Beyond Detroit

Great article in the June 2009 issue of Wired on the auto industry.

Some quotes:

By seeking to match the likes of Toyota, Detroit has been trying to come from behind in a game where its adversaries set the rules. To Klepper, the Carnegie Mellon economist, the Big Three today resemble the American television-receiver industry in the 1970s and 1980s, pioneered by US corporations that, after decades of domination, were suddenly confronted by foreign innovation. Companies like RCA and Zenith were slow to incorporate new technologies until it was too late; all exited or sold out to foreign firms. "Every time American companies catch up to the competition," Klepper says, "the competition already has moved on and instituted new things. In that situation, it's extremely difficult to get ahead."

The only escape from this conundrum is to pursue what Harvard Business School professor Clayton Christensen has called disruptive innovation—the kind of change that alters the trajectory of an industry. As Christensen argued in his 1997 book, The Innovator's Dilemma, successful companies in mature industries rarely embrace disruptive innovation because, by definition, it threatens their business models. Loath to revamp factories at high cost to make products that will compete with their own goods, companies drag their feet; perversely, financial markets often reward them for their shortsightedness. Good as they are, the European and Japanese automakers are established companies. At this point, they are as unlikely to pursue disruptive innovation as Detroit has been. That gives the US auto industry an opening. To take that opportunity, it will have to behave differently—it will have to step far outside the walls of the Rouge.

. . . . .

In its insularity, the auto industry is increasingly an outlier. A growing number of firms have adopted what UC Berkeley's Chesbrough dubbed "open innovation"—accelerating change by letting ideas flow much more freely in and out of companies. Rather than depending primarily on their own engineers, he says, auto companies should leverage the insights of others, outsourcing much or most R&D to an ecosystem of small, agile entities outside the factory walls. Unsurprisingly, open innovation is seen most clearly in firms like IBM, Alcatel-Lucent, and Millennium Pharmaceuticals, but Chesbrough argues that it has been picked up with success by companies in fields ranging from chemicals and packaged goods to lubricants and home-improvement gadgets. "The auto industry is different," he says. "It hasn't learned that no one company or industry has a monopoly on useful ideas."

. . . . .

How does a traditionally top-down manufacturer become an open-ended promoter of innovation? Clues can be found in "Managing in an Age of Modularity," a classic 1997 Harvard Business Review paper by economists Carliss Baldwin and Kim Clark. They studied how personal-computer manufacturers divided their products into subsystems, establishing standards that allow parts to be readily swapped out and replaced. By giving outside innovators the freedom to tinker with individual modules—hardware, operating systems, software, peripherals—PC makers spurred the development of far more sophisticated devices and allowed customers to individualize and customize their purchases. In other words, modularity encouraged multiple innovations from multiple sources and made them easy to incorporate.

. . . . .

By outsourcing most R&D, car companies would be able to reap the rewards of innovation for a fraction of the cost and risk. The growing sophistication of design and simulation software makes it easier for startups to create prototypes and test new products virtually, before undergoing those expensive processes in the real world. Not every idea will succeed, but the costs of failure will be reduced and borne by smaller firms that can collapse with less impact on the larger economy. Ultimately, modular construction will lead to cars that can be custom-built to the specifications of their future owners, somewhat as Dell allows purchasers to click on hyperlinks to add or subtract computer features. Custom-rebuilt, too—it will be easy to install upgraded modules, in much the way that computer owners replace old video cards.