Master Thesis Is Available at the Main Library of the Viennaprofessional University of Technolo Mbagy (

Die approbierte Originalversion dieser Diplom-/Masterarbeit ist an der Hauptbibliothek der Technischen Universität Wien aufgestellt (http://www.ub.tuwien.ac.at).

The approved original version of this diploma or master thesis is available at the main library of the ViennaProfessional University of Technolo MBAgy (http://www.ub.tuwien.ac.at/englweb/Automotive). Industry

Service Innovation in the business relationship between Tier1 supplier and OEM – History, trends and impact on business model innovation A Master’s Thesis submitted for the degree of “Master of Business Administration”

supervised by

Dipl.-Ing., Dr. oec. Christoph H. Wecht, MBA

Ing. Maria Stefan

1127145

Vienna, 25.01.2013

Acknowledgement

I am pleased to thank Dr. Wecht, my thesis supervisor, for the support, valuable suggestions and feedback to my work. A special thanks to my beloved family, my colleagues and all those who have accompanied and encouraged me to develop myself, to gain as much as possible knowledge and experience.

“Try not to become a man of success but rather as a man of value” Albert Einstein (1879-1955), Observer, January 15th 1950

“Genius is one percent inspiration, ninety-nine percent perspiration” Thomas A. Edison (1847-1931), Harper’s Monthly, 1932

Affidavit

I, Maria Stefan, hereby declare 1. that I am the sole author of the present Master’s Thesis, “SERVICE INNOVATION IN THE BUSINESS RELATIONSHIP BETWEEN TIER1 SUPPLIER AND OEM – HISTORY, TRENDS AND IMPACT ON BUSINESS MODEL INNOVATION”, 87 pages, bound, and that I have not used any source or tool other than those referenced or any other illicit aid or toll, and 2. that I have not prior to this date submitted this Master’s Thesis as an examination paper in any form in Austria or abroad.

Vienna, 25.01.2013 ______Signature

Table of contents

Acknowledgement..……………………………………………………………………….1 Affidavit……………………………………………………………………………………...2 Table of Contents………………………………………………………………………….3 List of Abbreviations……………………………………………………………………...4 List of Figures……………………………………………………………………………...5 Abstract……………………………………………………………………………………..6 Executive Summary……………………………………………………………………....7 1. Introduction…………………………………………………………………………….11 1.1 Research Question…….………………………………..……………………….11 1.2 Research Hypothesis……………..………………………………..…...……….12 1.3 Structure of Thesis…………………..…………………………………………..12 2. State of Art…………………………………………………………….……………….13 2.1 Background Information to Service- and Business Model Innovation....……14 2.2 Analysis of Service Development and Associated Business Model...... ……24 2.3 Drivers for Change in the Services from Automotive Suppliers…………….26 2.4 Service Innovation in the Automotive Industry………………………………..34 2.5 Trends 2012 for the Service Providers in the Automotive Industry….……..35 2.6 Business Models in the Automotive Industry………………………………….36 3. Methodical Approach….………………………………………….…………………..40 3.1 Research Approach…...……….…………………………..………...…….……41 3.2 Tools for the Analysis of Business Model………….....….…………...………41 4. Business Case Magna Steyr ………………………………………………………..46 4.1 Short History of its Business Model……………………………………...…….47 4.2 Analysis of Existent Business Model………………………………………...... 50 4.3 Conclusion………………………………………………………………………..57 5. Business Case Bosch Engineering GmbH…………………………………………58 5.1 Short History of its Business Model…………………………………………….59 5.2 Analysis of Existent Business Model……………………………………………64 5.3 Conclusion…………………………………………….…………………………..70 6. Business I-Point GmbH…………………….…………………………………………71

6.1 Short History of its Business Model…………………………………………….73 6.2 Analysis of Existent Business Model……………………………………………78 6.3 Conclusion …………………………..……………………………………………83 7. Critical Discussion regarding Conclusion of Research and Outlook….…………84 8. Bibliography …...………………………………………………………………..…….88

List of Abbreviations

Acronym Definition OEM Original Equipment Manufacturer ICT Information and Communication Technology KIBS Knowledge-intensive Business Service R&D Research and Development ICE Internal Combustion Engines JIT Just in Time EVL End Vehicle Life ESO Engineering Services Outsourcing 3 PL Third-party logistics M2M Machine-to-Machine (connectivity) SAE Society of Automobile Engineers BIW Body in White EMC Electromagnetic compatibility HEV Hybrid electric vehicle EV Electric vehicle PHEV Plug-in-Hybrid ESP Engineering Service Provider RWTH Rheinisch – Westfälische Technische Hochschule CNG Compressed Natural Gas ELV End-of-Life-Vehicle EU-directive on type approval of motor vehicles with regard RRR directive to their reusability, recyclability and recoverability IMDS International Material Data Systems KERP Kompetenzzentrum Elektronik & Umwelt GmbH CLEPA European Association of Automotive Suppliers IT Information Technology SEC Securities and Exchange Comission iPCMP iPoint Conflict Minerals Platform ROI Return on Investment

List of Figures

Figure number Designation

Figure 1 Structure of the Thesis Figure 2 Development of Partial Models during the Design Process Figure 3 Overview on the Definition of Partial Models Figure 4 Business Model Innovation - adapted overview Figure 5 Maturity Level for Service Organizations Figure 6 “Smart” Services or “One-stop-services” Figure 7 Drivers for Change in the Automotive Supplier Industry Figure 8 Typical Operating Models for ESO Provider Figure 9 Competitive Landscape of Major Automotive ESO Provider Supplier’s Best Value Capture at Components and Figure 10 Solutions Positions Figure 11 Dimensions for Design of Business Model at Tier 1 Figure 12 The Supplier Business Model Space Figure 13 Basic Features JIT, Integrated Supply and Modular Consortia Effect of Economic Crisis 2008/2009 on Business Model Figure 14 Redefinition Figure 15 Patent Activity in the Automotive Industry 2012 and 2010 Figure 16 Business Model Canvas Figure 17 Value Innovation Figure 18 “The Eliminate-Reduce-Raise-Create-Grid” Based on the Four Actions Framework of Blue Ocean Strategy Figure 19 Blending Approaches for Analysis Figure 20 History of Magna Steyr Figure 21 Business Model of Magna Steyr in 2001-2003 Figure 22 Mix of Brands and Models produced by Magna Steyr 2012 Figure 23 Business Model of Magna Steyr in 2012 Figure 24 The “Eliminate-Reduce-Raise-Create-Grid” applied to Magna Steyr’s business model from 2001 to 2012 Figure 25 Ranking of the European Automotive ESP’s 2011 Figure 26 Customer Perception for the European Automotive ESP’s 2011 Figure 27 Business Model of Bosch Engineering GmbH in 2003 Figure 28 Business Model of Bosch Engineering GmbH in 2013 Figure 29 The “Eliminate-Reduce-Raise-Create-Grid” Applied to Bosch Engineering’s Business Model from 2003 to 2013 Figure 30 Business Model of iPoint-systems GmbH in 2009 Figure 31 Business model of iPoint-systems GmbH in 2013 The “Eliminate-Reduce-Raise-Create-Grid” by Comparing Figure 32 iPoint-systems GmbH Business Models from 2009 and 2013 Comparison of the Three Business Cases Regarding Value Figure 33 Innovation

Abstract

The automotive industry has proven from the beginning of its history to be a driver of innovation in regard of technology, manufacturing and quality processes, services and business models. These innovations influenced also the education system and human resource strategies of the companies operating in the automotive industry.

The pace of change in the automotive industry has accelerated in the last 40 years more and more. After the appearance of the information technology, the relationships between OEM’s and suppliers were modeled by the new communication platforms in a revolutionary way and called for more speed, flexibility and complexity. Economic reasons have brought new challenges: the globalization for more markets and at the same time localization for more flexibility.

As key factor for the survival in the vigorous competition due to narrower markets, the need for distinction brings new ideas that offer a wider portfolio. Both the car producers and their suppliers are nowadays manufacturers, product developers and service providers, each in his own way. In all areas innovation became a necessity in the struggling against cost pressure, competition, shorter life cycles and market trends. New service related business fields appear continuously and shift the car industry from the classical patterns towards innovative technological, industrial and business solutions.

The aim of this master thesis is not a prediction of future trends in the innovation of services and future business models. It’s simply an analysis of some interdependencies that are created by service innovation in the Automotive Industry. These have consequently impact on the innovative adaptation of business models of the involved business partners.

Executive Summary

In recent times in the strive for development of alternative propulsions and new mobility solutions, the words “innovation”, “service innovation”, “business model innovation”, have more and more usage and importance in the concept of new automotive projects. The definition of innovation has been not re-invented; it’s getting only new weighting highlighted in the change processes.

The main objective of this master thesis is to analyze the impact of service innovation on business models used in the Automotive Industry.

Service innovation has for each sector of economy a different meaning. The differentiation depends on the approach of the service concept (whether the innovations refer to new service products, optimized processes of services, customer tailored business services, cutting-edge industrial services, etc). The driving forces that can create innovation in services have internal and external factors. Within an enterprise internal factors for service innovation have sources in the own capability to identify new opportunities and apply new strategies for a stabile business growth (new services as response to customer surveys, bundling of services in packages as competitive advantages, unique value propositions based on core competencies, synergies of competencies for technological innovation in companies within a group, replication on large scale of individual patterns based on successful business experiences, etc). External factors that can drive to service innovation are determined by the changes in business environment; e.g. need for organizational structure adaptation to new market conditions, change of lifestyle and social behavior of (end-) customers, new restrictive regulations from national or international authorities. Following the need for adaptation of business activity to these factors, the company’s short and long term strategies lead to a specific shape of managerial vision (base of the company’s core business model). Consequently, to each business unit of the company are individual business models associated to the performed activity. The core business model incorporates by aggregation all these business models. Services in the car industry have evolved in parallel with the progress of this industry; the interdependencies can be contemplated through the background

8 history and the mega trends that proven as driving forces for changes by innovation. Services of automotive suppliers had made a modest beginning with the first cars built around 1890’s (the so called “horseless carriages”). From the beginning the tangible product was completed with an intangible service product (e.g. know-how of craftsmen in craft production). From early times on, the strategy of suppliers was strongly influenced by the usage of machineries, level of organization, level of skills according to production techni- ques and size of output. The services were primarily related to product manufacturing according vehicle’s specification and product distribution. Later on, when the lean production introduced a new perception in terms of efficiency and quality, by outsourcing of processes in the automotive field, the hierarchy in the supplier chain as Tier system promoted the diversification of services (e.g. special services – adding value processes at sub-supplier to parts and components manufactured by Tier1 suppliers – such as coating, plating and heat treatment). The collaboration and alliances within supplier chain gained more importance as well as the higher flexibility and responsibility for improvements. Times changed with the development of information technology; the services have been industrialized and standardized for the better customization and more predictable performance. There is a new nature of services provided by revolutionary technological innovations that are combined with software technology (e.g. pre- assembly of PCB’s used for the electronic control unit of safety parts like ABS, ESP). New service providers offering project development and engineering services appear and compete in launching new product generations that incorporate more and more electronics and software development. According their strategy, some automotive suppliers keep the main business as classical manufacturing of parts and components improving their know-how and offering product related services (e.g. customized product development, product distribution and warranty). Other suppliers expand and use the advantages of successful M&A or joint-ventures adding new business activities in their portfolio. The innovation becomes a competitive advantage in stagnating markets as well as in new emerging markets. Competition is getting tougher due to several reasons; change of consumer behavior, market segmentation and globalization tend to shape the new trends also in services. A prognosis as of 2012 on the key trends for service providers in the automotive industry attempts to highlight the possible directions of development for services.

