Digital disruption is hitting the automotive sector hard, though the effects are still only just playing out. From the growth of electric vehicles to shared-mobility business models to self-driving cars, automotive companies are scrambling to catch each new wave.
The largest original-equipment manufacturers (OEMs) have long been working on digital transformations, but most tier-one suppliers have only truly begun to develop new digital products and services and push hard to digitize internal processes within the past few years.
They might profit from some important learnings developed from progress on digital transformations in other sectors. To name a few of the more important ones: digital transformations suffer from half measures; while there is enthusiasm for pilots, scaling them within the organization is hard and often does not yield the intended results; after pursuing a number of obvious measures, roadmaps tend to be vague or too narrowly focused, reflecting a lack of commitment; there are many small, product-focused digitization efforts ongoing in an organization, but there is no overarching strategy and no central coordination and moderation.
In our experience working with automotive suppliers, we have learned that successful digital transformations should be well designed and soundly executed across six core areas (Exhibit 1). Central to the success of the transformation is being clear about the impact each of the six areas has on the others and understanding the key dependencies across all of them.
A) Digital strategy and targets
The first step in the transformation process is developing a digital strategy that takes into account the myriad new ways value can be created with digital technology.1
One of the challenges for automotive suppliers is that digital technology generates two quite different kinds of opportunities: external and internal. On the external side, any new digital strategy must contend with a series of disruptions we characterize with the acronym ACES: autonomy, connectivity, electrification, and shared mobility.2 These changes mean suppliers have to think about a wide range of potential new approaches for engaging with customers.
Most suppliers have traditionally sold only on a B2B basis to OEMs but now can consider how they might interact directly with end users. One potential offering might be extended warranties that cover components produced by a supplier. But regardless of the customer being targeted, any external digital strategy has to be anchored on delivering a superior experience.
Internally, the primary sources of value reside in the cost-intensive areas of procurement and manufacturing. Internal strategy should focus on how digital technology can optimize underlying business processes. For example, this might mean a supplier applying advanced analytics to identify sources of manufacturing defects or digitizing the ordering process for OEM customers.
To make a digital strategy practical, it needs to be translated into a clear roadmap with specific actions that trickle down to key people in the organization, who will execute them. To track progress and maintain speed, leadership should put in place quantifiable key performance indicators (KPIs). Sample KPIs include the absolute number of digital products and services in the pipeline or the amount of R&D spending on digital technologies compared to total outlays.
At many automotive companies, there is a strong bias toward backing safe projects that yield incremental improvements. Focusing on a KPI like spending on digital R&D can help the business focus on riskier ideas that also have the potential to provide a bigger payoff. Good KPIs should also address cultural issues like employee satisfaction, organizational measures, or capability-related metrics like the percentage of digitally trained staff or digital-talent turnover.
B) Organizational structure for the digital transformation
In our experience, businesses are most successful in pushing through a digital transformation by organizing around one of three primary archetypes (Exhibit 2).
While establishing a new, separate digital unit (archetype 1) or embedding a digital business within an existing business unit (archetype 2) are valid options, establishing a digital center of competence (archetype 3) is most relevant to auto suppliers (since units typically are large and operate relatively independently). The digital center of competence (DCoC) is responsible for setting direction and ensuring that learning is widely shared. In this structure, the competence center does not have P&L responsibilities, but it does have its own budget, and each business unit (BU) owns its own internal digital initiatives. The DCoC assumes three important functions to develop products and services, build skills across BUs, and create external networks (Exhibit 3).
Such a structure provides a way to survey existing digital initiatives, identify opportunities for synergy, eliminate overlapping initiatives, target new initiatives, and prioritize new capabilities to be developed or acquired. Most companies that choose the competence center structure also appoint an empowered chief digital officer (CDO), who reports directly to the CEO or CTO.
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