Automakers face a challenge in managing the future

When businesses are initially established, their success largely depends on their value proposition and unique offering to the market. This success enables companies to grow and expand. But then what?

Large organizations often become so focused on current revenue streams that they lose sight of priorities like imagining the future, identifying innovations and making smart strategic choices about where to invest. Instead, they move into survival mode, trying to maintain their current positions rather than taking the risk of transitioning into new ones.

Put differently, the challenge for companies is how to deliver on this year’s goals while simultaneously trying to position themselves to be successful in the future. This dynamic is playing out big time in the transportation industry. There is perhaps no better current example of this dilemma than traditional automakers. These companies are facing disruptive technologies such as electric vehicles, connectivity, autonomous vehicles, a change from vehicle ownership to purchasing transportation as a service, and the global emergence of subcompact vehicles. They also face an unexpected wave of new competitors such as Waymo, Tesla, Uber, Lyft and others from Silicon Valley, as well as BYD and LeEco from China.

The great challenge for senior industry executives is how to manage the decline in traditional vehicle sales until the return on new technology investments fill the void. In this way, auto executives are facing a situation similar to what traditional entertainment companies faced with the switch to streaming, or brick-and-mortar retailers with the rise of e-commerce.

The challenge presented is what strategic bets should automakers make going forward and how can they modify current business models to maximize positive outcomes for all stakeholders? Companies are having to reengage fundamental questions such as where and how they should compete.

Automakers aren’t the only one faced with challenges by a changing transportation industry. For those born since the 1980s, owning a car and getting a driver’s license aren’t the life milestones they once were. Younger buyers are more interested in ease of transportation and mobility, and with often crippling student loan debt they are thrilled not to have car payments. Students graduate college with an average of about $37,000 in student loan debt. It all adds up to $1.5 trillion across the country.

Millennials are also killing the motorcycle industry. For instance, Harley Davidson is struggling with declining sales and an aging demographic that is increasingly hanging up its boots. Being an “Easy Rider” is no longer easy for an aging customer base, and younger consumers are more interested in less expensive bikes that generate lower margins for manufacturers. To attract younger customers to the brand, Harley Davidson is setting up riding schools around the country and is releasing an electric motorcycle called the “Livewire,” which will be priced at just under $30,000. The manufacturer’s suggested retail price for the entry- level Toyota Prius is about $23,500.

In the unlikely event you are not clear on this, everyone – individuals and institutions – are living in an age of disruption. The growing challenges of globalization and the rapid spread of digital technologies and artificial intelligence offer existential threats as well as new opportunities. The younger generation will experience the consequences of these disruptions for many years to come and will witness industries in transformation through their own daily experiences as they change the way Americans live and work.

It once again shows that the late, great author V.S. Naipaul was right when he said, “The world is always in movement.”

 Originally Published: February 9, 2019

The Highway Trust Fund is crumbling; maybe it should

The federal Highway Trust Fund, which provides transportation funding to the states, is projected to run dry in August. But with a technology-driven revolution underway in the way Americans use surface transportation, applying yesterday’s solution and simply replenishing the fund won’t solve the problem.

According to the Obama administration, if the fund is exhausted, states will be forced to put off 112,000 highway construction and 5,600 transit projects, resulting in the loss of 700,000 jobs. When dealing with the government, there are always plenty of zeroes to go around.

The traditional source of revenue for the trust fund is the federal fuel tax of 18.4 cents per gallon, which has not been increased in over two decades. Given that it’s an election year, an increase is not only dead but already decomposing.

One reason the federal fuel tax doesn’t generate enough revenue is more fuel-efficient cars. But that isn’t the whole story. Surface transportation is in the midst of a quiet but profound transformation because technology is fundamentally improving urban mobility.

Technology advances make it easier for people to navigate public bus and rail transportation. Personal ride-booking and car-sharing services are available in nearly every major city, resulting in an interactive transportation network that generates fewer vehicle miles traveled.

As is always the case, technology is outpacing traditional institutions’ ability to adapt. Customers and markets have embraced the digital revolution. The country is witnessing the emergence of an integrated surface transportation network where each transportation mode no longer operates as if it exists in a separate universe.