The innovation in new technologies combined with optimization of organizational structures and processes also creates more or less niche service products (e.g. industrial engineering, M&A consultancy, contract manufacturing of complete vehicles, digital and virtual factory, supplier chain management). The more innovative are the new services the more will take place an innovative adaptation of the associated basic concept of business model.

An analysis of the competitiveness and innovation in services within the Automotive Industry will underline this transformation in some case studies presented in this thesis.

The method used for analysis is using a strategic tool: Business Model Canvas, developed by Alexander Osterwalder and Yves Pigneur, which describe, analyze and design business models.

The 3 business cases illustrate the effect of innovative services to the innovation of business models: − Magna Steyr: business model for contract car manufacturing − Bosch: business model extended with Safety Management according ISO/WD 262662 at Bosch Engineering GmbH − IPoint: business model based on compliance and sustainability solutions with automotive OEM’s and suppliers

The findings will be presented in a first step individually and later on compared. A critical discussion regarding the conclusion of research will review the research question and the research hypothesis, evaluating the answers delivered by the findings of the business cases on the research question.

1 Introduction

The motivation to select a topic about service innovation and business innovation for a master thesis has the origins in the intensified public interest for innovations that have impact on businesses, and particularly in the personal chance to analyze the effects of innovative new services from the perspective of a Tier1-supplier.

The companies in all sectors of economy compete nowadays in a very harsh business environment, under the negative effects of multiple waves of a global economic crisis. The Automotive Industry is a representative example of dealing with the pressure of competition. There are companies that are better than others; these companies are leader on the market for their product and service quality and/or innovative way of doing business and have a business excellence oriented management, which is able to implement the best strategies for competitive advantages. Those who succeed to be better and can improve or keep their leader position on the market can survive. All others are forced to look for reliable partners and to build alliances in order to obtain more market shares.

1.1 Research Question

The central research question is outlined as follows: what is the impact of service innovation on the business models used in the Automotive Industry between Tier1 suppliers and OEM’s?

The following questions deliver a constructive support for the research approach:

. What services can be considered innovative in the case of Tier1 suppliers involved in the automotive industry? . What new business opportunities can open the new service concepts for the product and service suppliers in the car industry? . What are the driving forces that change the established business models? . What is the Value Innovation (in terms of Blue Ocean Strategy) through the adapted business models? Enables service innovation a business model innovation for these suppliers?

1.2 Research Hypothesis

The research hypothesis: innovative services that can develop to core competencies of a Tier1 supplier are basis for innovative business models. The research hypothesis doesn’t include in the framework of the thesis any analysis of factors that have a cost impact (such as regarding labor, raw material, inflation, etc). The background information helps to underline the description of the research problem (how the design of new services can perform an innovative change of the way of doing business).

1.3 Structure of the Thesis

The structure of the thesis is represented in figure 1.

Fig.1 Structure of the Thesis

2 State of Art

For a better focus on the research topic, a review of the both key words “service” and “business model” is necessary. The meaning of the term “service” can be contemplated from different perspectives (Lies Jan): “(1) as of favor that is voluntarily offered someone, (2) as a non-product based economic performance that represents either (2a) the core activities of a enterprise (service provider) or (2b) the support of products as additional output (services offered before and after sales of goods); case of customer service and economically seen with this term is meant a service company (3) as the service feature experienced by a customer at the moment of special attentiveness from a service provider” According the same source (Lies), the steadily experienced service can be perceived by a customer depending on the service provider’s company culture. The definitions above do not include the term internal service providers (e.g. human resources, facility management and information technology departments) that operate within a company. In a wider sense, an interaction takes place between supplier and user for the service realization (cf. Macaulay et al. 2011:4). All these perspectives provide the perception criteria for creating new services.

The second key word, “business model” has a more complex meaning; it has many definitions, most of them focusing business model elements for specific applications. Wirtz defined it as a simplified and aggregated representation of the relevant activities of a company that explain how arises “the value added component of marketable company information, products and/or services”. (Wirtz 2010:70) According his definition, for generation and consolidation of competitive advantage, beside the architecture of added value also the company’s strategy and the interface with customer & market are taken in consideration. Casadesus-Masanell and Ricart (2007, cited by Weiner et al, 2010) have a wider approach and precede the business model with a decision component: “In summary, a business model consist of: (1) a set of choices and (2) the set of consequences arising from those choices”. This perspective does not avoid the division of the

13 business model in its elements; the management’s decision has been linked to the others. (cf. Weiner et al, 2010:20).

2.1 Background Information to Service- and Business Model Innovation

The innovation in services is encouraged by strategies for continuous design of new tangible and intangible products, knowing or anticipating the customers’ needs. Droege et al (2009) remarks interchangeability in existing studies between ‘service development’ and ‘service innovation’ but does not distinguish between them. The perspectives on service innovation show certain segmentation in the basic assumption. Four approaches are used for analysis of service innovation: technologist, assimilation, demarcation and synthesis. (cf. Droege et al, 2009). The ‘technologist’ approach was suggested by Barras (1986, 1990, cited by Droege et all, 2009) with the “reverse product cycle model”, and see technological innovations as source of change in services. Gallouj (2002, cited by Droege et al, 2009) criticized this view due to limitations of technology role in some areas as insurances, legal expertise or gastronomy, where service innovations are non-technological. The ‘assimilation’ perception attributes similarities between service activities and manufacturing activities. Services have been argued by Pavitt (1984, cited by Droege et al 2009) as “innovation laggards” and changes were interpreted as “consequence of the diffusion of innovation that are developed and first applied in manufacturing sectors”. This approach is frequent in earlier statistical studies about service innovation and in similar way also in areas as trade and productivity, assuming that existing instruments can better describe service economy (cf. Macaulay et al. 2011:3). The ‘demarcation’ viewpoint can be described as opposite to ‘assimilation’ and suggest a service-specific form of innovation, as referred by numerous studies. Organizational innovations, KBIS and ICT’s play an important role in innovation processes (cf. Gallouj & Windrum, 2009). Differences between services and manufacturing are mainly represented by some service-specific features highlighted by Fitzsimmons &Fitzsimmons (2000, cited by Droege et al, 2009) as e.g. their intangibility, higher degree of interaction with customer up to co-production, simultaneity.

The ‘synthesis’ approach, the fourth perspective on service innovation aims to integrate elements of service innovation neglected in the analysis of product innovation in manufacturing (cf. Droege et al, 2009). For example Miles (1993, cited by Macaulay et al, 2011) observed that the manufacturing and service sectors have independent development pattern for similar elements; manufacturing firms produce more customized products and have more interaction with customers while service firms are becoming mass-producer using standardized services offered on large scale. Strictly related to the structure of innovation in services some trends can be highlighted: “more complex service concepts” (increased use of concepts including management consulting and training activities), innovative new “service delivery systems” (transferring of know-how and capability to self-service together with a service package and/or the reproduction of successful established delivery systems on a large scale), “more specialized services” due to markets segmentation and distinction and “explicitly recognized technical and social innovations” (Normann 2007:25). These movements to innovation in services can be characterized by the source of the drive forces that induce the innovative changes. In case of internal sources for change, the management systems of an enterprise create a favorable own environment that enables innovative new business strategies. On one side, the decisions on improvement or changes in the product and service portfolio have as basis the result of the regular customer satisfaction surveys and the economic KPI’s that show the achieved market share. The internal forces have an organizational aspect (e.g. the re-allocation of human resources, change of organizational structure due to new roles), a technological aspect (technical innovation which can be combined with new services), a collaborative aspect (innovation ideas need support of the several departments of an enterprise, knowledge management) and a experience based aspect (lessons learned eliminate the patterns where potential failures were identified). On the other side, the realistic evaluation of own capabilities for innovation is possible only analyzing the external forces for change. External forces are: change of consumer’s behavior, competition conditions and the effect of contradiction between cost pressure and customer needs (cf. Normann 2007: 27).

Some interesting overviews of service innovation and innovation in services are provided by Gallouj and Djellal (2010, cited by Macaulay et al., 2011); they have a focus on the organisation of innovation in service organizations, suggesting that these are typically different from the R&D management model in manufacturing (see

Macaulay et al., 2011:11) and at the same time, as described in the ‘synthesis’ approach, firms apply both management models (innovation in services and R&D for development of products and industrial processes). The classification of approaches regarding management of service innovation proposed by Sundbo and Gallouj (2000, cited by Macaulay et al., 2011:11-12) differentiate between seven broad patterns how innovation processes in services activities may be organized: 1. ‘Classic R&D Pattern’ applied mainly in large and/or technology based firms 2. The ‘Services Professional Pattern’ is applied in KIBS, where ad-hoc and individualized solutions for clients provided by employees relying on their professional skills 3. ‘Neo-Industrial Pattern’, applied as hybrid between the ‘Classical R&D Pattern’ and the ‘service Professional Pattern, alongside a specialised R&D or innovation department, as eg. in large engineering consultancies 4. The ‘Organised Strategic Innovation Pattern’, applied in large service firms, where innovation is organized in form of projects and are directed by cross- functional teams with strong leadership from marketing groups 5. ‘Entrepreneurial Pattern’, applied by new service firms that offer radical innovation, relying more on new business models 6. The ‘Artisanal Pattern’, applied in smaller operational services, where major innovations are imported from other sectors (e.g. manufacturing) 7. ‘Network pattern’, applied where service firms create a common network that can innovate on behalf of network member’s and one of the firms can play a dominant role in such a network (e.g. services offered by franchise networks)

This classification is a useful tool however several innovation patterns “can, and often do exist within a single firm” (EPISIS Strategy indicators, Final Report of Task force 1, 2011).

In practice the boundaries between some innovational aspects are not strict. As suggested by Pim den Hertog et al. (2010, cited by Macaulay et al., 2011) several innovations regarding services are the result of changes happen at the same time along six dimensions (an offered value created by service provider, a new way of interaction between provider and customer, a new systems of value where business partners jointly collaborate for creation of new services, new models for alignment of cost and revenue distribution, the organizational or “soft” elements of a new service

16 delivery and the application of new technologies enabling the offer of new services). The simultaneous combination of these dimensions has a dynamic effect on the management capabilities to support the processes for service innovation. Hertog et al (2010, cited cf. Macaulay et al, 2011) examines these management capabilities and identify six specific capabilities offer an effective support of innovation processes: (a) identification of customer needs and how these needs can be satisfied; (b) the elaboration of necessary service concept; (c) the ability to use existent elements by bundling; (d) the ability to actively participate in the creation and coordination of innovation processes; (e) scale management; and (f) adaptation using lessons learned. The use of these capabilities influences the successful service innovation and allows a differentiation regarding the maturity of the service related business models.

Regarding the innovative strategies, service firms are differentiated by “the degree of innovativeness in their service development in terms of novelty/innovativeness” and by innovation strategy in terms of investments in innovation (Crevani et al, 2011). The innovative strategies have an impact on performance: firms with high grade of innovation strategy profile are superior in terms of productivity and economic grow compared to non-innovative firms as shown by Cainelli et al (2004, cited by Crevani et al, 2011) respectively Elche and Gonzales (2008, cited by Crevani et al, 2011).

