Future of the Autonomous Automobile: A strategy for BMW Read Case...

Future of the Autonomous Automobile: A strategy for BMW

Read Case study #3 on BMW in the appendix section of your text C-44 and answer each question in its entirety.

1-What are the opportunities and threats that could impact the organization?

• Review all the general environmental categories. (PESTEL Analysis)
• Use Porter's Five Forces model to analyze the company's industry. Identify key competitors and analyze their strategies, core competencies, and competitive response.

2-What are the strengths or weaknesses of the organization?

• Review factors within the company that are critical to the strategy of the firm and classify them as strengths or weaknesses.
• Look for resources, capabilities, and core competencies.
• Use the "Four Criteria of Sustainable Competitive Advantage".

3-In the past, BMW has been able to successfully differentiate its products by engaging in value-adding value chain activities. What are some of these specific activities? How can BMW ensure its ability to continue with value-adding activities as it evolves into a maker of self-driving cars?

• Use the"Value Chain Analysis" to identify value-adding activities and functions.
• This question is not about Business or Corporate level strategies. focus on the functional level.

Case Study

Introduction

Norbert Riedheim, the head of BMW's Future Car group in its global research and development (R&D) division, has just been informed that three automakers have received California permits to test an on-road autonomous automobile: Google testing on a Toyota car, Volkswagen's Audi, and Mercedes-Benz. BMW did not apply for the permit because the company was in the process of developing a relationship with Baidu, the Chinese Google-like Internet company, to start testing similar automobiles in Shanghai and Beijing. Given the rapidly changing scenarios, he wonders what position BMW should aspire to, and what their strategy should be.

Riedheim has been in Silicon Valley and knows all those companies well, and enjoys friendly relations with management and even selective partnerships with Google. He knows that in the era of "co-opetition" new technologies and new alliances can change the chessboard of innovation very quickly. In order for the company to remain relevant for the next 20 years, he and his colleagues need to be vigilant and stay on top of the latest developments in the ecosystem of autonomous driving. BMW is focused and committed to developing autonomous vehicles, as evidenced by CEO Harald Krueger revealing at a BMW's recent shareholder meeting that the company is gearing up to launch its first autonomous vehicle by 2021:"... the BMW iNEXT, our new innovation driver, with autonomous driving, digital connectivity, intelligent lightweight design, a totally new interior and ultimately bringing the next generation of electro-mobility to the road."

Riedheim is excited by this bold vision. He has been at the company for a long time in different positions. Having signed on with the automaker right after his graduate studies in engineering, he spent 3 years as an assistant to the general manager of a factory producing the 3-series sedan, followed by shorter stints in supply chain, marketing and finally product management for the company's i3-series, the company's first foray into electric mobility. Having witnessed the engineering and marketing prowess of his employer, he is confident that BMW will master the autonomous challenge as well. Yet, Riedheim knows that the evolution of the autonomous automobile is still in its very beginning stages. How willthis new world evolve and how will BMW evolve its position in it? What will he say about BMW's emerging strategy in his upcoming briefing with an important BMW board member?

He goes back to his desk, and reviews the facts once more.

Brief History of BMW

The automaker got its start as a manufacturer of aircraft engines in Munich, Germany, in March 1916 and turned into a motorcycle and automobile company in 1928.Since then, BMW has manufactured motorcycles and cars. It is most well known for its high-quality cars in the upper segment of the market. After WWII the company had to restore its manufacture and reputation. The first car that started a new era for BMW was the 501 model, a famous classic today that quickly established the company as a producer of high-quality, technically advanced cars. Most prominent among its superior engineering capabilities are its engines, which many experts attribute to its early legacy in aero-turbines ("turbine" still being the nickname of its 6-cylinder car engines). In 1973 the factory in Munich started building the BMW 2002 turbo engine. This was the same year that the first oil crisis hit the western world, which had become dependent on cheap gas. Sales of gas-guzzling volume-produced performance cars slumped and BMW started to develop a strong skillset in more fuel-efficient turbo-diesel engines.

In 1990 the Bavarians, leveraging their competency in making high-agility, precision steering, introduced a new kind of rear axle that allows the rear wheels to turn a few degrees in the same direction as the front wheel. This improved car stability in turns at high speed, as well as the fun of the driving experience by a BMW driver, which is central to BMW's value proposition. Since then, few other manufacturers have managed to match this active handling experience, which today is a hallmark of the BMW brand.

