Shifting Paradigms in the Automotive Industry - Essay Example

? Management Management Industry Analysis-P5F The sharp population growth that took place around halfway through the 18th century brought about a need of improved modes of personal transport. Previously, carriages drawn by horses had been the common means of transport within cities, but the congestion resulting from the population growth rendered them inappropriate. The technology used in steam engines for industrial and agricultural applications was adapted by manufacturers of personal vehicles. The increasing popularity of personal vehicles, coupled with an improved and paved road infrastructure, attracted the attention of entrepreneurs towards the development of propulsion technologies. This led to the development of electric vehicles from the middle of the 19th century as well as those that were propelled by internal combustion engines. This opened up business opportunities for inventors of battery and motor technology as well as those who traded in storage of electricity. However, internal combustion technology managed to get an early mass adoption after the assembly line was invented by Henry Ford (Etzion & Struben 2011, p. 3). In the case of Better Place, the timing was convenient as it was launched when most governments were concerned with the emission of greenhouse gases by vehicles that ran on the internal combustion technology. From the point of view of the five forces analysis developed by Porter, also known as P5F, it is evident that the advancement of electric vehicles by Better Place had the advantages associated with new market entrants. For example, one of its geographical targets was Hawaii, which imported 90 percent of its oil in order to meet its gasoline requirements. Further, the state had the highest prices for gasoline in the entire nation. Therefore, revival of the electric vehicle, whose production had temporarily stopped in the 1930s, was a direct threat to the internal combustion technology that had raised concerns among environmentalists. Suppliers in the industry also had the advantage of a high bargaining power because of their small number as compared to suppliers of vehicles that ran on internal combustion engines. The electric vehicles created a situation of threat of substitutes for the internal combustion vehicles since they served the same purpose but at a cheaper cost of maintenance and in more environmental-friendly ways. However, with the key challenge facing electric vehicles being the low mileage provided by the battery as well as the slow development of charging points, it was not clear how quickly the market’s demand side would develop. Further, according to a report prepared by Ernest and Young, consumers, especially in the United States, were not readily willing to consider electric vehicles as practical options to internal combustion (Etzion & Struben 2011, p. 14). This placed a limit on the number of units that would be released into the market at any given time. In light of this, the United State’s vehicle manufacturer, General Motors (GM), withdrew from the production of electric vehicles, resulting in a major setback for advocates of the technology. However, at the same time, this also paved way for many other smaller companies to venture into industry. This consequently reduced their bargaining power as suppliers, forcing them to shift focus from luxury vehicles to more affordable ones. Scenario Planning The business scenario at Better Place was planned to address the concept of making the world a better place by the year 2020. The founder’s vision was based on the idea of creating a link between customers, battery companies and vehicle companies in a way that would facilitate and maintain the widespread adoption of electric vehicles (Etzion & Struben 2011, p. 4). The link was aimed at overcoming limited mobility, which was the most significant downside of electric vehicles. This planning went beyond what had limited most companies in the industry. The companies believed that adoption of electric vehicles on a large scale would only be achieved after an improvement that would enable the vehicles to cover more than the 100 miles that were available at that time. The planning model adopted by Better Place had its strength in the fact that the company intended to buy electricity and batteries and then sell miles to vehicle owners. Therefore, the battery and the vehicle would be bought separately by consumers, which provided a solution in the form of a re-engineered vehicle rather than a re-engineered battery. This factor positioned electric vehicles at the same level with internal combustion vehicles in terms of price. Better Place, by buying the batteries and electricity, intended to get vehicle buyers to sign up for service plans with them where they would provide all services associated with the propulsion of electric vehicles. With electric vehicles having been positioned at par with internal combustion vehicles at about $20,000, Better Place pointed out that buyers would spend about $8,000 only since the battery, priced at $12,000 would be bought by the company (Etzion & Struben 2011, p. 5). The