As a complementary aspect, the competitive strategies of companies (in wide sense without focusing their product-based or service centric portfolio) demand creation of unique value propositions offered in a different business solution. Magretta exemplified this as “that what strategy is all about – how to do better by being different” (Magretta 2010:12). Company’s management has a decisive role for the “committed choices” related to strategy – as pointed out by Caves (1984, cited by Casadesus-Masanell and Ricart, 2010) and Ghemawat (1991, cited by Casadesus-Masanell and Ricart, 2010). In the designing of sustainable business models that ensure and preserve the competitive advantage, strategy analysis represents a key stage (cf. Teece, 2010).

The implication of the strategy in the creation of business models is also highlighted by in the business model design process (at the phase of idea generation), and Wirtz visualized the strategic components (resources model, strategy model and

17 network model) in the first concept stage of the development of partial models during the design process (cf. Wirtz 2010:210). The partial models build up the integrated business model; the illustration of the business model design process of from idea generation up to decision making created by Wirtz 2010 is represented in Fig.2:

Fig.2 Development of Partial Models during the Design Process (Wirtz 2010:216)

Defining the partial models, we observe that the strategic components mentioned above refer to fields of actions on Top Management level (illustrated in Figure 3):

Fig.3 Overview on the Definition of Partial Models (cf. Wirtz 2010:120-149).

There are many tools for the design of a business model. One of the most frequently used tools is the Business Model canvas, developed by Alexander Osterwalder and Yves Pigneur, which describe, analyze and design business models. With focus on innovative aspects in this work, a presentation of this tool for business model creation is included in Chapter 3.2 of this thesis, before using it for the analysis of business cases

The success of a business model can be maintained as long the company is able to keep market position and ensure the planned profit margins. A general perspective on the reasons for change of business models indicates three main drivers: market, technology and regulation (cf. Wirtz 2010:257).

Combining both drivers market and technology, there are many firms with focus on their knowledge assets, that compete on the so called “markets for technology”, where “firms sell rights to their intellectual property rather themselves directly commercializing products and services based on their knowledge capital” (Gambardella and McGahan 2010: 263). The business model comprises the licensing of technologies to customers; a business model change is connected to the further development or even new technology (e.g. software); a further adaptation is also caused by the market (the segmentation makes necessary general purpose technologies and specialized technologies).

Generally, business models innovation occurs by changing key elements of an existent business or by inventing brand-new ways of doing business. In the literature there are three main forms of innovation used for an existent business model: Product Innovation, Process Innovation and Market innovation. Not only an extension, adaptation or innovation of a competitive value proposition is necessary for the change to a “right” business model, but also improvements or radical changes on the business processes and of the way how the business accesses the market (cf. Johne1999:6): - On the one hand, the value proposition (product/service) innovation includes new features of an existent product or a radical product change/innovation; on the other hand, not only the features of the product/service itself can be changed, but also the support services offered to them - The change of business processes means a consolidation of competitive

advantage by increase of productivity; the benefits of the cost saving can be transferred to customers in form of cost reduction-proposals or reinvested in further improvements/innovations of the value proposition. - Innovations in the way the businesses enter the market is not only valid for existent businesses but also for those who just had their launch. The so called “market innovation” means the improvement/extension of the target markets by entering new market segments, new regions. - In many cases (for example services innovation) an innovative information technology plays a supporting role, enabling new business opportunities.

The success of the business model change is conditioned by the in-depth analysis of the advantages and weaknesses of the existent business model and a critical review of three questions (Sniukas 2012:8):

I. Who is the customer? II. What is the value proposition that can be offered to customer? III. How can be offered/distributed the value proposition?

The customer represents in this context a generic term for markets, customer segments, and individual customers. The value proposition can have a tangible (products) or a intangible form (services related to products, consultancy based on experience, software solutions). The value proposition is valuable when it offers advantages bundled to it (supporting features, additional value propositions, covers not only the visible needs but also the hidden needs of the customer and can solve the problems of the customer. The way of offering/distribution of value proposition can be in form of value creation (e.g. R&D, manufacturing, market research, etc), value delivery (e.g. types of distribution channels, what level of customer experience), capture or extraction of value (e.g. for financing, sales, licensing).

A summary overview of the business model change based on the change drivers described by Wirtz (Wirtz 2010:257) and the findings on the 3 questions according Sniukas (cf. Sniukas, 2012) has been illustrated in the Figure 4, next page.

Fig.4: Business Model Innovation - adapted overview (cf. Sniukas 2012 and Wirtz 2010)

A closer look at Fig. 4 allows the following remarks regarding to business model innovation: - A change in the business model requires a good knowledge of the market; only those who closely followed his competitors and keep the industry trends in focus, can adapt to new markets or market segments with establishing the right product/service portfolio at the right time - The extension, adaptation or innovation of a competitive value proposition requires a clarification of which areas of the business are really competitive and secure an advantageous position in the market. - The knowledge of the core competencies enables the company to restructure its organizational divisions based on its core products. This organizational alignment is by no mean rigid. In order to preserve competitive advantages, a flexible adaptation to target customer/ target market is necessary

Core competencies play an important role in strategic decisions of a company; Prahalad and Hamel (1990) defined them as “the company’s collective knowledge about how to coordinate diverse production skills and technologies” and indicated tree ways to identify them: (1) core competencies allow the potential access to multiple markets; (2) core competencies does not embody only the capability to offer good price/performance attributes of current portfolio; on the long run have to contribute also to anticipate needs of the customer that are not yet articulated and (3) any reproduction of a core competence has to remain difficult for competitors. According Prahalad and Hamel, the acquisition of specific technologies without production skills does not guarantee a successful imitation at competitors. (Prahalad and Hamel,1990).

As regards to the flexible adaptation of a core business model or its elements, an important question arises: when does know a company that its core business has to change? According Zook (cf. Zook, 2010:153) this question can be answered through the identification of the ‘warning signs’ which accompany the life cycle of a core business model; the evaluation shall be based on the state of the core customers, the state of the company’s core differentiation, the state of the industry’s places where attractive profit can be earned, the state of the company’s key capabilities and the state of alignment of company’s culture and organization to the key objectives of the core business. These criteria help to determine undervalued, overlooked or unutilized assets. A consequent action of a company that reveals an undervalued asset is to lay it down in order to make free capacities for better solutions: “shrinking to grow” as Zook says. (Zook, 2010:170)

There are five circumstances that need a change of the business model (Johnson et al 2010:61): (1) opportunity to address the needs a larger group of potential customers through disruptive innovation (e.g. low-cost products for emerging markets) (2) capitalization of cutting-edge technologies encased in new business model (3) opportunity to offer a new job-to-be-done, in areas where this is missing (4) need to challenge the low-end disrupters (5) necessity to react to a changing basis of competition Changing or innovating business models is the right way to remain competitive but the right new business model is only successful when businesses can overcome the

22 different barriers during business model experimentation. According Christensen (1997, cited by Chesbrough, 2010) and Amitt and Zott (2001, cited by Chesbrough, 2010), managers recognize the right business model but its design may be potentially negatively influenced by conflicts regarding the so called “disruptive technologies” or generally “disruptive innovation”; these can proven as “roots of tension” when between the business model applied for an existent technology is in conflict with the business model that shall be applied for the disruptive technology . (Chesbrough 2010:358). The most significant aspect where a new business model related to a new technology may fail is the wrong alignment to the customer’s needs. Disruptive technologies are characterized by “worse performance features than an already established technology” as described by Christensen and Overdorf (2000, cited by Wirtz, 2010) and require “completely different competencies and manufacturing capabilities from the ones the companies had” (Bower and Christensen 2010:24). The performance improvement can be re recovered when the new technologies offer attributes that the customers can up rate then the already existent ones. In this case the innovation with higher rate of improvement proves as a sustaining one.

In order to minimize the risks of damages for the business models based on new technologies, the following methods are described by Bower and Christensen (cf. Bower and Christensen 2010: 34-45): - to detect whether the new technology is disruptive or sustaining - to define whether the disruptive technology is strategically critical - to locate the initial market for the disruptive technology creating information regarding the new markets, where the new technology emerge - to separate the teams involved in disruptive innovation in an independent organization when the new technology has a lower profit margin then the core business and covers the individual needs of a new group of customers - to keep the independent organization responsible for disruptive technology separated in order to preserve resources for the mainstream business model

As conclusion, business model innovation is essential for the sustainable success of the companies and at the same time is a huge challenge for their performance capability, resources allocation and organizational processes when the model change proves to be radical or even disruptive.

2.2 Analysis of Service Development and Associated Business Units

With regard to service organizations, there are 5 maturity levels of which evaluate the grade of distinction between the so called “Service-Administrators” and “Service- Designers”. (cf. Geissbauer et all 2012:3). The lower the maturity levels of the service organization, the lower the performance of revenue and margins (Figure 5).

Fig. 5: Maturity Level for Service Organizations (Geissbauer et al 2012:4)

The complexity of organizational structures influences the maturity level considerably: only from the third level of maturity level service activities are offered within separate business unit where planning, design and implementation of services are bundled; complex services are co-produced with leading customers in the fifth level by a business unit which has direct profit and loss responsibility and in case of organizational separation from own company a simplification of service delivery to other enterprises or competitors can even achieved (Geissbauer et all 2012: 4-12).

As described in (Geisbauer et al 2012:11), many firms with service maturity-level 5 are market leaders with efficient service processes worldwide implemented consistently across the service units and are leader in service innovation and the share of sales that they achieve with innovative services. In these firms the design of new services and innovations are bundled in service research and development functions with qualified resources, the key customers deliver inputs for development of new service features and suppliers and partner companies are integrated in the service development processes contributing with their own development part.

The Capgemini’s research report (Capgemini, 2010) analyzed best-in-class manufacturers across different industries that successfully implemented strategies to increase the share of revenues of their service business, and by the process of transforming from a product-centric to service-focused approach, considered services as strategy. For the framework of this research, the definition of service included all activities necessary to maintain and restore the functionality of a product during its active lifecycle. The differentiating factors according this research report refer to the top management commitment towards services, including an executive representation on management board level; innovative service business model and motivating employees to shift their perspective from product seller to ownership experience.

According Capgemini (Capgemini, 2010) the key findings described in the research report are: − Service as strategic profit center enhanced by the organizational structure (own business unit reporting profit from service activities) − Continuous strive for innovative financial solution that cover their cash flow needs and at the same time provide more customer payment flexibility − Companies tend to extend their service portfolio by M&A or partnership with companies that have service expertise − Enrichment of service portfolio by moving beyond their classical product services and offer their customer a range of “smart” services within the segment (e.g. the One-stop-business model illustrated in fig. 6) − Improvement of the customer’s benefits moving from the management of traditional aftermarket services to a product lifecycle maintenance service. − Replacement of traditional contracts that ensure product functionality with long-term performance-based contracts

− Improvement of service management and delivery mode using new monitoring technologies for the early diagnosis of malfunctions

Fig. 6: „Smart“ services in the so called „One-stop-business-model” Source: Capgemini (2010) research report

Reviewing the maturity levels defined by (Geissbauer et all 2012:4), the author of this thesis see similarities between the findings from the Gemini’s (2010) research report related to best-in-class manufacturer with service strategy and the specific elements attributed to service designers with collaborative business model with Level 5 of service maturity-level.

2.3 Drivers for Change in the Services from Automotive Suppliers

In the today’s car industry operate dedicated service providers that have a defined role in the functionality of the supplier chain, service providers for e-business solutions, service providers dedicated to engineering activities and automotive suppliers that extend their classical manufacturing activity with added-value- activities in order to maximize their profit and defend their position on the markets

26 despite uncertain times.