In 2001 the company built another competency, this time pioneering cutting edge electronics: a new kind of "head unit" (the control and entertainment console that sits in the center of a dashboard). It was called "iDrive" and it allowed operating the unit easily with a joystick-like knob giving tactile feedback to the driver, without having to take his or her eyes off the road. iDrive had been developed in collaboration with BMW's Technology Office in Palo Alto, at the heart of Silicon Valley. After an initial period of drivers' adjustment to the new technology and user interface, the iDrive and various iDrive-like derivatives quickly became a common feature in luxury and performance automobiles of many brands.

Finally, on January 8th 2014 during the Consumer Electronic Show in Las Vegas, BMW demonstrated its first fully automated car prototypes based on its regular car models.The car uses 360 degree radar technology, as well as a set of other sensors including cameras and ultrasound to accelerate, steer, and brake without driver intervention. The company also demonstrated another feature called "Emergency Stop Assistant," which will pull the vehicle to the side of the road, stop, and activate an emergency call in case the driver experiences an unexpected health condition, such as fainting, a heart attack or a stroke.These advancements demonstrated the ability of BMW to stay on top of the new technology.

Brand reputation:BMW is acknowledged worldwide as a successful carmaker. In 2012, Forbes elected BMW as the most reputable business in the world, and in 2016 it became the second most valuable brand in the automotive industry, with a market value of $26.4 billion.

Handling, engines and traction motors:BMW was able to become a market leader in the production of engines, which led the company to win several 'engine of the year' awards, in an industry where technology is a top priority and competition is fierce.

Information technology integration:BMW was able to integrate technology innovation in its vehicles, winning international prizes such as the Berthold Leibinger Innovation award in 2014 for its laser-light technology and the Autoblog's 2014 Technology of the Year award for the whole technology suite working together on the BMW i8.

Environmentally friendly vehicles:BMW researched dual fuel engines, hydrogen-driven cars, and hybrid electric cars. Furthermore, 80% of its automobiles are made from recycled and recyclable materials.The Brand won the World Green Car of the Year Award in 2015 at the New York International Auto Showand at the 2014 Los Angeles Auto Show, BMW was presented with the Green Car of the Year Award from the Green Car Journal for the BMWi3.

The ecosystem of Autonomous Driving Today

The idea of cars driving themselves has existed for a few decades, since the early days of Tsukuba Lab in Japan in 1977 and the European EUREKA Prometheus projectin 1987. But only recently, with the advances in computer technology, has it become a reality. The 2004, 2005, and 2007 Urban Challenges conducted by the Defense Advanced Research Projects Agency (DARPA) in the U.S. yielded significant advances, with cars eventually completing a 132-mile course successfully as exemplified by the winner of the 2005 DARAP Urban Challenge: Stanford University's VW Touareg "Stanley."

The domain of autonomous driving promises stunning prospects as well as some key uncertainties. It is at the intersection of large opportunity and the uncertainty of a number of future trends that could affect the domain to take a turn in one direction or another. According to Navigant Research, annual sales of autonomous vehicles could reach nearly 95 million by 2035.Morgan Stanley analysts also believe that self-driving cars will change the auto industry.

At the core of the self-driving car is state-of-the-art microprocessors, i.e., computer chips called Central Processing Units (CPU) or Graphical Processing Units (GPU). GPUs are CPUs that have special capabilities related to processing imagery or graphics. Two major players in the microprocessor technology market are working on the hardware for self-driving carsIntel,maker of CPUs and NVIDIA, maker of GPUs. Recently, through cooperation with these Silicon Valley stars, car manufacturers globally have obtained processing technology that powers critical components to allow them to build self-driving cars. Several companies and research centersare working on an even more powerful type of processorQuantum Computers that will be able to handle massive computational tasks in parallela quality essential for the artificial intelligence needed for autonomous driving. With Google recently joining the effort,the prospect of creating one (quantum computer?) becomes more realistic.

Self-parking:A car with this feature can park itself without driver intervention. This is primarily a convenience feature for most drivers, but can also aid drivers that are physically impaired. It can help avoiding fender-bender accidents that may increase car insurance costs.

