Driving Business Change Through Idealized Design: The Stages

This chapter is from the book

Idealized Design: How to Dissolve Tomorrow's Crisis...Today

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This chapter is from the book

This chapter is from the book 

Idealized Design: How to Dissolve Tomorrow's Crisis...Today

Learn More Buy

Idealized Design at General Motors

In the Introduction, we saw how idealized design could be used to reinvent a major corporation, AT&T, and at the same time reinvent the industry in which it operates. However, it is likely that idealized design will be used more often in projects of smaller scope. At General Motors, in the late 1990s, the company faced a challenge with one of its new products, the OnStar safety and security system. Their actions illustrate the steps by which idealized design was applied locally in a huge organization through the determination of a few partisans of the method.

The example also illustrates that an organization going through a crisis of market-share loss and declining profits—that continues to this day—can nevertheless successfully remake parts of its business. The example was told to the authors by Nick Pudar, Director of the GM Strategic Initiatives group, who worked with Ackoff on problems at GM.

General Motors had introduced the OnStar system in its Cadillac line as a differentiating feature in 1996. Consumers could purchase the OnStar feature and have it installed on their vehicle at the time of purchase of the vehicle. OnStar was based on an electronic device installed in the cars that provided two-way cellular communication with a live advisor in a call center. The system delivered a range of services to owners: automatic two-way communication with the call center if the car is in an accident and the airbag deploys (at the same time, the car’s GPS location is sent to the call center advisor who can dispatch emergency services to the car’s location if necessary); if the owner is locked out of the car, the advisor can send a signal that unlocks it; if the owner cannot find the car in a crowded parking lot, the advisor can send a signal to the car to flash its lights and honk its horn; if the "check engine" light comes on, the owner can request the advisor to do a remote diagnostic check to determine how severe the problem is and what to do about it. These and other services that OnStar provided are, of course, of considerable value to owners.

But the OnStar system was expensive to install and maintain. Cadillac buyers could afford the car at a price that included OnStar. On the other less-expensive GM lines, however, the additional cost presented more of a problem. The system could not be included in the base price of the car without increasing the price beyond what planners believed buyers would pay. Therefore, installation had to be made by dealers who were able to sell the system as an "accessory" to those buyers willing to pay for it. It cost the customer almost $1,000, not including the cost of installation and dealer profit. In addition, buyers had to pay a monthly charge for cellular service and a subscriber fee for services provided by OnStar advisors. The result was that GM had more than 30,000 OnStar subscribers by 1998, far too few to consider the system a success.

It became clear to the people directly involved with OnStar that they needed to rethink their strategy if the system were ever to become widely adopted by owners and profitable. The OnStar leadership commissioned a small team to study the problem, and the team decided to use an idealized design approach. We look here at what they did at each stage in the process without going into all the details of the steps described earlier in this chapter. The object is to give an overview of a real-world application of a typical idealized design.

Idealization

1. Formulate the Mess

GM indeed had a mess on its hands if it wanted to expand the number of buyers who would pay for OnStar. The high cost of device installation and the high monthly fee of the combined OnStar and cellular service resulted in too few new customers for it to be profitable for GM.

The team formulated the mess. First, the device either added to the price of the vehicle and had an impact on sales, or, if it were offered below cost, it degraded the profitability of the program. Second, the team was concerned that dealer installation might potentially result in added quality and warranty costs because the vehicles had to be partially torn up to install the OnStar device. Third, the installation of OnStar bypassed GM’s policy of lengthy testing to validate each new product, raising concerns about the quality of the system.

The team was concerned about the complexity of the business. Maintaining the availability of the right installation kits for each dealer was a daunting task. Each different GM vehicle required a different installation. Dealer training for the installation process was not a simple task either.

Dealers had their own concerns. Although they made a reasonable profit on each OnStar device they sold and installed, each dealer did not sell enough units to make it seem worth the time it took to install. Dealers also believed that selling OnStar to their customers created possible confusion and could interfere with selling the vehicle itself.

When the teams modeled the current business, they found that the same issues would be present regardless of how aggressively the business was pursued in the future. The economics and logistics of dealer installation could not be made into an attractive and lasting aspect of the business. Thus, the team realized that dealer installation was not sustainable. However, factory installation had its own problems. If the OnStar device was installed on a vehicle in the factory at no cost to the buyer, there was no guarantee that a customer would become a subscriber (and thus allow the subscription revenue to offset the hardware cost). Given the hardware costs at the time, it did not appear that factory installation would ever be a viable solution for the business.