plan, therefore, was that the company would make up the difference by selling miles to consumers in the form of electric charge. The company, as well as other competing entities, would sell electric charge in miles rather than kilowatt hours through service plans that were comparable to those offered by companies that provide mobile telephony services. In this sense, Better Place designed a menu offering three levels of service plans. The first plan, which was suitable for frequent and heavy users like the taxi industry, would enable them to pay for long-term supply of electricity. The plan targeted this market segment because of their heavy use of gasoline fuel, which accounted for upto 66 percent of usage in the United States alone (Etzion & Struben 2011, p. 6). According to Better Place, this plan would protect the users against sharp spikes in the cost of electricity, because the long-term bills they paid would not be affected by the spikes. The second plan would allow drivers to pay a fixed monthly fee so long as they could predict annual average driving range. Therefore, drivers could estimate the miles they are likely to drive and then pay for it in a mode broken down into monthly installments. The third plan targeted the market segment that comprised of low-mileage drivers. Although this market segment would be exposed to the spikes in electricity costs, Better Place pointed out the key advantage of purchasing miles only when required and in smaller units (Etzion & Struben 2011, p. 6). Key Success Factors One key success factor for Better Place and its electric vehicle business was the choice of regions that had high levels of consciousness among consumers as their target markets. For example, Israel, which was the company’s first site, had 57 percent of vehicle users preferring electrically powered ones. Similarly, the United States, Canada, Australia and Denmark had 30, 35, 39 and 40 percent respectively of drivers who would rather have electric vehicles than internal combustion ones (Etzion & Struben 2011, p. 15). Targeting such markets would ensure that the concept of electric vehicles would stay in demand, contributing towards the success of suppliers and dealers. There was also the issue of governments stepping up the fight against dependence on oil and emission of greenhouse gases by internal combustion vehicles, providing an easy entry platform for Better Place and the electric version of vehicles. However, this also encouraged many other companies to produce electric vehicles, stepping up the competition. With the aspect of competition becoming a reality, the team at Better Place realised and acknowledged the fact simply providing electric vehicles would not satisfy the needs of the consumers completely, and hence jeopardize its chances of success. This was particularly linked to the direct competition that was created by alternative infrastructures of charging that were being developed by some companies and also targeting the same market regions as Better Place. As vehicle manufacturers partnered with electricity companies, Better Place made it a priority to campaign for the standardization of the recharge infrastructures and at the same time calling for battery developers, vehicle manufactures and utilities to comply with international standards (Etzion & Struben 2011, p. 16). Through this initiative, Better Place wanted the government to for all new entrants into the business to be bound by universal standards so that users of electric vehicles can plug into the recharge grid network with a common connector. This initiative was informed by the belief that electric vehicles would be mainstreamed by utility companies in the form of laying underground cables, installing infrastructure and providing fixtures for lighting. This perception led Better Place to partner with an array of utility companies. By adding value to the utilities, Better Place was also able to grow its presence over many regions. For example, in Israel they partnered with Israel Electric Corporation; in Canada, they partnered with Bullfrog Power (Etzion & Struben 2011, p. 16). The Israeli venture had a successful start as the government electric vehicles at only 10 percent, an offer that will be extended upto 2019, unlike conventional internal combustion vehicles that are taxed at 70 percent. Another factor that contributed to the company’s success in Denmark was the fact that drivers were offered the relief of buying electric vehicles at zero percent by the upto 2015. So long as users bought vehicles and used the recharges networks in which Better Place was a partner, it was a direct contribution towards its success. Finally, the car manufacturer Renault-Nissan accepted specifications proposed by Better Place and committed to provide electric vehicles that were compatible with proposal. Their commitment was to produce 100,000 vehicles by 2016 (Etzion & Struben 2011, p. 17). Resource and Capabilities In 2007, in what was its initial round of venture capital funding, Better Place managed to raise $200 million and a further $350 million in its 2010 second round (Etzion & Struben 2011, p. 2). Previously, in 2005, the founder of