Lane control:Helps the driver to steer though curving highway roads. This is mainly a security feature that helps drivers to avoid potentially dangerous accidents like the car driving into oncoming traffic or veering off the road.

Speed control in heavy traffic:This feature goes a bit further by allowing the driver to let the car navigation system accelerate and slow down the vehicle when the car moves in a traffic jam. This adds the driver some relief to an otherwise tiring journey through tough traffic conditions.

Fully automated car:The highest level of automation is achieved when the car can drive itself in any conditions, including driving through crossroads and crosswalks with or through traffic lights, making turns, changing lanes, keeping distance with other vehicles, and responding to any kind of emergency situations. In this case the driver inputs the destination into the navigation system and allows it to drive. This feature has been widely discussed as the future of mobility. Most drivers would spend their time being entertained, being social, or being productive in their cars.

Fully Automated Cars: The competitive Landscape

While BMWand Audihave already presented prototypes of fully automated cars, other car manufacturers are developing and testing partial autonomy approaches. Toyota/Lexus are working on the concept of assisted driving. Tesla recently announced that it is already installing navigation hardware on its cars,although its system is not intended to take full control either, but rather provide assistance for the driver to improve safety. GM first invested $500M in ride-hailing company Lyft and then the two companies announced plans to test a fleet of autonomous Chevrolet Bolt electric taxis on the road within a year.

Other players are more skeptical: Volvo's head of R&D, Peter Mertens, has been very direct in saying that the prospect of a driver reading a newspaper or answering e-mails while driving "is a very, very long term vision."The carmaker is concentrated on safety instead, such as object avoidance and more traditional protection such as material strength. Yet, in a surprising twist, that same year, (which year?) Uber's Founder and Co-CEO Travis Kalanick, started to hire dozens of autonomous auto experts at leading technical institutions, and it wasVolvo with its well-established reputation of making some of the safest automobiles on the road, that heeded the call to partner.

Along similar lines, Ford engineer Torsten Wey opined that he does not believe cars will ever be fully autonomous: "I doubt we will ever get there," he said.According to Wey there are situations when the car's autopilot is not intelligent enough to make decisions. The human driver does not only consider behavior of his own car, but also takes into account behaviors of others. Experienced drivers can intuitively predict what other cars on the road will do then act accordingly, augmenting the measurable data of the moment with their own experience. For instance, when a driver sees a car in front of them slow down to turn into a restaurant parking lot, the driver can judge that the car will likely not stop right there in the middle of the lane, based on subtle contextual clues and a lifetime of learning. A computerized system, however, does not yet have that intuition and will not acquire it for a long time. Yet earlier, Ford tripled its autonomous vehicle development fleet and accelerated its on-road software and sensor testing.

Clearly, automakers are in an uncomfortable dance of cautioning expectations yet forging ahead full steam. But this diversity of signals, views and approaches between car makers is only the beginning of a complex picture: as a seasoned, technology-savvy strategist, Norbert Riedheim knows that competition may not only come from established players, but also from new entrants into a given market: BMW needs to anticipate.

One of these new entrants is Internet giant Google, which demonstrated its self-driving car in the summer of 2014. The technological program at the heart of the Google car is called Google Chauffeur.It is an example of a truly driverless car that can move itself in a targeted, pre-programmed fashion from point A to point B using advanced sensors that collect and interpret data from the environment. This is enabled by multiple Google technologies, including its Maps navigation technology. Google uses a Toyota-brand vehicle for testing its autonomous driving system, but it is not in a formal joint venture with the firm and could still choose any other automaker as a partner.Being cash-rich, the company could also develop its own car, as has been successfully demonstrated by Tesla.

Alternatively, much like Tesla, Google could cooperate with an established carmaker (in Tesla's case it was a design collaboration with Lotus in the UK). Along those lines, the company announced its new self-drivingtechnology development center in Novi, Michigan, in May 2016 and one of the first projects at the new facility will be the self-driving Chrysler Pacifica hybrid minivan, developed in-house.

But given its deep pockets, Google could conceivably also still buy an ailing carmaker, such as Saab, still struggling to recover after its purchase by National Electric Vehicles Sweden (NEVS), which is owned by Hong Kong-based energy company National Modern Energy Holdings. Or it could approach Volkswagen to take over the Seat or Skoda subsidiary, which seem to be duplicating each other's offerings in the VW brands family.