Some representative milestones in the automotive history provide an insight about how its evolution with multiple implications in the technological, social and economic progress of industry influenced and shaped the transformation of the automotive suppliers. Three central characteristics have an essential implication in the concept of modern car: the all-steel body, the Powertrains based on internal combustion engines and the multipurpose-vehicle (cf. Ornato and Wells, 2007).

The workers in the craft production era were many as self-employed contractors to the car assembler firms and highly “skilled in design, machine operation, and fitting (…). Most parts and much of vehicle’s design came from small machine shops” (Womack et al, 2007:22). The procurement and distribution was coordinated by the owner or entrepreneur at the assembly firm.

Around 1920’s the innovative ideas of Ford and Sloan (GM) changed the assembly of a car focusing on the standardized product (e.g. Ford’s Model T) , opened new perspectives to a complete assembly system called “mass production” and based on innovative organizational solutions (e.g. Sloan’s multidivisional company) allowed a step forward to the five model product. (cf. Womack et al, 2007:39). The parts and components suppliers were mainly in-house: GM had 70% integration and specialized divisions; Ford had 100% integration at the Rouge and had disintegrated to 50 % only after the 2nd World War. (cf. Womack et al, 2007:57). The collaboration between assembler firms and suppliers for product development was limited; the engineering tasks for the design of parts and components were primarily centralized at assemblers (e.g. Ford and GM).

Beside this, many technical inventions from suppliers contributed to the technological progress of the car industry. For example, the body-chassis technology introduced 1914 by Edward Budd revolutionized the Ford era. This concept integrated the chassis and body in one piece (“monocoque”) and had a major impact on product and production processes in terms of price, variety of styles and higher production volumes. (cf. Ornato and Wells, 2007). The Budd Company supplied car bodies, including an all-sedan body, to car manufacturers GM, Studebacker, Ford and Crysler. (Harvard Business School , Keyword Edward G. Budd ). Other parts and components as tires, batteries or alternators with large use in many vehicles or internal combustion engine parts, where the assembler’s firm had no in-

27 house production, were procured from suppliers which specialized their technology and were able to compete with other suppliers by improving an existent specification and adapting it to a new car. (cf. Womack, 2007:58). Harvey S. Firestone, from the Firestone Tire & Rubber Company, created the dismountable rim in 1907, and the balloon tire in 1923, which became industry standard. Firestone succeeded to establish auto supply and service stores based on a plan initiated in 1928.(Harvard Business School, Keyword: Harvey S. Firestone).

The Powertrains based on internal combustion engines (ICE) registered also a tremendous development: in 1900 from 8000 cars with registration in the US 22% were powered with ICE, 38% with electric engines and 40% with steam engines. Around 1905 the share of cars equipped with ICE (especially gasoline engine) could overtake the other variants; in 1912 the car registration in the US had 902.000 cars with ICE. (cf. Orsato and Wells, 2007). Several firms developed parts, components and later complete systems for ICE. Important contribution in development and mass-production of gasoline and diesel engines had DEUTZ AG, a German company founded by Nicolaus August Otto, the developer of the four-stroke engine. Robert Bosch, also German supplier, “built a magnetic ignition device very similar to one developed but not patented by Gas-Motoren-Fabrik DEUTZ AG.” (Deutz AG, Keywords: History. Milestones. Striking Heads). Bosch developed the low-voltage magneto ignition for a stationary vehicle in 1897 and delivered 1902 the first high-voltage magneto ignition system with spark plug to Daimler-Motoren-Gesellschaft.(Robert Bosch Homepage. Keyword: Company history).

The innovations from suppliers were primarily product-based, the services being limited to the design, delivery and quality improvements of parts and products. The supply flow in the era of mass production was not able to cover the day-to-day needs; consequently large stocks were built up at suppliers due to missing flexibility of tools in the production and unsteady fluctuations in the assembler’s orders. (cf. Womack, 2007:59). In the 1950’s Toyota began to transform the organization of component suppliers into functional tiers, based on the new, lean production approach. The suppliers with expertise in product engineering were clustered as tier 1 suppliers and

28 designated to collaborate in the developing of a new product. To each tier 1 supplier corresponded second tier suppliers, which had expertise in process engineering and manufacturing operations (cf. Womack et al, 2007: 59). The lean production changed essentially the flow of parts introducing the Just in Time (JIT) delivery (or kanban, as called at Toyota). The full implementation of JIT took twenty years and changed tremendously the productivity and quality within the lean supplier chain.

Twenty years after the introduction of JIT, the OEM’s and suppliers involved in the automotive industry reevaluated their competitive advantage and came to the conclusion that JIT is not sufficient to ensure the increase of efficiency and thus to cope with the competitive pressure. The result was (cf. Collins et al, 1997) a rationalization of the supply base at OEM’s introducing new supply requirements (global sourcing, full service supply and design for manufacturing/assembly of components) together with outsourcing activities. The automotive industry had long periods with record production volumes (for example between 1997 and 2002 average yearly volumes of 16,4 million units in North-America and 16,3 million units in Europe) and consequently continuously high demands for components and systems for suppliers (cf. Jackson and Miecznikowski, 2004) . Following the focus on the profitability, OEM’s have outsourced a significant part of their previous core competencies (components or module assembly), consolidated their positions more or less successfully through M&A and alliances with other OEM’s or Tier1 suppliers and used synergies in platforms and component sharing (cf. Holweg and Miemczyk, 2003). During those years, many automotive suppliers could increase their size, adding new components in their portfolio and engineering capabilities though M&A (e.g. Magna, Lear, JCI, Valeo, Denso, GKN and Federal Mogul). These transformations did not necessarily also contributed to the financial wealth of the suppliers; many could not attain satisfactory performances in their profits. (cf. Jackson and Miecznikowski, 2004). This unfavorable situation has accentuated as soon OEM’s had financial difficulties and imposed cost reductions on their component suppliers. The economic pressure created restructuration of processes and redefinition of the competitive strategies among the firms involved in automotive industry (cf. Orsato and Wells, 2007b). In addition to the price pressure and competitive pressure, also other factors are challenging for the supplier industry: a very strong volatility of demand is affecting the revenue structure (e.g. shift to emerging markets, shifts to other OEM’s, shift to

29 other segments) combined with the efforts to follow the technology trends investing in R&D for specific product segments. The financing of activities became challenging due to limited availability of cash flow and difficulties to extend their debts and costs for raw materials and skilled personnel increased. (cf. Bernhart et al, 2010). Due to uncertainty of markets, the challenges mentioned above remain as forces that shape the supplier industry (illustrated in Fig. 7).

Fig.7: Drivers for Change in the Automotive Supplier Industry; Source: (Bernhart et al., 2010b).

The evolution of the supplier chain and the wide spread of electronic communication means created opportunities for design of new services and innovations in the way of doing business. Once with the electronic data exchange via Internet, the business-to-business transactions between OEM’s and suppliers turned to real-time information exchange using Electronic Data Interchange (EDI), based nowadays on several bi-directional protocol standards specific for the industry. The benefits of EDI were highlighted by Tuunainen (cf. Tuunainen, 1999): − The introduction of EDI required new forms of relationship up to creation of new value-added networks, improved the relation with customers and increased the productivity − EDI could be used at the same extent as “inter-organizational systems’” by partners with different size within the network structure − The technological means could help to save costs through implementation on large scale and once with the use of services of Internet Service Provider (ISP) and value-added networks (VAN), the benefits were significant (using flat-rates for internet services instead the costs per kilobit charges of VAN’s

and standardized connection protocols with Internet-to-VAN gateways).

Following the wide spread of the lean production philosophy to US and Europe, one of the characteristics typical for the Japanese supplier management, the early involvement of suppliers in the product development, was benchmarked and opened new perspectives in the relationship between OEM’s and component suppliers. The high level of involvement was possible through the communication of development requirements from OEM’s primarily to their major subsystem suppliers in the early design phase with focus on subsystem integration (cf. Liker et al, 1996).

The relationship between OEM’s and suppliers has been changed also through the pro-environmental attitude adopted from 1980’s onwards by almost all car manufacturers. The focus on waste reduction and efficient use of resources was materialized in the 1990’s in the consolidation of platforms and increased use of modularization in assembly processes. This focus on environmental performance changed also the criteria for component sourcing and supplier evaluation. These efforts in the automotive industry were visible around the turn of the millennium, when the new cars powered by ICE emitted 95% fewer pollutants into the air than the vehicles built until 1975. (cf. Orsato and Wells, 2007a). Not only the attitude of OEM’ but also the environmental regulations (ELV, emission standards), progresses in technology and scarce oil resources motivated the OEM’s and the Powertrain component and system suppliers to adapt the design efforts towards environmental-friendly products with high grade of recycling and lower emissions. These efforts generated new applications: the declaration of materials used was reported by suppliers via Portals dedicated for Material Data System using Internet (IMDS) allowing a follow-up and elimination of prohibited materials. New service concepts have been created in order to support the compliance to environmental standards. The collaboration in product development between OEM’s and automotive suppliers requested also data exchange related to the design of parts. The creation of electronic data with detailed view of product (using programs as for example Catia) and the development of appropriate means of communication (specific portals via Internet) generated new service opportunities for firms specialized in software development. Starting 1990’s other factors contributed to major changes in the automotive industry: the increasing technological complexity, the globalization of markets,

31 shorter product life cycles and an aggressive competition between traditional suppliers and foreign suppliers. (cf. Hsuan, 1999).

These factors had as affect the shortening of development periods for new vehicles and increased the need for speed and investments in R&D for both manufacturers and suppliers in the automotive industry. New challenges related to increasing use of electronic components, strive for fuel efficiency and development of alternative fuel vehicles created new business opportunity for firms with expertise in engineering. Firms with capabilities in Powertrain Engineering completed their services for development with applications via simulation and testing systems (e.g. AVL). Using simulation, the efficiency in the development process increased and the system integration was possible in shorter design period. Not only OEM’s started to use the services of such firms; the shorter development phases force suppliers to combine their core engineering competences with the support of these services. Simulation systems have been introduced also in other product areas: the EURO- NCAP tests summarize nowadays the efforts from OEM’s and their chassis system suppliers for increase of safety for the vehicle drivers. In order to increase their flexibility in reacting to market development, OEM’s had also to consider an outsourcing of R&D structures. Following the globalization of vehicle production and sales, also a globalized delivery of R&D services and cost pressure registered a higher demand, especially for low-cost solutions. Many OEM’s choose R&D locations in emerging countries (GM, VW), others outsource engineering tasks to development centers of global suppliers located in the emerging countries. But also supplier have to manage trade-offs when they awarding contracts for entire subsystems with short development period. The outsourcing has often in such cases cost-driven reasons, but allows a better relocation of in-house resources for core activities and increase the responsiveness of development cycles in terms of shorter time-to-market (cf. Bernhart et al, 2010a). The offshore outsourcing engineering services is used for packages dedicated to new vehicle development or for packages used for vehicle series development (such as vehicle facelift). Large engineering service offshore providers (e.g. Magna or Valmet) develop and in some extent also produce complete vehicle lines – for example for niche vehicle variants with limited volume, OEM’s “frequently contract ESO providers to complete the development and focus their captive R&D resources on their core development programs” (Bernhart et al, 2010a). This type of collaboration with OEM’s need extended capabilities, which can

32 compensate the fluctuations of volumes and capacity utilization between existent contracts and new contracts awarded. There are 3 operating models for ESO (Bernhart et al, 2010a): the (onsite) labor contracting, the work package contracting (fulfilled at ESO provider’s by own workforce, based on specification from customer) and the R&D facility operator at offshore location.