Better Place had sold his software development firm at a price of $400 million. This achievement made Better Place the second largest in the history of startup companies. Using his software development skills, the founder also designed and built a recharging infrastructure for electric vehicles, an idea he shared with the utility firms that Better Place partnered with. Given the fact that a full recharge with the then available technology took several hours, the entrepreneur came up with switching stations. In the stations, which operate in similar fashion to conventional gasoline stations, robotic arms are used to replace batteries that are depleted automatically with others that are charged fully as they move along conveyor belts. Although at $1 million the cost of a switching station was much higher than the conventional gasoline stations, Better Place had already accumulated the necessary capital from the venture capital funding and the sale of the software development firm. The company also received a boost when they jointly announced with the Israeli government and Renault-Nissan’s CEO that Israel would be the company’s first country. With the commitment of 20,000 Israelis to subscribe to electric vehicles and the company’s plan to install 100 switching stations and 100,000 charge spots, the prospect of flowing business was already taking shape (Etzion & Struben 2011, p. 17). This was also significantly aided by the signing up of over 90 corporate owners of fleets as subscribers of Better Place at the time the demonstration center was opened in Israel in 2010. Besides partnering with one of the major gasoline station operators in Israel, Dor Alon, the company also managed to get into contract with fleet operators like Orange, Microsoft, IBM and FedEx. By partnering with Dor Alon, Better Place was able to deploy its switching stations at facilities owned by the operator. The company’s capability to flourish also stemmed from the initiative of the founder to develop software that could track data and have the ability to communicate with the grid in order to dispense electricity in times of fluctuating demand. This was aimed at minimising expensive spikes in the demand for electricity. Further, this was a significant resource because on-board computers in the electric vehicles, which were connected to a data system, would recognise whenever a vehicle hooked to the grid. Once communication was established, the company would have the capacity of complementing the grid, hence the larger part of recharging would be carried out in hours considered to be off peak (Etzion & Struben 2011, p. 16). Better Place was also advantaged by the timing of its launch, when technologies employed by power trains, and electric vehicles in particular, were receiving significant attention from the media. This was a major boost in its ability to grow its market share in the electric vehicle industry and possibly achieve critical masses in a short period (Etzion & Struben 2011, p. 14). Business-Level and Corporate Strategies At the business level, the key strategy employed by Better Place was to overcome the paradigm of limited mobility as caused by lack of a comprehensive infrastructure in the recharging grid. This led to the adoption of the concept of buying electricity and batteries from utility companies and then selling miles to consumers. Eventually, the idea of service plans was developed to facilitate the initiative and also enable the long term vision of linking car companies, utility companies, consumers and manufacturers of batteries (Etzion & Struben 2011, p. 6). This was then followed by the vision to install charging spots at convenient locations that would enable consumers to recharge their vehicles whenever they were stationary for considerable amounts of time. Such installations were strategically intended for installation at restaurants, train stations, work places, parking lots and shopping malls. Another plan included giving consumers the option of installing charge spots at their homes at a cost ranging between $250 and $300. At the proposed switching stations, each switching lane would be given the capacity to replace up to 12 batteries within an hour, considerably reducing the time in comparison to that used to get a full recharge at a charging spot. Essentially, this would attract more buyers of electric vehicles, since it would only take 30 minutes to fully charge one battery and have 20 of them available every hour per switching lane (Etzion & Struben 2011, p. 6). Further, there was the additional advantage of a reduced cost of acquisition, since the cost of the battery at the time of buying an electric vehicle would be borne by the company, not the consumer. At the corporate level, the key strategy was that of partnering with governments, fleet operators, vehicle manufacturers and utility companies to establish a wide network of operations. The company partnered with Israel Electric Corporation to develop its network infrastructure in Israel. It also partnered with the Renault-Nissan Alliance that would produce vehicles for it, as well as 92 corporate organizations that would remain in long-term arrangements