talent will require new ways of recruiting, a new employee value proposition, and new incentive structures that will likely vary significantly from the core.

Build alongside your future customers. Bringing one or two lighthouse customers “into the tent” to codevelop the first version of your product is a great way to ensure that you are not building in a vacuum. As an added benefit, these customers can become your first evangelists who advocate for your product early and build momentum.

New business building has become a top agenda item for many automotive incumbents, but they often find it very difficult to do successfully. The suggestions outlined in this article and in other publications by McKinsey’s Leap Practice highlight pitfalls to avoid and lay out a path that incumbents can follow to create value. Acting during these turbulent times could yield outsize returns and could be the difference between simply surviving the downturn or thriving beyond it.

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