Fig. 8: Typical Operating Models for ESO Provider; Source: (Bernhart et al, 2010a)

The established market players as ESO provider are located mainly in Europe; the most of the “newcomers” are located in emerging countries like India.

Fig. 9: Competitive Landscape of Major Automotive ESO Provider; Source: (Bernhart et al, 2010a)

2.4 Service innovation in the automotive industry

Automotive suppliers (especially Tier1 suppliers), create value but when they focusing mainly manufacturing activities, cannot capture a fair share of the created value. For an efficient capture of the created value, the supplier has to attain an advantageous position on a specific market – by advantage of value (quality, performance, safety, etc.), time (time-to-market) and cost (due competition level) (cf. Jackson et al, 2004). The focus on product innovation allows a competitive advantage for a certain time and request efforts in continuous improvement- or innovation activities of product portfolio. As described in Fig. 10 (Jackson et al, 2004), the Tier 1 suppliers could evolve in time only having an advantaged position of their components: − from traditional component suppliers (with low system responsibility, with product design matching a given specification) − to assembly suppliers (who have capabilities to design assembly of subsystems), − some of them improve their position as system integrator (by system engineering, system program management and integrated supplier chain management) and − only fewer suppliers could consolidate their position as solution providers (with co-design of concept, system integration, with responsibility for design performance risk) offering complex services and solutions to their core customers.

Fig.10: Supplier’s Best Value Capture at Components and Solutions positions Source: (Jackson et al, 2004)

2.5 Trends 2012 for the Service Providers in the Automotive Industry

Based on the mega trends predicted for future mobility, the following five key trends were highlighted in 2012 to be in focus of the efforts of service providers (primarily for engineering services) in the automotive industry (cf. Ebert, 2012): 1) Successfully innovate in new products, improved processes and new basic technologies (as for e-cars, communication networks, intelligent usage of energy) 2) Use of model-based development in order to cope with the increase of complexity. The model- based development can help to increase the product quality and shortening the development time, reducing errors and development costs. 3) Fostering of tool-supported collaboration. The forms of collaboration between teams, projects and people has changed because of the high variety of networking components, applications and device; new tool architectures and methods are required. 4) Steady focus on quality, in order to cope with the global competition. More and more competitors from low-cost countries enter the market but often their quality level is not sufficient. An aggressive low price combined with poor quality lead to the elimination from the market. 5) Need for performance improvement; besides the increasing quality requirements for products and solutions also other performance criteria are essential: cost-efficiency of development, high grade of adaptability to new environments and effective exploitation of modern technologies, “Energy efficiency, platforms like AUTOSAR, IP based car networking, new electric powertrain concepts and global standard like the ISO 26262 are the main drivers of innovation and change”. (Ebert, 2012).

For the logistic server providers in the automotive industry the trends seem to drive towards 3PL and use of cloud-based platforms. For example, the cloud-computing based platform “Logistics Mall” created by the Fraunhofer-Institute and Logata GmbH (Germany) is the first independent “Software-as-a Service” for logistics-IT that bring together user (automotive firms), software providers and Logistic service providers in a virtual ‘shopping mall’. (Logistic mall Homepage).

2.6 Business Models in the Automotive Industry

The traditional business model of an OEM is linked to: − the segmentation of the market (low-cost segment with high volumes and standard technological level, premium segment with moderate volumes and high technological level, and the niche segment with low volumes and innovative features); − the content of value proposition, in form of product (automobiles, commercial vehicles, trucks, special purpose vehicles) or services (financing, insurance, repair shop, after sales services); − distribution network (authorized import agent, dealer network, e-commerce).

The core business model of an established supplier has to be aligned to the model of its key customers, depending on its responsibility/position in the system integration (as shown in Fig.10, page 34). The decisions for the supplier’s business model design follow 2 levels of strategy: at business unit level and at portfolio level (Miecznikowski et al, 2004). The business unit level defines the strategy in accordance with the core competencies for the products where an advantageous competitive position exists. The portfolio level defines what products/services or bundled packages can be offered and evaluates the added value of the offer (cf. Miecznikowski et al, 2004). Tier 1 suppliers create value through technology of their products, scale advantages, delivery capabilities, etc. and capture the value through programs of products and services. The design of business model takes in consideration the weighting of the following dimensions for the business (see Fig. 11):

Fig.11: Dimensions for Design of Business Model at Tier 1 according (Miecznikowski et al, 2004).

An example of business orientation for Tier 1 suppliers according the dimensions that ponders theirs business models space is shown in Fig. 12.

Fig. 12: The Supplier Business Model Space . Source: (Miecznikowski et al, 2004)

Regarding the spectrum of products, there is a differentiation between commodity products (where the suppliers focus on a business model based on low-cost production and excellent quality) and products with high grade of integration and level of technology (where the suppliers focus on business model based on technology leadership and customer orientation). (cf. Accenture research, 2010) Another important factor that impacts the business model is the grade of supplier’s involvement in the assembly process. Due to customization and modularization many suppliers embraced the role of system suppliers, assumed responsibility of design and engineering for a vehicle system together with the synchronously matched supply. (cf. Alford et al, 2000). For some suppliers the grade of dependence to OEM increases (especially for the so-called Modular Consortia – where the supplier plays co-investor role); these suppliers have limited possibilities to acquire additional business that helps them to capture more value and consolidate their core competencies. (cf. Collins et al,1997).

Fig. 13: Basic Features JIT, Integrated Supply and Modular Consortia. Source: (Collins et al, 1997)

An interesting business model have the contract manufacturer or Tier 0,5’ suppliers. Without to compete with OEM’s, the 0,5 Tier suppliers produce low-volume niche models on behalf of the OEM. Contract manufacturer have capabilities for complete design, development and production of a car (e.g. Magna, Valmet). Unfortunately some contract manufacturers located in Europe could not survive to the economic crisis 2008/2009. For example Bertone went into bankruptcy in 2008; in 2009 Heuliez had been placed into administration and Karman was declared insolvent (cf. Automotive World, 2009).

In order to preserve profitable margins and return on the capital employed that allows investments in R&D and further development of capabilities, the Tier 1 suppliers may adopt an integrated business model. This type of business model needs a clear recognition of the business complexity and the dominant dimensions for getting ability to designate the appropriate operational model with clear decision rights, roles and responsibilities (cf. Jackson and Miecznikowski,2004).

Following the economic crisis 2008/2009 many top managers of supplier firms changed the strategy towards a redefinition of business model (see Fig. 14).

Fig. 14: Effect of Economic Crisis 2008/2009 on Business Model Redefinition Source: (Bernhart et al., 2010b)

An overview about the automotive subsectors shows in Fig.15 where in 2010 the efforts for innovation in new technologies were higher than the year before.

Fig.15: Patent Activity in the Automotive Industry Status 2012 and 2010; Sources: (Thomson Reuter, 2013) for Status 2012 and Thomson Reuter (2011, cited by Nusca, 2011) for Status 2010

The high level of patents for alternative powered vehicles in 2010 and 2012 indicates the shift in the focus of automotive firms towards new products portfolio – one of the essential steps for re-definition of the automotive business models after the economic crisis 2008/2009. Market studies as for example (Bernhart et al, 2010b) indicate that in the next 5-10 years, the Powertrain components will represent the product segment with the most growth (due to downsizing, need for compliance to CO² regulations, alternative fuels and electrification). For Tier1 suppliers this means measures towards alignment to a potentially profitable target product portfolio that ensure market share. Other important steps in the re-definition of business model are: - the consolidation of delivery and supply networks as a competitive advantage to competitors. The shift to other regions needs a solid supply network adapted to the new markets, with eventual restructuration of supplier base on a partnership model (cf. Jackson et al, 2004); - the allocation of investments in R&D and CAPEX for the growing product segments in line with the increasing complexity and variety. A risk management for the covering the uncertainty of market has to conduct the focused allocation of investments. (cf. Bernhart et al., 2010b). - to develop competencies for the functional integration of electronic components – also within strategic partnerships and alliances (cf. Bernhart et al., 2010b). The megatrends predicted until 2025 show further changes in the landscape of automotive industry. The following megatrends (cf. KPMG survey, 2013) will shape

39 the automotive business up to 2025: − the environmental issues (fuel efficiency and reduction of emissions, lightweight materials), − urbanization − change in customer behavior regarding car ownership, − growth and global competition (growth in emerging countries, overcapacity in Western Europe and Japan). Besides the influence of megatrends, a shift in the division of labor between OEM’s and suppliers is expected to influence the business models in the automotive industry. The OEM share in the global R&D value will decrease from 60% today to 47% in 2025, whereas the supplier share will increase from 32 % to 36% and the share of engineering service will almost duplicate from 9% to 17%. In production area for suppliers is expected a consolidation of their position: their value share will increase from 65% to 71% in 2025, whereas the OEM value share will decline to 29%. (cf. Oliver Wyman and VDA, 2012). The need for mobility solutions and the increasing share of car connectivity are other opportunities to extend the traditional automotive value chain. For example the share of M2M market in automotive area (in terms of total connections) was about 8% in 2010. There is a hindering factor for the automotive suppliers: the need for complex crossborder connectivity requires alliances and partnerships with ICT companies and telecommunication firms. (cf. Economist Intelligence Unit, 2012).

3 Research Approach

The research approach will follow the following steps: − Step 1: Situation analysis describing the initially offered portfolio including services and the associated core business model in use − Step 2: Analysis of the consistency of initial business model elements and identification of strengths and weaknesses − Step 3: Description of the new ideas for the business model elements which enabled higher potential for profit and competitive advantage − Step 4: The adjustment of the initial business model elements based on the conclusions Step 3 and the value innovation of the new case

3.1 Research Methodology

For the proper identification of the causality in terms of service innovation or of business innovation, the key terms having impact on business innovation have been explained using the terms provided by a literature review (scientific articles, books, studies, surveys published in the Internet. The method used for analysis is based on the evaluation of an earlier business model and the current one for each of the three business cases. The result of evaluation assesses briefly the situation in regards of the business environment that has an impact on the success of the business model (market, competitors, macroeconomic conditions, trends) for the both stages – previous and current. A SWOT analysis may point out the main strengths and weaknesses but would not indicate what existent factors have to be changed / eliminated or what missing factors to be created for an increase of value creation.

The business cases are analyzed based on data collected from the Internet (e.g. the homepages of the related companies, press releases, blogs and internet pages from other player in the automotive industry). After a short review of the history of the three firms, the analysis of their portfolio and business models is expected to deliver an answer on the research question. The analysis plan in 4 steps that comprises the analysis models and the tools are used under the consideration of the available level of information about the business models. The tools used for the case study analysis have been intentionally selected without use of detailed data about economic performance indicators (the analysis in the framework of this thesis is limited to finding the solution to the research problem).

3.2 Tools for the Analysis of the Business Models

For the analysis of the case studies, the author of this master thesis has chosen to use “The Business Model Canvas” (Osterwalder and Pigneur, 2010), as one of the most effective tools for visualization of a business model. This concept has been developed by Alexander Osterwalder and Yves Pigneur with the support of 470 practitioners from 45 countries as co-creators, and allows an overview of all aspects of a business model within 9 building blocks as illustrated in Fig.16.

Fig. 16: Business Model Canvas (Osterwalder and Pigneur, 2010:44)

Osterwalder (2004, cited by Wirtz, 2010) presented in his dissertation 2004 a specific basic approach, explaining that “different points of view on business models can exist within a company and that a business model can be the link between these views”. The same source sees a distinction between business strategy, business organization and ICT. The ontology-based model from Osterwalder is differentiated from the model of Wirtz by a very strong emphasis on the relationship between the individual blocks and elements (Weiner et al, 2010:31).