To further complicate things, it is not just in the visible corners of the technology world that prominent companies like Google are working on autonomous automobiles and from which sudden advances could emerge. In start-ups, universities, and R&D centers around the world, leading technologists are working on pre-commercial solutions. In early 2013 there were multiple reports about companies and individuals who were working on an affordable self-driving feature. One of them is Professor Paul Newman from Oxford University who works on self-driving technology that utilizes cheap sensors.Also, Intel awarded the top prize in its Gordon E. Moore competitionto a Romanian teenager for using artificial intelligence to innovate a viable model for a low-cost, self-driving car. One company took it a step further and designed a commercial self-driving accessory that can be installed on selected models of compatible cars with sensors mounted on the rooftop. It is a startup called Cruise,which emerged from a Silicon Valley incubator, Y-Combinator, and started accepting pre-orders for it assisted driving system in mid-2014. In March 2016, Cruise was acquired by GM, which appears to be interested in integrating the system into the design of its own cars.

Another critical element of autonomous drivingmapping and location servicesis also flourishing globally, especially in Europe. Nokia Corporation's former mapping business, HEREbased in Berlinprovides an open platform for cloud-based maps. HERE is not only the main alternative to Google Maps, but also the market leader in built-in car navigation systems. According to Nokia's website,four out of five cars in North America and Europe feature HERE integrated in-dash navigation. Not surprisingly, in August 2015 BMW, Audi, and Daimler announced their acquisition of HERE.These 3 automobile companies will be directly controlling an essential part of the autonomous automobiles' value chainmapping and location serviceswhile securing the supply of critical geo-location data in their automobiles.

It would be wrong to limit the ecosystem view to traditional geographies, like Silicon Valley in the U.S., or other entrepreneurial hubs like Berlin in Europe and R&D labs in Japan that have been strong in automotive or IT innovation for decades. A look into the future of the automobile has to take into account developments in Asia. For instance, autonomous taxi startup nuTonomy announced a pilot in Singapore that it could become the first company to operate Level-4 driverless taxis commercially in a city.And, as mentioned, BMW selected Baidu as its partner in the Chinese market when, in the Fall of 2014, it needed a high-resolution GPS system to start testing in Shanghai and Beijing, two of the most demanding, densely populated, and vast automotive markets in the world. And now Baidu claims it is developing its own automated car, but unlike Google, it works on driver assistance and is not a fully self-driving car.

The Chinese market is already the largest and the fastest growing in the world, with 18 million cars sold in 2013,a compound annual growth rate (CAGR) between 2005 and 2012 of 18.1%, and an expected 6.3% average year-over-year growth through 2020 making it a tremendously important market for BMW.

Luckily, BMW made an early, courageous decision to enter the Chinese market, benefiting from the excellent relationships held by a former BMW board member and former government executive in charge of the company's government relations. The effort bore fruit: in 2013 BMW sold 390,713 cars in China, up 20% from a year earlier. This meant that China had officially overtaken the U.S. (375,782 cars sold) as the group's biggest market and had outpaced the overall company's market growth of 13.9 percent.

As Riedheim leans back in his sleek BMW carbon fiber chair, he wonders how this ecosystem might evolve and how should BMW position itself within it? What are some plausible, alternative futures? Having studied disruptive innovation and strategy throughout the years, Riedheim knows that big bets often don't pay off because too many variables in a market forecast change. So, understanding these alternative futures first will help him to craft a strategy that is robust against different market states.

Exploring the Future

Through his work with design consultancies over the years, Riedheim has learned that this exploration first requires a clear view of all the uncertainties that could combine to pivot the market and ecosystem in one direction or another.

Key Uncertainties

Social:Who will use self-driving cars? Autonomous vehicles can be used to transport people who cannot drive, either because they are elderly, too young, physically or visually impaired. A car that today is driven by a family member can become an independent transportation vehicle for all family members, even those under 18 and without a driver's permit. However, it is not clear if, or how, this technology might be adopted by the consumer majority. What will be their aspirations, concerns, anxieties, and potential mistakes? Additionally, the permissible behaviors allowed in the car itself will depend on whether the vehicle is fully self-driving. For instance, driver-passengers could be able to spend their time in the car messaging, reading, or working. Drinking alcohol might also be permissible, since the fully autonomous car will not require any intervention by the passenger ... or will it? What if systemsfail and driver-passengers are required to become active drivers?