Technology is in place that allows cities to operate roadway, rail and water transportation modes that complement each other. This gestalt shift represents a fundamental challenge to the traditional approach of the road gang pouring more and more concrete. This is all happening in the name of market solutions, the kind that would make Adam Smith smile.

The proliferation of innovative mobility tools has major implications for traditional approaches to planning, funding, and delivering surface transportation. Recent lifestyle changes, especially among the millennia! generation, are transforming the surface transportation marketplace. It is hard to resist the temptation to conclude that it is time to deliver the eulogy for traditional surface transportation planning and funding.

History- specifically the Japanese Navy’s strategic failure at Pearl Harbor- can teach us something about not letting business as usual blind us when it comes to the need to overhaul surface transportation in the U.S. The Japanese Navy’s officially sanctioned model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasize its victories in spectacular naval battles like Trafalgar during which Royal Navy warships attacked and destroyed opposing warships.

Thus, Japanese naval thinking focused on attacking the U.S. Pacific Fleet’s battleships while they were moored at Pearl Harbor. Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. The Japanese were intellectual prisoners of a past that they believed would shape the future.

So it was that, in a brilliant display of tactical management, six aircraft carriers furtively approached the Hawaiian Islands just before dawn that fateful Sunday, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the triumph at Trafalgar, the Japanese Navy’s benchmark of success.

But as the sun set on Dec. 7, Pearl Harbor’s all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing it to continue serving as a forward base for American naval power in the Pacific. In reality, Japan’s tradition-bound naval leaders chose the wrong targets at Pearl Harbor.

Tradition is often the worst guide when it comes to doing anything really important. Things that have survived long enough to be venerated are often obsolete. American surface transportation is beset by a host of traditions that have helped produce the problems we face today. We must free ourselves of them if we’re to come up with a truly effective vision for what transportation should look like in the future.

originally published: July 12, 2014

Uber is taking taxicab industry for a bumpy ride

New firms that use mobile apps to connect passengers with drivers of vehicles for hire and ride-sharing services have been the target of protests by taxi drivers and owners across European and American  cities, most recently Cambridge, underscoring how digital technology is disrupting a regulated industry .

The protests are a study in what happens when well-established incumbents who are protected by regulators seek to maintain a cushy status quo rather than leverage technology to improve customer service.

The cabbies’ cup runneth over with rage because they claim the apps create an unfair advantage and the new market entrants fail to conform to regulatory and licensing requirements. Companies like Uber argue that they are introducing competition and offering customers the luxury of choice and superior service. The technology they use has the potential to transform transportation the way Amazon has changed the retail shopping experience.

As the economist Joseph Schumpeter noted, capitalism is the “perennial gale of creative destruction.” What is occurring in the taxicab industry has been repeated in one industry after another; none are safe from innovative technologies.

The taxicab business model has serious customer-service deficiencies. Too many passengers find cabs unavailable, poorly maintained and aggressively driven, all of which makes for an unpleasant experience. All this is occurring under the umbrella of officially sanctioned taxicab companies with near-monopoly power.

The industry structure in major American cities revolves around the issuance of a fixed number of medallions, operating licenses which are freely tradable so the right to operate a taxi is divorced from the actual work of driving one. The happy few medallion holders make their money by leasing cabs to drivers – independent contractors who receive no benefits. The restricted supply translates into high medallion prices; in Boston the current price is about $625,000. The system is a classic example of government regulation that creates wealth for a happy few at the expense of society as a whole.

The taxicab industry is an easy target for entrants using the latest digital technology, and they are  making a meal of it. Mobile communications technology facilitates a wide range of business concepts to address opportunities posed by a flawed industry model and an increasing number of city dwellers who choose not to own cars.

Uber was launched in 2010 in San Francisco. It lets customers use an app to call for a car with a few taps on their smartphones. The car arrives within a few minutes. The fare, including gratuity, is charged directly to the customer’s credit card, so no cash changes hands, enhancing safety for both passenger and driver. An email receipt is sent to the customer when the trip is completed.