2. Ends Planning

The team then came to the heart of idealized design, asking this question: "If you could have anything you wanted today, what would it be?" For the OnStar idealized design, the team’s answer was simple: GM would have OnStar factory installed across the entire vehicle lineup for the 2000 model year. (The idealized design project was being conducted in the fall of 1998, and the 2000 model year vehicles would start being built by the next summer [1999].)

This design met the challenges identified in the original formulation of the mess. If OnStar were a standard feature on all vehicles, it would confer a distinctive and desirable awareness of GM to prospective buyers; factory installation would eliminate the need for dealers to "sell" the system and, instead, it would become a sales feature for dealers to use in closing the sale of a vehicle; factory installation would ensure quality control on installation and a lower installation cost; the final result would be a more aesthetically pleasing hardware package.

When the team presented this timing as the "ideal," they got uniform rejection from across the entire enterprise. The ideal was deemed to be ridiculously unrealistic, and completely disconnected from the reality of the extensive and lengthy vehicle development processes. At that time, typical product programs took up to five years to complete. The validation and testing process would never allow any vehicle features to be added late in the process. If new hardware such as OnStar was to be installed in the factory, it had to be added to a new product program and start from the beginning. The implication was that the earliest that OnStar could be factory installed in GM was for the 2005 model year, and on only one vehicle line to begin with. It would have to prove its value to the corporation, and then other vehicle platforms would decide whether it was warranted to add OnStar to their programs.

However, the team persisted and continued to describe and communicate the virtues of having a factory-installed solution across the entire line of GM vehicles. They presented a business simulation and financial model that showed a steady decline in costs through learning effects as well as economies of scale and scope.

Eventually, upper management became convinced of the value of factory installation but was unconvinced that it could be accomplished by the 2000 model year. The team was faced with finding ways to fill the gaps between the ideal and present reality.

Realization

3. Means Planning

While the team was promoting the value of factory installation to upper management, it also turned its attention to finding the means of accelerating the expansion of factory installation of OnStar across all vehicle lines as soon as possible—shooting for a launch in the 2000 model year. The stages of idealized design do not always occur in lock-step sequence but often overlap as they did at GM.

The team identified five components of a successful business model to develop, based on Adrian Slywotzky’s elements of a business model. First was this: Who were the customers to be served? These were to be every owner of a new GM vehicle. Spirited debate broke out over the question of including cellular phone service along with OnStar services. While some argued that cellular service was not in GM’s product portfolio, others made the point that including it would generate revenue as GM became a "reseller" of that service. The team decided in favor of the opportunity to participate in the revenue from cellular service.

The second component of the business model to develop was the value proposition (what will be delivered to the customer that has value for that customer). OnStar would deliver a broad array of safety, security, and information services in a way that would be appropriate for different situations confronting vehicle owners.

The third component was service delivery; the team decided that the service would be "high-touch" and delivered directly by a live human advisor when required or requested by owners. However, an automated "virtual advisor" would also be available if the customer preferred that kind of service. Finally, the service would also be delivered and enhanced through the Internet at a personalized website for the customer. Setting up the system would take place outside the vehicle, and then voice recognition technology was used to navigate through the information when the customer was in the vehicle.

The fourth component turned out to be as contentious as any issue facing the team. This component was the extent of strategic control over the service. Should the design of the service be kept proprietary and exclusive to GM as a way of differentiating its vehicles to customers? Or should it be an open architecture across the entire automobile industry? The team concluded that the idealized design would have both open and closed aspects. The exchange of information to and from the vehicle would be an open architecture design with standard protocols. This would stimulate third-party developers to create service applications that could be used with the OnStar hardware. The team believed that the creativity and energy of outside companies would create "killer apps," or software applications that eventually dominate their markets, more quickly than if GM tried to develop everything in-house. However, the data and information that would be exchanged would have "controlled access" that was handled with encryption and authentication keys. The data would get "red, yellow, and green" designations. Things that were green would have encryption and authentication keys that were license free, and would have full read/write access to and from the vehicle. Such areas as radio control, seat memory control, heating, and ventilation would be candidates for the green designation. Things that were red would not have any access at all. Such areas as traction control, brakes, airbags, steering, and other safety critical systems would not be allowed to have read or write access by any non-GM application. However, there were other areas of the vehicle that had some economic value such as maintenance diagnostic data that would be designated as yellow, and would be made available through license arrangements.