In a further research article Osterwalder et al (2005, cited by Wirtz, 2010) expressed the opinion that every publication related to business model can be attributed to the three categories “Overarching Business Model Concept”, “Taxonomies” and accordingly “Instance Level”. With this approach, they established a classification and examined the structure, distinction and the development of the business model concept; as result derived from their research “Nine Business Model Building Blocks” assigned to 4 pillars (Product, Customer Interface, Infrastructure Management and Financial aspects).

Looking at the meaning of the 9 blocks, these are defined in hierarchy of use as follows (cf. Osterwalder and Pigneur, 2010):

. Customer segments: groups of people, organizations to whom an

enterprise create value . Value Proposition: products or services that create value for each customer segment . Channels: touch points of interacting with the customer and delivering value

. Customer relationships: types of relationships established with customer segments

. Revenue streams: how and at what price a company capture value . Key resources: assets which are indispensable for the success of the business model

. Key activities: the actions to be undertaken in a company to operate successfully . Key partnerships: network of suppliers and partners that help a company to leverage its business model

. Cost structure: all costs accrued to operate the business model

As regards to the classification according types, Osterwalder and Pigneur (2010) group the business models according similarities in five patterns (Unbundling Business Models, The Long Tail, Multi-sided Platforms, Free Business Model and Open Business model).

Complementary to the business models analysis with the Business Model Canvas from Osterwalder and Pigneur (2010), the author of this thesis selected the Blue Ocean Strategy concept from Kim and Mauborgne (2005) as investigation method, and one of its analytic tools to be used for the competitive advantage and innovation content of the business models presented in the three case studies.

The Blue Ocean Strategy defines the “market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the Indus- tries not in existence today. This is the unknown market space.” (Kim and Mauborgne, 2005: 4).

The Blue Ocean is created by generating new value through innovation and its alignment to utility, price and cost positions. (cf. Kim and Mauborgne, 2005:13). The basic strategic concept for creating uncontested market space is called Value Innovation. In the context of unknown market space, the value innovation means a higher value as utility for the customer and to cost savings due to elimination or

43 reduction of competition pressure (cf. Kim and Mauborgne, 2005: 16) (see Fig. 17).

Fig. 17: Value Innovation (Kim and Mabourgne, 2005:16)

For creation of uncontested market space, the authors of “Blue Ocean Strategy” propose the Four Actions Framework, which contains four key questions “to challenge an industry’s strategic logic and business model”. (Kim and Mabourgne,2005:29). These are the four questions of the framework: 1) Which of the factors that the industry takes for granted should be eliminated? 2) Which factors should be reduced well below the industry’s standard? 3) Which factors should be raised well above the industry’ standard? 4) Which factors should be created that the industry has never offered? The first two questions go for the way how to drop the costs versus competitors, whereas the last two suggest possible ways to increase the value to customer and create new demand.

In completion to this framework and on the basis of its four questions, a key analytical tool called “The Eliminate-Reduce-Raise-Create-Grid”, establishes four action fields within a grid. This tool is recommended by the authors of “Business Model Generation” as perfect extension to their Business Model Canvas (cf. Osterwalder and Pigneur, 2010:226). Osterwalder and Pigneur adapt the approach by blending the Blue Ocean Strategy

44 framework with the business model canvas. (Osterwalder and Pigneur, 2010:228). According this adapted approach, the grid containing the questions from the Four Action Framework is the basis for the evaluation of Value Proposition and business models and creation of new markets, by exploring new Customer Segments.

Fig. 18: “The Eliminate-Reduce-Raise-Create-Grid” Based on the Four Actions Framework of Blue Ocean Strategy – adapted by (Osterwalder and Pigneur, 2010:227)

Blending Blue Ocean Strategy and Business Model Canvas, Osterwalder and Pigneur make the suggestion to apply the questions from Four Action Framework to each of the nine building blocks of the Business Model Canvas (as illustrated in Fig. 19).

Fig. 19: Blending Approaches for Analysis (cf. Osterwalder and Pigneur, 2010:228)

4 Business Case Magna Steyr

When selecting the Austrian based company as a case study, the author of this thesis was inspired by the dynamic progress from its foundation to today.

Magna Steyr, a subsidiary of Magna international, is today a symbol of the successful ‘symbiosis’ between an engineering service provider, a Tier 1 and Tier 0,5 supplier.

Having an experience of over 100 years and a wide product and service portfolio, Magna Steyr has as core capabilities the design and assembly of entire vehicles, the development and manufacturing of components and systems, and innovative solutions for the mobility of the future. The company consolidates its position in the industry by introducing its “own new ideas and new developments”. As “international leading contract manufacturer and engineering partner of automotive manufacturers, is committed to a clear growth strategy. The primary means to achieve this will be the expansion of the product portfolio, intensified internationalization and the development of programs for new customers”. (Magna Steyr Homepage, 2010b)

As regards to the cost pressures that a contract manufacturer faces when it has to absorb several OEM’s costs, Mr. Guenther Apfalter, President of Magna Steyr, explained in an interview dated 2008 (cf. Kunal N Talgeri, 2008), that a contract manufacturer has to offer “more than just developing cars and manufacture those cars”, has to be cost-effective by benchmarking itself “against current plants located in Europe and North America” and even against plants in low-cost countries (to seek projects in Turkey, India and Russia), to react quick and be flexible.

Regarding profitability, Mr. Apfalter said: “(…) not just every plant, but every product that the plant makes must be independently viable”. (Mr. Mr.Guenther Apfalter (2008, cited by Kunal N Talgeri, 2008).

4.1 Short History of its Business Model

Magna Steyr AG& Co KG was founded 2001 as subsidiary of the auto supplier Magna International, 3 years after the acquisition of majority holding in the Steyr- Daimler-Puch assembly plant by Magna International. Magna Steyr took over the contracts and capabilities of the former plant including 6000 employees. In 2001 Magna Steyr has assembled the Mercedes M-class and the Jeep Grand Cherokee WJ/WG and prepared the launch of production (in 2003) for SAAB Cabrio. From Steyr-Daimler-Puch took over also contract manufacturing for Mercedes-Benz G- class (in series production since 1979), for Mercedes-Benz E-Class 4MATIC (production till 2002), SAAB 9-3 Convertible series 342 (production till 2002).

At the SAE World Congress and Exhibition 2001 in Detroit, Magna International introduced its engineering company Magna Steyr as a company able “within 32 months, up to 36 months to build a complete car” (Mr. Siegfried Wolf, President and CEO of Magna Steyr (2001,cited by Automobil industrie, 2001).

Fig. 20: History of Magna Steyr. Source: http://magnasteyr.com/capabilities/vehicle-enginering-contract- manufacturing/about-magna-steyr/history

In 2002, the annual general meeting adopted via resolution the change of company name: − from the former Steyr-Daimler-Puch Fahrzeugtechnik AG& Co KG to MAGNA STEYR Fahrzeugtechnik AG& Co KG and

− from the former STEYR Powertrain AG & Co KG to MAGNA STEYR Powertrain AG &Co KG In the same year, MAGNA STEYR took over Eurostar, a former plant of Daimler Chrysler. The acquisition included also an agreement for the production rights for a new Daimler Chrysler model. With the acquisition of Eurostar, the production capacity at Magna Steyr could increase up to 180.000 cars by 2004, ensuring further spare capacity of 70.000 units. Magna Steyr acquired from Chrysler the production of the minivan Chrysler Voyager and its dedicated 800 employees. Magna took over also the other 1200 employees of Eurostar with the goal to use the workforce for the production of BMW X3 SUV, the first project of MAGNA STEYR for BMW with start of production in 2003. (cf. Automobil Industrie, 2002).

2003 was at Magna Steyr a year of launches in production for several car models: the Mercedes-Benz E-Class series 211 (produced till 2007), the SAAB 9-3 Cabrio and the BMW X3 (produced till 2010). With this wide range of models, Magna Steyr proves itself as “competent specialist for all kind of niche vehicles and special models” as declared by Dr. Herbert Demel, chairman of Magna Steyr (2003, cited by Automobil Industrie, 2003a).

About 5.600 people were employed 2003 in the final assembly of the cars in the both plants of Magna Steyr (the former Steyr-Daimler-Puch and the former Eurostar factories). The Magna Heavy Stamping in Albersdorf/Gleisdorf (district Weiz) supplied stamping parts and welding assemblies for vehicles with a workforce of 800 employees. The powertrain components supplied for the car manufacturing have been produced in Ilz (Fürstenfeld district) or in Lannach, near to Graz. The engineering activities were supported locally by 250 employees of the Magna Steyr Engineering Center in St. Valentin/Steyr, specialized in simulation and calculation software, engineering in the field of vibration and acoustics as well as gear and truck engineering. Further 90 employees for automotive engineering were located at the Magna Steyr headquarter in Oberwaltersdorf (Lower Austria). (cf. Automobil Industrie, 2003b). 2003 Magna Steyr had built 113.000 cars in Graz and achieved a turnover about 2,11 billion Euros. (Automobil Industrie, 2004a).

In 2004, the Magna Steyr’s business unit Powertrain was hived off into a separate company named as Magna Group MAGNA Drivetrain. In same year Magna

Drivetrain has announced the acquisition of two major contracts from General Motors (for development and production of new generation of transfer gearbox) and Volkswagen (for development and production of a new generation of all-wheel drive gearbox). (cf. Automobil Industrie, 2004b). Short time after the separation in the new company Magna Drivetrain, the Magna International acquired the worldwide operations of the New Venture Gear, a DaimlerChrysler subsidiary specializing in the production of transfer cases and other drivetrain products, and kept only in the USA the business as a joint venture with Chrysler (20% share of Chrysler). (cf. Automobil Industrie, 2004c). In June 2004 Magna Steyr Fahrzeugtechnik AG & Co.KG has aquired the engineering division of the French-based Groupe Douarte including five locations in France with 300 employees. Through this acquisition Magna Steyr had strengthened its local presence and position as automotive supplier and engineering service provider towards the French OEM’s. Thus its total work force involved worldwide in the engineering activities increased to 1.500 employees. Magna Steyr top management declared in a press release the intention to develop classical components at the new locations in France. (cf. News, 2004).

In 2005, with the acquisition of the Fuel System Group from the separate public company Tesma International Inc., Magna Steyr focuses the expansion of capabilities in the powertrain business area. Magna announced officially the merger of Magna Drivetrain and Tesma International to form Magna Powertrain. (cf. Magna Seating Systems Homepage, Keyword: Our History.)

The same source has indicated another milestone in 2006, when Magna international Inc. acquired Car Top Systems (CTS), former subsidiary of Porsche AG, specialized in producing roof-modules for vehicles.

According the Homepage of Magna Steyr, the Magna Car Top System Group integrated at the beginning of 2010 as an autonomous business unit of Magna Steyr, adding the roof systems to its complete vehicle competence. The new business unit could in parallel expand capabilities in Japan through the acquisition of Karmann Japan Co. Ltd., the former subsidiary of Wilhelm Karmann GmbH and convertible system supplier. This extension of Magna Steyr’s manufacturing footprint by 2 production facilities in Japan included also new business with the Japanese car manufacturer Nissan. (Magna Steyr, 2010a).