Uber does not own its cars but relies on a network of established, licensed drivers who apply to be part of its network. In this sense, Uber is not in the taxi business but serves as a referral or dispatch system. It uses sophisticated data analysis to determine where drivers should wait so they can respond quickly to service requests.

Drivers and passengers rate each other. During peak demand periods, fees increase. Drivers get 80 percent of the total fare and the balance goes to Uber.

The firm uses technology to provide superior customer service in a mature industry that offers an undifferentiated product. Uber has entered a locally regulated market that has evolved over a long time to protect established interests.

Taxicab regulators are not elected and work closely with existing companies, to whose interests they are highly sensitive. The result is regulation that is designed to improve conditions for the regulated, not promote the public interest. As the Boston Globe Spotlight Team uncovered in April 2013, the taxicab industry mainly enriches the holders of government-issued medallions while drivers earn subsistence wages and passengers pay some of the nation’s highest fares.

Despite all the talk about the virtues of competition, businesses seek to move away from competition and toward monopoly. Instead of adapting to new technologies , the taxicab industry looks to government, like the cavalry in a John Wayne western, to ride to the rescue and protect the status quo.

originally published: June 21, 2014

Drive time redefined

An otherwise typical California town we’ll call Santa Rosita is horne to one of the nation’s most unusual movie theaters. Until a few years ago, the Bijou was no different from any other small-town theater. It was trying to survive on modest ticket sales as the area’s last outpost of a vaguely Art Deco Hollywood culture that has largely disappeared.

But things changed when the elderly owner died and his widow announced she was going to sell out to a local real estate developer who planned to convert the Bijou into a combination private gym and office building.

That was before the prospect of losing its only traditional movie theater created a groundswell of dismay throughout town. It reached the point that the municipal government was pressured into buying the Bijou from the widow to keep it open.

In a burst of civic enthusiasm, the town government proceeded to eliminate admission charges. Henceforth, the mayor proclaimed, the Bijou would be free to everyone “just like a city park or swimming pool.” Needless to say, this free movie policy led to a considerable change in the Bijou’s attendance patterns. Virtually no one goes to the movies on weekday afternoons anymore. Even on weekday evenings, it rarely has more than a handful of customers.

But on weekends when local schools and most businesses are closed, things change dramatically. The Bijou is full of people, with many more lining up outside.

When the Bijou shows an especially popular film, the line begins forming well in advance of the noontime opening. Santa Rosita’s police department even has to assign several of its all-too-few police officers to control the crowds.

This seems like a ridiculous way to operate a movie theater. Theaters everywhere else charge admission. To maximize box office revenue, they even charge higher prices when demand is highest. This tends to spread out demand by encouraging some moviegoers to attend on weekdays, when tickets are cheaper.

But the Bijou has no tickets. Access to its seats is free, in the sense of not charging an admission fee. But it’s not free if you factor in the hours moviegoers have to wait for seats on weekends when everyone wants to see free movies.

Ridiculous as this sounds, it is exactly how most American highways operate. Access is free to motorists regardless of time of day or day of the week, despite the fact that we pay for access to every other transportation mode.

Free, that is, in the sense of not charging motorists for each mile they travel. Like the Bijou, it’s hardly free if you factor in the time motorists spend traveling that mile during periods when bumper-to-bumper traffic reduces average speeds to about 10 mph.

Until fairly recently, the logistical problems of charging motorists directly for highway use made the idea impractical. Fortunately, new technology is eliminating that excuse.

Vehicles can now be equipped with simple electronic gizmos that respond to radio signals from roadside transceivers. This enables the road’s central computer to identify the vehicle, measure the distance it travels and charge the owner’s computerized account appropriately according to whatever per-mile rate  is in effect when the trip is made.

The rate can vary depending on the type of vehicle (more for heavy trucks that wear out pavement faster, less for compact cars), time of day, (more during rush hours, less when demand is low), the amount of pollution each vehicle generates, or even actual demand at the time of travel.

Thanks to the miracle of modern technology, we can now price access to highways just like we price access to movie seats (except at the Bijou). At the same time, this technology might just provide a fair, user-funded way to pay for much-needed upgrades to tired transportation infrastructure that limits the nation’s economic growth. 

originally published: July 9, 2011