All the data would flow through a single control point called the vehicle gateway. The team viewed this gateway as an important common interface for OnStar to connect to a wide array of vehicles. If the idealized design included other manufacturers’ vehicles, it would be important that all vehicles had a similar gateway that functioned in the same manner for easy and standard communication for OnStar. The team recommended that an industry consortium be formed to drive toward a common approach to handling vehicle data exchange and set the appropriate standards. GM initiated the early discussions with other car manufacturers, and the Automotive Multimedia Interface Consortium (AMIC) was formed to address these very issues.

Finally, the team dealt with the fifth component of the idealized design business model, value capture. OnStar should make money from a variety of transaction types, including—but not be limited to—subscriptions, pay-per-use, supplier commissions, access fees, slotting fees, revenue sharing, reselling, and so forth.

4. Resource Planning

The team parceled out resource planning to a number of groups to determine how much of the types of resources—personnel, money, facilities and equipment, information and knowledge—would be required to meet the 2000 model year deadline. Groups determined when each resource would be needed and where it would be deployed. The groups also planned how to ensure that the resources would be available when needed. Specific focus was placed on design of low-cost and simplified hardware; development of the process of installation at the factory; design and negotiation of access to a system of non-geographic-based wireless phone numbers; redesign of the role of the dealer in the marketing process; change of the marketing approach from a customer acquisition focus (which would become automatic if OnStar was installed on all vehicles at the factory) to a customer retention focus (signing up owners for the OnStar service after their trial period was over); increasing the call center personnel to handle the huge anticipated volume growth; major redesign of the associated information technology applications to handle the business growth; renegotiation of many support contracts with outside vendors to take advantage of economies of scale; and development of a sales force to market OnStar to other vehicle manufacturers. Many additional details had to be identified and worked through to scale up the business in preparation for the increased volume of factory installation.

5. Design of Implementation

The team laid out a timeline specifying who was responsible for the completion of each phase of the implementation by the scheduled deadlines. It also specified the resources that needed to be allocated to each phase in order that the project move forward as planned. Each of the activities previously described had individual timelines that flowed into an overall timeline. The organization was small enough and concentrated enough to allow for regular meetings among the leaders in each area to track progress and to react quickly to deviations from the plan.

6. Design of Controls

Finally, the team designed control mechanisms to monitor the progress of the project. To succeed, each part of the system would have to be brought on line in time to make the 2000 model year deadline. If a scheduled completion of some part of the project did not occur on time, the final deadline would be in jeopardy. Having timely awareness of a slipped schedule would give project managers a chance for corrective action that might meet the ultimate deadline, or minimize the delay it might cause.

The Outcome

This example of idealized design took place in the real world, and in the real world perfection is elusive. The idealized design called for OnStar to be factory installed on all GM models in the 2000 model year. The team did not succeed in full implementation, but it achieved enough success to prove that the concept of the project was feasible and that it would result in a significant increase in the sales of and revenue from OnStar.

Through hard work and determination, they were able to find solutions to launch OnStar as a factory-installed feature in half of GM’s portfolio of 54 vehicles for the 2000 model year. Not every vehicle carried OnStar across the board. Some vehicles included OnStar as part of an "option package." Others offered it as an optional feature. A few did include it as a standard feature on each vehicle. Another important decision made was that the marketing divisions of GM would include one year’s worth of OnStar service at the time of vehicle sale at no cost to the buyer as part of their differentiation strategy. The team expected that buyers who experienced the value of OnStar would sign up to continue the service. These decisions quickly launched OnStar’s growth from 30,000 subscribers in 1998 to more than 3,000,000 subscribers in 2005. Table 1.1 shows the approximate monthly average of service requests by owners.

Table 1.1 Subscriber Interactions in 2005

In addition, GM announced in 2005 that it would aggressively expand its OnStar delivery to be standard across all retail vehicles by 2007. By that time, GM plans to provide OnStar standard on more than four million new vehicles each year in the United States and Canada. In keeping with its important strategic decision to license OnStar to other automakers, in 2005 OnStar provided service to Lexus, Audi, Acura, VW, Honda, Subaru, and Isuzu. Some of these automakers installed the hardware in their factories before shipping the vehicles to the United States, and others installed it at the port of entry. None required their dealers to do the installation. Neither of the other two Big Three U.S. automakers licensed OnStar.

Many people worked extremely hard to make OnStar the success that it is, but at the beginning, OnStar’s future was uncertain. The idealized design framework helped people focus on what the OnStar business "should be now" instead of focusing on the then-existing problems and constraints. It is safe to say that without idealized design, the partial launch in the 2000 model year would have been impossible and the full implementation in the 2007 model year would not be GM’s mainstream plan.