Ford’s CEO has a smart plan to save his company from disruption. It won’t be enough. – Vox

Posted: Friday, April 08, 2016

Over the next decade, Detroit’s big car companies are likely to face existential threats as Silicon Valley companies like Google, Tesla, Apple, and Uber invade the auto market. Ford CEO Mark Fields plans to meet this threat with a preemptive strike — but even his bold idea probably isn’t bold enough to meet the scale of the challenge, a problem that underscores how genuinely hard it is for business leaders to deal with the threat of massive technological change.

“Our approach is to first disrupt ourselves,” Fields said in a recent interview with The Verge (which, like Vox.com, is owned by Vox Media). His plan is to create a new subsidiary called Ford Smart Mobility LLC. Based in Tesla’s hometown of Palo Alto, the new company will house Ford’s work on ride-sharing and self-driving cars.

By creating an independent subsidiary to deal with a disruptive threat, Fields is taking a page from The Innovator’s Dilemma, the 1997 Clayton Christensen book that introduced the concept of disruptive innovation. Locating the new organization in Silicon Valley will give it some insulation from the bureaucratic culture of its corporate parent and an opportunity to absorb the culture of the technology sector.

Unfortunately, Fields does not seem prepared to give the new subsidiary the degree of independence it will likely need to succeed. When The Verge’s Chris Ziegler asked if Ford Smart Mobility could work with other automakers, Fields said no, arguing that “we want it to be dedicated to Ford.”

“It’s not moving from an old business to a new business, just a bigger business,” Fields said. “They’re interconnected.”

Unfortunately for Ford, the reason incumbents struggle to adapt to disruptive innovations isn’t that they’re bureaucratic or dumb — it’s that establish companies rarely have the stomach to introduce new products that undercut the market of their existing ones. The more interconnected a subsidiary is to its corporate parent, the more vulnerable it is to this problem and the less likely it is to be truly disruptive.

Three big threats to the automotive establishment

Over the next decade, we’re likely to see three major automotive innovations that could threaten established auto companies like Ford:

  • Electrification undermines the relevance of car companies’ core area of expertise, designing and manufacturing internal combustion engines and transmission systems that harness their power to make cars move.
  • On-demand vehicles undermine the basic business model of designing and manufacturing cars that are primarily meant to be sold to individual owner-operators rather than corporate fleets.
  • Automation creates a whole new basis of competition in the fields of artificial intelligence, machine learning, and mapping where auto industry incumbents do not have an obvious advantage over established software companies or new startups.

These three trends reinforce one another. Automation will make on-demand vehicles more affordable, dramatically expanding their use and causing more people to opt out of car ownership. If more riding shifts to on demand, there will be a bigger market for electric vehicles designed specifically for on-demand use in urban areas. These may be significantly lighter, smaller, and therefore cheaper than conventional cars. Self-driving cars will be able to automatically drive themselves to a charging station when they run low on power, so they won’t need the heavy, expensive batteries that make electric cars uneconomical for most consumers today.

Why Ford’s subsidiary needs to be truly independent

Put all these trends together, and the result is likely to be cars that look dramatically different from the cars Ford and its competitors are selling today.

And the problem, as Christensen explained, is that it’s extremely hard for a mature organization like Ford to adapt to this kind of change. The problem isn’t just that individual employees would have to learn new skills. It’s that successful companies have cultures focused on serving their existing customers. And by definition, Ford’s customers mostly want to buy Ford’s existing gasoline-powered, customer-owned, non-self-driving cars. As an institution, Ford isn’t well positioned to produce the kind of cars that are likely to succeed in a self-driving, ride-sharing future.

So Fields has exactly the right instinct: By creating a subsidiary in Silicon Valley, he starts building a team that is steeped in the culture of the technology sector and unencumbered by a need to serve Ford’s existing customer base.

But the project will only succeed if Fields is personally committed to giving the company the autonomy to be truly disruptive. “In our studies of this challenge, we have never seen a company succeed in addressing a change that disrupts its mainstream values absent the personal, attentive oversight of the CEO,” Christensen wrote in The Innovator’s Dilemma.

In particular, there’s a good chance that the next generation of automotive technologies will eventually cannibalize the market for conventional, customer-owned, gasoline-powered cars. If Ford is serious about having its new subsidiary succeed, it needs to be prepared for it to participate in that process — creating products that undermine the profitability of its parent company.

But saying things like, “It’s not moving from an old business to a new business, just a bigger business,” suggests that Fields doesn’t fully grasp what it could mean for Ford to “disrupt ourselves.” When a disruptive technology enters the market, the result is often that most of the established companies go bankrupt.

If Ford’s plan succeeds and Ford Smart Mobility really does start to disrupt its parent company, Fields is going to face a lot of pressure from within Ford’s Detroit headquarters to rein it in. For the plan to work, Fields needs to not only resist this pressure, he needs to give the subsidiary’s leaders confidence that he’ll continue doing so no matter how strong it gets.

Instead, Fields is already sending the opposite signal, telling the media that the new subsidiary is going to be “dedicated to Ford” and will be limited to working with Ford’s own vehicles. That suggests he’s not actually prepared to stand up for Ford Smart Mobility’s leadership if it winds up truly disrupting its parent company.

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