Harvard Business Publishing

The following was co-authored by Innosight Senior Director Kevin Bolen:

It seems that everyone wants to know what the automakers will do differently in the increasingly unlikely event that they receive a massive Congressional bailout. Leaders suggest they'd like automakers to "be more innovative" and "reinvent their business model." But what exactly does that mean? And how would government officials monitor progress against these goals to see if the bailout is being well spent?

First, let's look at what it would take to "be more innovative." Our research and field work suggests watching whether automakers:

1. Place the customer at the heart of the innovation process: Firms that succeed in innovation are obsessed with learning more about the customer and, more specifically, the jobs they need to get done. Clayton Christensen likes to describe how millions of people use their car as an office, but no auto manufacturer has designed a car with desk space, power options for laptops and phones, Wi-Fi connectivity, and other features that would help get this job done. Looking for important, unsatisfied jobs-to-be-done could help auto manufacturers identify attractive growth segments and avoid commoditization. One sign that auto manufacturers have appropriately shifted their attention: an increase in the ratio of market research spending to advertising spending.
2. Have senior leaders actively engage in innovation: Leaders in many of the firms we work with and admire participate daily in innovation efforts. And this is not passive involvement. They join focus groups, observe behaviors, review project plans, help set prioritization parameters, evaluate funding requests, and develop and oversee unique organizational models to incubate the best concepts. Innovation is not simply a budget item for these leaders; it is second only to talent development on their personal to-do lists.
3. Create a diversified portfolio of ideas: No one can accurately predict what market demands will be five to 10 years from now. No one knows what the energy situation will look like. No one can predict the economic climate. No one knows precisely which early-stage ideas will take off and which will stagnate. Pinning a firm's future on a single breakthrough is unrealistic. A broad, diversified innovation portfolio can help companies withstand shocks and respond to market shifts. The freedom to fail in one area because of emerging opportunities in another is the hallmark of an effective innovation program.

Second, what would it really mean for the U.S. automakers to "reinvent their business model"? Our colleagues Mark Johnson and Clayton Christensen have an article with this very title in the latest Harvard Business Review.

One of the fundamental problems the article highlights is that many companies are held captive by their capabilities. That is, companies start the search for growth with what they do well. Instead of letting new strategies lead to innovative business model, their current business model dictates their strategic options. This, by default, results in purely sustaining innovations and further commoditization.

True business model reinvention would go well beyond simply cutting labor costs or rationalizing product lines. It could involve some of the following changes:

• Changing the very definition of the business: While Segway's personal transporter failed to meet sky-high hype, auto manufacturers should be thinking about entirely different forms of solutions to a consumer's functional requirement to get from point A to point B. After all, automakers aren't really in the automotive industry, they are in the transportation and productivity industries.
• Creating entirely new forms of distribution to more cost effectively reach consumers: For example, in their HBR article our colleagues describe how Tata Motors plans to use a novel distribution mechanisms for its sub-$3,000 Nano automobile. U.S. auto manufacturers need to consider similarly innovative distribution approaches.
• Building new revenue models: Imagine, for example, a model where a customer pays a monthly subscription fee, which gives them a fully electrical vehicle for trips around town and on-demand access to a gas-powered car of their choice for long trips.
• Collaborating with competitors in new ways: Under-siege media companies are looking for creative ways to cooperate with each other to share costs and with attackers like Yahoo! and Google to build revenues. Auto manufacturers could similarly think about creative ways to share costs or explore new growth opportunities.

There are surely other business model levers that auto manufacturers should explore, but seeing novel product forms, distribution mechanisms, revenue models, or partnership models would be a sign that manufacturers have taken business model innovation to heart.

These kinds of changes are not trivial. They will require radical shifts in mindset at all levels of management. Some employees will not be able to make the adjustment. Congress should avoid any temptation to tie bailout funds to maintaining the current employee mix. After all, Einstein taught us that insanity is "doing the same thing over and over again and expecting different results." Fresh thinking coupled with smart management focus on innovation and business model change provides the best hope for the sector's salvation.

Note: Innosight has worked with General Motors on several projects over the past two years, but neither author of this article has been directly involved in that work.