with it. By categorizing its markets into countries and islands, Better Place was able to visualize its sales in terms of numbers. The company conceptualized islands as regions that had high population densities but with limited traffic flow to outside regions. For example, the population of Israel is concentrated within an area of 10,000 square kilometers and urban centres are placed not more than 150 kilometers away from each other. Due to this, 90 percent of vehicle users commute below 70 kilometers everyday (Etzion & Struben 2011, p. 15). Therefore, this market was strategically chosen as it would allow Better Place time to develop its own comprehensive recharge infrastructure while serving the large population of short-distance commuters at the same time. Ideally, the revenue earned from the 90 percent of drivers who commuted short distances every day would keep the company running while it developed a wider network of charging sports and switching stations. This was supported by the government’s tax rebate on electric vehicles. In Hawaii, Better Place partnered with state government and the Department of Energy in an initiative to develop alternatives of clean energy in order to meet 70 percent of energy the requirements of the state by 2030 (Etzion & Struben 2011, p. 15). Stakeholder Mapping Better Place used stakeholder mapping to research multiple perspectives in order to identify and establish a collection of key stakeholders across the whole range of stakeholders. As is already evident from the partnerships pointed out, the stakeholders ranged from consumers to investors, vehicle manufacturers, utility companies and battery manufacturers in Israel, Australia, Denmark, Japan, Toronto and Hawaii (Etzion & Struben 2011, p. 30). For example, it is only through the analysis step of stakeholder mapping that Better Place was able to determine that it could add value to utility companies while it also earned mutually from it. One such case was Israel Electric Corporation. Basing on Israel Electric Corporation’s expertise in the field of sourcing electricity from renewable energy and solar power, Better Place created a partnership that would see it contribute towards having 10 percent of electricity from these sources by 2020. In return, Better Place would have a supplemental source of energy for consumers who purchased its electric vehicles, making this a mutually beneficial venture for the two different business entities. In a similar way, there was both willingness as well as necessity to participate established by stakeholder mapping from firms such as Bullfrog in Toronto and Hawaii Electric Company in the United States. After an analysis of the gas station franchise, Dor Alon, Better Place acknowledged the value they would add to themselves as well as the franchise by installing charging spots and switching stations in the already existing gasoline stations. This would be beneficial to Better Place since they would use an already established and strategically located network of service stations, while Dor Alon would have an added aspect of business. By prioritising the identified stakeholders and identifying possible issues, Better Place partnered with them at their different levels of intensity and time. This enabled them to be clear and strategic about which entity they engaged with and why before spending money and time unnecessarily. For instance, Israel, as a government, was by far the most strategic stakeholder because of their willingness to support the use of renewal energy as a source of electricity which, in turn, was a crucial business component for Better Place. The Hawaii state government was also a strategic stakeholder because the clean energy concept was a government and Department of energy initiative. In their capacities as rating and regulating agencies, the Department of Energy, government of Hawaii and government of Israel would add value to Better Place by championing the shift towards clean energy and supporting the cause of electric vehicles. Stakeholder mapping enabled Better Place to recognize that they may create a prioritized, relevant and robust list of stakeholders, but it was bound to change over time as they move through the stages of implementing their development. This was the reason behind involving different levels of engagement with stakeholders that went in diverse directions including sponsoring nonstop taxi days for 100 days in Tokyo to prove the viability of electric vehicles (Etzion & Struben 2011, p. 15). Another variation in the level of engagement with stakeholders by Better Place is seen by their different approach to minimize the emission of greenhouse gases. Whereas manufacturers of internal combustion engines sought to reduce emissions by improving efficiency in alternative fuel capabilities such as diesel engines, Better Place sought to work with global names in vehicle manufacturers as well as local battery manufacturers as well as small investors. References Etzion, D & Struben, J 2011, Better Place: shifting paradigms in the automotive industry, viewed 28 December 2013, http://www.oikos-international.org/academic/case-collection/free-cases Read More