2010 another important business unit was integrated into Magna Steyr: ACTS (Advanced Car Technology Systems) founded 1997 and located in Sailauf, Germany, was affiliated to Magna Steyr Engineering Germany. ACTS develops, simulates and tests components and functional systems, particularly in the field of passive vehicle safety. The range of services comprises functional integration (e.g. integral safety, passive/active pedestrian protection, cockpit safety, safety for e-vehicles) and testing (e.g. tests for environmental simulation, planning, development simulation, CAD, manufacturing of test rigs and training, prototyping and low-volume assembly). (cf. ACTS Homepage, Keywords: history, company profile).

2011 following the acquisition of Erhard & Söhne, a supplier of tank systems and compressed air tanks for commercial vehicles, a new competence area, fuel systems, integrated into Magna Steyr.

In August 2012, Magna E-Car Systems was re-integrated into Magna International. Following this re-integration, the Battery Systems business is part of the Magna Steyr Fuel & Battery Systems. (cf. Magna Steyr Homepage. Keyword: Magna Steyr history).

4.2 Analysis of Existent Business Model

In 2001, the business model of Magna Steyr was strongly influenced by the capabilities inherited from the former company Steyr-Daimler-Puch Fahrzeugtechnik AG & Co KG, whose majority holding was acquired in March 24th 1998 by Magna International Inc. More than 100 years tradition and experience in vehicle manufacturing and over 50 years of experience in co-operations in automotive manufacturing for OEM’s as Audi, DaimlerChrysler, Fiat and Volkswagen, and using continuously accumulated specific know-how for “all-wheel-drive and off-road vehicles rounding off the total vehicle competence” (Magna Steyr Homepage. Keyword: product history), help Magna Steyr to keep competitive advantage: the gained experience is today a USP of the Austrian facility.

The author of this thesis see the business model between 2001 and 2003 as illustrated in Fig. 21 (next page).

Fig. 21: Business Model of Magna Steyr in 2001-2003 (based on Business model Generation Canvas of Osterwalder and Pigneur, 2010)

Since its foundation, Magna Steyr AG & Co KG consolidated continuously its core competences based on the experience in automotive manufacturing (contract manufacturing and design of complete vehicles) with additional competences, through a wide range of products and services.

In 2012 Magna Steyr had centers of competence at 37 sites worldwide and 10.500 employees in North America, Europe and Asia. The range of products and services offered by Magna Steyr consists of four areas: Engineering Services, Vehicle Contract Manufacturing, Roof Systems and Fuel & Battery Systems. (cf. Magna Steyr, 2012).

The area of Engineering Services offers the development of integrate modules and systems, with focus on the complete vehicle and using the existent global engineering network (2000 engineering employees at 15 locations worldwide), called OpenLink (cf. Magna Steyr TV –on You Tube-, 2013). The use of all the engineering resources worldwide allows the development of a complete car within 22 months. The engineering center in Graz plays a central role in the coordination of the engineering activities. Each engineering location has a specific competence within the OpenLink. For example: the team located in Turin

(Italy) is specialized in styling, the team located in Shanghai (China) is responsible for BIW and trim, and the team in Pune (India) takes care of vehicle acoustics and safety. There are four project steps from the project idea up to serial production readiness of a car (cf. Magna Steyr TV –on You Tube-, 2013):

(1) the discussions with the customer about platform specification, requested location for the project realization (location where the engineering activities converges in a Project House), requested parameters (e.g. adjustments to a specific market, features for car safety, features for pedestrian protection). (2) the engineering center in Graz defines the project team and engineering strategy. A project leader from each expert team location is assigned in the Project House. (3) the project development begins with the use of virtual development tools and worldwide standards; the development processes are supported by the continuous feedback and fine-tuning within the assigned international engineering network. The virtual development and the high expertise of the team ensure a project realization in shorter time and in a more efficient way. (4) once the project requirements were fulfilled and the development targets were achieved, the car is ready for the assembly.

A few examples of vehicles virtually developed at Magna Steyr that are mentioned on Magna Steyr’s Homepage, prove the high expertise in interaction simulation, measuring and testing combined with the so called “complete vehicle competence”: BMW Z4 Coupé, BMW X3, Fiat Bravo and Peugeot RCZ. (cf. Magna Steyr Homepage. Keyword: Product & Service. Engineering Services: Complete Vehicle).

Other fields of engineering services at Magna Steyr are: - Body&Trim (also using virtual development and focusing on lightweight construction technologies) - Electrics/Electronics (concept and development of EE architecture, component, subsystem and system integration in the complete vehicle, automated validation and verification, EMC competence center, and functional safety –ISO 26262-) - Chassis and Powertrain (conception, development and integration of chassis) - Prototype (manufacturing of concept vehicles, test vehicles and prototype

vehicles) - ACTS (competence in design of solutions for passive vehicle safety) - Aerospace (specific fuel technologies, thermal structures, satellite-drive systems) (cf. Magna Steyr Homepage. Keyword: Product & Service. Engineering Services ).

In the area of Contract Manufacturing, Magna Steyr offers complete vehicle production with associated industrial services, and even door modules. Magna Steyr produced as contract manufacturer some 2,5 million vehicles in 21 models. (Magna Steyr Homepage, 2013).

The mix of brands and models produced 2012 in Graz were as follows (cf. Magna Steyr Homepage): Brand - Model SOP Services performed by Magna Steyr

Mercedes – Benz G-Class 1979 engineering and contract manufacturing of complete car Mercedes – Benz SLS 2009 engineering and contract manufacturing of AMG aluminum body aluminum body engineering and contract manufacturing of Peugeot RCZ 2010 complete car Mini Countryman 2010 contract manufacturing Mini Paceman 2012 contract manufacturing

Fig. 22: Mix of Brands and Models produced by Magna Steyr 2012 (cf. Magna Steyr Homepage).

In the area of Fuel & Battery Systems, Magna Steyr offers development and manufacturing for energy storage systems (from conventional fuel tank systems for passenger cars and for trucks to battery systems for HEV, EV and PHEV). In the area of Roof Systems, Magna Steyr offers development and manufacturing of soft tops, retractable hard tops, modular tops, hard tops.

Magna Steyr has no traditional mission statement. As a subsidiary of Magna International Inc., the company is guided by the key principles outlined in the “Corporate Constitution” and the “Magna Employee’s Charter” that govern the parent company. According the “Magna Corporate Constitution”, for R&D is allocated a minimum of seven percent of its profit before tax (EBT) “to ensure its long-term viability” (Magna Steyr Homepage. Keyword: About Magna. Our culture).

As proof for its innovative ability, Magna Steyr created the concept car family MILA (Magna Innovation Lightweight Auto). The first concept car of the MILA family, MILA 1, was presented for the first time at the IAA Motorshow in Frankfurt 2005 and was a single-seater sports car with a mid- engine and rear-wheel drive, powered with CNG. Meanwhile there are several other concept cars within the MILA brand (cf. Magna Steyr’s MILA Homepage. Keyword: MILA Vehicles): − MILA 2 (two-seater version), − MILA Alpin (a compact off-roader with alternative drive options), − MILA EV (small and light city car as electric vehicle concept), − MILA Aerolight (light compact four-seated CNG vehicle with low CO₂ emission) − MILA Coupic (SUV coupé as 3-in-1 vehicle concept).

Analyzing the business model of Magna Steyr of year 2012, the author of this thesis sees the business model canvas as shown below, in Fig. 23.

Fig. 23: Business Model of Magna Steyr in 2012 (based on Business model Generation Canvas of Osterwalder and Pigneur, 2010)

The core business model 2012 of Magna Steyr shows a high grade of diversification of product portfolio, intensified customer orientation through significant increase of

54 flexibility, customized solutions (production size adapted to customer’s requirements from low volumes to higher serial volumes) and a centrally coordinated global presence.

By examining and comparing the canvas of the business model in 2012 and the business model for the period 2001-2003, the following changes are in evidence:

a) New customer segments and maintenance of long-term business relationship are in focus (meanwhile the capabilities of Magna Steyr and customer satisfaction are the basis for new business with the former customer of the old company Steyr Daimler Puch Fahrzeugtechnik).

b) New customers can enjoy a higher flexibility and wider range of services than 2003; there are cost implications for achieving the current performance but higher chances for new business and acknowledgement for the proved expertise make the efforts worth.

c) The use of OpenLink is an important competitive advantage ensuring global presence; with this global engineering network, Magna Steyr can offer support wherever the customer needs.

d) The reduction of development time for a complete vehicle from 32-36 months to only 22 months by using means of virtual development is an outstanding performance; the shortening of development times ensure an adaptation to market demands and helps to keep development costs to a lower, predictable level.

e) The new capabilities (as module and system supplier) add new revenue stream models to the already existent ones.

f) The concept car family MILA shows the improved capabilities of Magna Steyr in terms of design, lightweight materials, powertrain and roof technologies.

g) Through several research activities, Magna Steyr developed competence also in aerospace technologies.

h) Through its various activities and projects independently developed, Magna Steyr strives to remain cost-effective and competitive.

i) The risks regarding project cancellations or contract withdrawals increase due

to economic crisis.

For a better illustration of the transformations necessary to attain the recent performances, the analysis of the differences between both business model canvas (the business model 2012 with the business model for the period 2001-2003) uses “The Eliminate-Reduce-Raise-Create-Grid “ from the Blue Ocean Strategy according the interpretations of Osterwalder and Pigneur (Osterwalder and Pigneur, 2010:227) - see Fig. 24.

Fig. 24: The “Eliminate-Reduce-Raise-Create-Grid” Applied to Magna Steyr’s Business Model from 2001 to 2012

4.3 Conclusion

The purpose of the company is described In the Disclosure from the Magna Steyr’s Homepage as follows: “to exercise the function of a holding for and hold shares in companies dedicated to the development of complete vehicles as well as vehicle components (design of comprehensive solutions from receiving the customer’s order up to the start of production) and the production of vehicles for specific market and product demands (body-in-white, paint shop, complete vehicle assembly, CKD-kits, etc.) “.(Magna Steyr Homepage. Keyword: Disclosure: Purpose of the company).

The analysis of the Business Case related to Magna Steyr does not unveil a new disruptive business model. The target customer segments remain the OEM’s interested in the core competences of Magna Steyr. The revenue stream models stay in line with the new and/or improved value propositions.

According the findings of this analysis, the main innovative aspect is not related only to innovation in the business model of Magna Steyr itself.

The innovation of the business model results from the focus on technological innovations and continuously growing experience in contract manufacturing; the improvement of service portfolio offered for the development of systems and complete vehicles (with new USP’s such as rapid prototyping, simulation, development collaboration within global engineering network OpenLink) had a significant contribution to the innovative change of the Magna Steyr’s business model.

In its manner of doing business, Magna Steyr is striving to create value innovation through its efforts to attain higher value as utility for the customer and cost savings due to elimination or reduction of competition pressure.

5 Business Case Bosch Engineering GmbH

The author of this thesis has selected Bosch Engineering GmbH, the wholly owned subsidiary of Robert Bosch GmbH specialized in engineering services, as the second business case related to service innovation at Tier 1 suppliers in the automotive industry.

Bosch Engineering GmbH was founded following the strategic decision of the mother company to intensify the activities in the field of software development and application services for the motor sports and other special projects for the automotive industry. The organizational separation from the parent company through the foundation of an own company with limited liability (GmbH) simplified the delivery of services to other companies.

Looking at the classification of maturity level for the service organizations according (Geisbauer et al, 2012:4), the author of this master thesis appraises the maturity level of Bosch Engineering GmbH as a level 5 service organization with a collaborative business model, which extends the core service business model in other segments.