Technological:Today self-driving cars are possible because of the existing hardware and software technology. However, as described, there are both cars with fully self-driving features pre-installed (such as Google's car), and systems like Cruise, which can allow other cars to become self-driving. The development cost of these technologies differs widely and will influence pricing to consumers and hence the adoption response by consumers: for instance, a survey by JD Power and Associates found that only 20% of Americans currently would 'definitely' or 'probably' buy a self-driving car if the price was only $30.000.

Economic:Firstly, there are of course various crises in Asia, the U.S. and Europe that have depressed consumer spending over the past two decades. Will the global and regional economies recover sufficiently to enable consumers to replace their vehicles with new, unproven autonomous ones, or would they resort to buying pre-owned vehicles that are cheaper and use more established technologies? Secondly, self-driving vehicles will impact different market players. Insurance companies might change their business models based on a lower rate of accidents. Driverless vehicles may allow some companies to save money on drivers (such as taxi or bus companies). Also at the national level, research from The University of Texasestimated that if just 10% of vehicles were self-driving, a country such as the U.S. could save about $37 billion a year on healthcare and environmental costs. For the same reason, the U.K. government has announced its commitment to spend 10 million on a test-bed for self-driving cars.Finally, the cost and purchasing power in different regions will weigh into the market economics in different ways, since self-driving cars will change the current production process and countries will facilitate autonomous automobile adoption among consumers in different ways and along different timelines.

Environmental:Pollution regulations will change, considering the new emissions generated by self-driving cars, which may be lower than the emissions generated by cars today. This assumption is based on two main factors: first, autonomous vehicles will be able to optimize their consumption by themselves based on road conditions as well as acceleration and breaking behavior, and second, electric cars and smart charging infrastructure may at some point converge on autonomous automobiles, such that gasoline could become obsolete.

Legal:Self-driving cars have to be explicitly legal and encouraged by regulators, not just be tolerated as a dubious "gray area." Bad or lagging legislation could slow down the investment required and therefore the development of the technology. Furthermore, authorities have to develop new liability frameworks to answer the following questions: who has what kind of influence over autonomous cars "misbehaving" and who will therefore bear the legal and financial responsibility? Would it be the driver, the software or the IT hardware provider, the data processing companies, the telecom companies linking cars wirelessly, the application providers for different functionalities that may have little to do to with driving but could interfere with behavior in the car, the car manufacturer, or the company responsible for the car's maintenance?

Ethical:Two main aspects represent key uncertainties in this area. The first issue concerns privacy: what information will be collected by autonomous automobiles, and who has access to it? The second point regards safety. How can autonomous cars be prevented from being hacked, getting virus-infected, and being used for remote criminal activities such as terrorist attack or drug delivery? How does society address computer-savvy minors hacking into cars and sending them on remote joy rides? Will physically or visually impaired passengers be at the mercy of malfunctioning autonomous driving intelligence?

To get more information about these and many other uncertainties and assumptions, both governments and private companies have started to experiment. In the U.S., California, Nevada, and Florida allow companies to use self-driving cars on the road for testing purposes.Meanwhile, BMW has tested its self-driving car in Europe, and recently also got permission from the Chinese government to test its cars in Shanghai and Beijing.

Strategic challenge/aspiration: Given the changing scenario, what kind of business should BMW aim to be over the next 10 to 15 years? What are its aspirations?

Objectives: What are the key metrics that would indicate BMW met the challenge and achieved its goal?

Opportunity: What is the size of the opportunity for BMW?

Competitive advantages: Given BMW's current competencies, (e.g., internal capabilities, market positions), which ones will be hard to replicate in the emerging automobile industry ecosystem? (carmakers, Internet companies, technology startups, R&D labs, governments, insurance companies, suppliers, etc.)? Which ones does it still need to build and develop, and why?

Moves: What concrete immediate actions should BMW take now to build external positions and internal capabilities? What types of hurdles or failures are possible and should be accepted as part of the entrepreneurial path? What kind of learning milestones should the company set for itself?

As Riedheim sits down to start work on these questions, he knows the burden on him is considerable: the future of this iconic company is at stake.