In a ranking of the European Automotive ESP, the Bosch Engineering GmbH was 2011 mentioned on place 14, showing a share of approximately 90% of revenue attained with automotive engineering activities, as illustrated in Fig. 25. (Christian Kleinhans and Christian Otto, 2012).

Fig. 25: Ranking of the European Automotive ESP’s 2011 according Berylis Strategy Advisors Research & Analysis (2012, cited by Kleinhans and Otto 2012)

Fig. 26: Customer Perception on the Ranking of European Automotive ESP’s 2011 according Berylis Strategy Advisors Research & Analysis (2012, cited by Kleinhans and Otto 2012)

According the same source as for Fig 25, the profile of Bosch Engineering is described a company more focused on segments, which offers services focused on project/system integration, as illustrated in Fig. 26.

5.1 Short History of its Business Model

Bosch Engineering GmbH was set up in 1999, as a 100% subsidiary of the Robert Bosch GmbH, under the name ASSET Automotive Systems and Engineering Technology. Its initial staff comprised 13 associates. It started with services for luxury-class cars, development studies and special models of series-produced vehicles. The company has grown rapidly; in 2000 had 100 employees. (cf. Bosch Media Homepage, Automotive Technology, 2009).

The product and service portfolio of ASSET Automotive Systems and Engineering

Technology has expanded 2002 through the acquisition of the company Erphi Electronic GmbH, service provider for engines and engine components specialized in charging, injection, and exhaust gas treatment systems. Erphi Electronic GmbH proved continuously its high expertise: for example, by developing a regulated two-stage turbo-charging system for diesel engine. The benefits of development were seen especially in downsizing concepts. (cf. Automobil Industrie, 2005).

In 2003 were 2 major changes: from 01.01.2003 the renaming of the company as Bosch Engineering GmbH (BEG) and the integration of Bosch Motorsport as its division specialized in the development and manufacturing of motorsports electronics and motorsports components. (cf. Bosch Engineering GmbH Homepage. Keyword: About us. History). With the know-how, which relies on 111 years of Motorsport Technology from Bosch, Bosch Motorsports offers services and products to complete racing series and individual teams; for example is the exclusive supplier for DTM series, the U.S. Grand Am racing series, and Formula 3 Euro Series. Since the beginning of the 1980’s Bosch Motorsport fitted electronic series gasoline injection systems and engine control systems in Formula 1 vehicles. As special service for the collectors of classic cars and the restorers of historical racing cars, Bosch Motorsports offers services like maintenance (spare-parts), repair and technical support of dyno- and track tests. (cf. Bosch Motorsport Homepage).

In 2005, Bosch Engineering GmbH was relocated to the new development center for automotive engineering in Abstatt, near Heilbronn. The workforce of BEG comprised 600 associates. (cf. Automobil Industrie, 2004c).

In 2006, the Bosch Engineering K.K. in Yokohama, Japan was founded. The Japanese office focuses on the processing of projects and system development for the automotive industry. According the Bosch Motorsport Homepage, in the office located in Yokohama are represented also the activities of Bosch Motorsport for Asia-Pacific.

In 2007, Bosch Engineering GmbH expanded its global presence with Bosch Engineering North America located in Farmigton Hills, USA and Bosch Engineering France, located in Saint Ouen (Paris). The engineering services of both offices

60 supplement the portfolio of the regional Robert Bosch affiliates. According the Bosch Motorsport Homepage, in the Bosch Engineering North America are represented also the activities for Bosch Motorsport for North- and South America. Bosch Engineering France has as core competences the development for niche projects and projects with low production volume.

In 2008, the product and service portfolio of Bosch Engineering GmbH expanded in the field of general aviation with the foundation of the regional company Bosch General Aviation Technology GmbH, located in Vienna, Austria. The BEG affiliate, Bosch General Aviation Technology GmbH, represents a new division specialized in services and products for electronics systems in general aviation. (cf. Bosch Engineering Homepage. Keyword: About us. Related Divisions. Bosch General Aviation Technology GmbH.) In 2008 Bosch Engineering GmbH had 1000 associates.

In January 2009 another Bosch Engineering location was opened in Vienna, Austria. Bosch Engineering Austria offers services for software and function development for gasoline and diesel projects. In July 2009, at the celebration of its 10th anniversary, Bosch Engineering GmbH had roughly 1400 associates in Germany, the U.S., Japan, France and Austria. The company’s portfolio included “services range from initial studies to series production, and focus on the specific software development for engine management, safety, and comfort systems, and their electrical or electronic integration.” (Bosch Media Service Homepage. Automotive Technology, 2009). The services were related not only to passenger cars; meanwhile these covered also areas such as commercial vehicles, construction and agricultural machinery, ships, and industrial applications. Testing services and the pool of Bosh Group’s motor sport activities rounded off the company’s profile at its 10th anniversary.

From October 2009, Bosch Engineering GmbH participated for 3 years, together with Robert Bosch GmbH, as partner in a research project (with open innovation collaboration) called e performance, started by Audi AG and Audi Electronics Venture GmbH, the 100% subsidiary of Audi AG. (cf. Audi AG Homepage. Keyword: e performance). Other project partners were: RWTH University Aachen with 3 of its institutes (ISEA –

Institute for Power Electronics and Electrical Drives, IEM – Institute for Electrical Machines, IKA – Institute for motor vehicles), the Technical Universities in München, Dresden and Illmenau, and the Fraunhofer-Institute with 2 of its institutes. The goal of the research project was the development of a modular system for electric cars with flexible modular technology, which also included a plug-hybrid drive. In with focus of the open innovation project was the building up of new components and sub-models, the research vehicle F12 and the development and testing of a high-voltage battery. (cf. Electronikpraxis, 2012).

In March 2010 the Bosch Engineering location in Shanghai, China was inaugurated. According the Bosch Engineering Homepage, Bosch Engineering China focuses on processing projects and developing systems for the automotive industry.

From 2011, Bosch Engineering GmbH offered also services related to the development of systems for hybrid and electric vehicles. Focus of the services was the system-, function-, and software development for drive systems and solutions for vehicle dynamics and their electrical and electronic integration. The focus of development was on prototypes and small services. (cf. Januch Stephan, 2012)

In July 2011 the Bosch Engineering location in Nuneaton (Coventry), United Kingdom was opened. Bosch Engineering UK offers complex development for international vehicles and engine manufacturers. In October 2011, Bosch Engineering GmbH was active around the globe with some 1600 associates at eight locations in Germany, Austria, France, the United Kingdom, the United States, Japan and China. In a press release at that time, Mr. Bernhard Bihr, the company president, declared: “Of the 500 projects or so we work on for customers each year, no two are ever alike. (…) Whatever the field in question – be it commercial vehicles, agricultural and construction machinery, rail vehicles, robots and driverless vehicles, industrial and marine applications, or leisure craft – we offer individual electronic systems for diverse applications” . (Bosch Media Service. Automotive technology, 2011).

In November 2011 the engineering activities expanded to South America and a new Bosch Engineering location in Curitiba, Brasil was opened. According the Bosch Engineering Homepage, Bosch Engineering Latin America offers complex development services for international vehicle and engine manufacturers. For the

62 local motorsport Bosch Engineering Latin America offers components and development services.

In January 2012, the Erphi Electronic GmbH, part of the Bosch Engineering GmbH, was renamed in Bosch Systems Engineering GmbH. (cf. Bosch Engineering GmbH Homepage. Keyword: About us. History). In summer 2012 Bosch Engineering GmbH presented a new tool for the optimization of tests in the diagnosis communication of the software developed for engine electronic control units, called Masic. Bosch Engineering GmbH proved its expertise in the development of engine control units with a significant increase in efficiency in the diagnosis communication. (cf. Krakovszki and Götz, 2012). According a press release published in September 2012, Bosch Engineering GmbH had extended its portfolio of customized services for commercial vehicles. As a new service, the company offered support for the electrification of high-way applications’ powertrains. The components for the off-highway segment complete the comprehensive portfolio of Bosch Engineering services for the electrification of commercial-vehicle powertrains: the design, development, and simulation of complete systems and operating strategies, engine-management and power- electronics software adaptation, and system-component application. The press release mentioned as scope of the Bosch Engineering services also the construction of demo systems and concept vehicles. Bosch Engineering was presented as “a system engineering partner for nearly every kind of powertrain: from all-electric and hybrid drives, to monovalent CNG, bi-fuel, and dual-fuel engines, to classic diesel engines. In their work, their specialists can draw on proven large-scale series technology developed by Bosch, and adapt its electronic systems to the special requirements of vehicles and target markets”. (Bosch Media Service Homepage. Automotive Technology, 2012a).

In another press release published at same date (September 18th 2012), Bosch Engineering GmbH presented its system solutions for the connection of vehicle systems with external IT systems. These systems are used for applications such as fleet management, condition monitoring, and vehicle locating for commercial vehicles. Bosch Engineering expanded its portfolio with the offer of connectivity hardware for commercial vehicles and off-highway systems. In addition to connectivity hardware, the new technical system offers also include software solutions. Bosch Engineering GmbH has been presented as a global engineering

63 service provider, who offers “engineering services for automotive, industrial and marine applications, railway and commercial vehicles, construction and agricultural machinery, as well as powersports and general aviation – independent of the actual production needed.” (Bosch Media Service Homepage. Automotive Technology, 2012b).

5.2 Analysis of Existent Business Model

When considering the business model of Bosch Engineering in 2003, the corresponding business model canvas can be shown as below (see Fig. 27).

Fig. 27: Business Model of Bosch Engineering GmbH in 2003 (based on Business model Generation Canvas of Osterwalder and Pigneur, 2010)

The main fields of application in 2003 focused on electronic systems and drive systems of automotive sector. The capabilities of the initially company ASSET Automotive Systems and Engineering Technology have been extended through the acquisition of Erphi Electronics and the integration of the Motorsport Division at the renaming of the company into Bosch Engineering GmbH.

In 2012, Bosch Engineering GmbH offers a broad range of services also for other fields of application: “commercial vehicles, construction and agricultural machinery,

64 rail vehicles, industrial and maritime applications, as well as leisure vehicles, optimizing the technology for each respective field of application.” (Bosch Engineering Homepage. Keyword: Fields of Application).

The range of services begins with the development of systems, functions and software; continues with development testing services and consulting; through to sales and distribution of sensors; and culminates in complete systems for motorsports. The range services related to development of systems refer to engine and powertrain management, Chassis management and driver assistance systems, Occupant safety, Power supply systems and energy management, and Bus systems and in-vehicle networks. (cf. Bosch Engineering GmbH Brochure at IAA, 2012).

The service portfolio of Bosch Engineering GmbH at beginning of 2013 comprises also:

- consulting (on-site support cooperation for optimization of quality management methods, project management, development processes, software engineering, security processes, open source software management, etc). (cf. Bosch Engineering Homepage. Keyword: Services. Consulting)

- testing services (through offering of facilities and services for measurements that are necessary for developing vehicle systems)

- training courses as in-house seminars in cooperation with the parent company, Robert Bosch GmbH, on topics of engine control systems for gasoline and diesel engines, the hybrid system, and the electrical system. Training courses are also offered for topics from their service range (from quality management to on-board network management) (cf. According Robert Bosch Engineering Homepage. Keyword: Services. Training Courses).

- functional safety and safety standards - services such as safety consulting, safety development and safety evaluation for Automotive (ISO 26262, ISO 6469, ECE guidelines) , for mobile work machines and industrial applications (ISO 25119, ISO 13849, IEC 62061, machine guidline, etc.), for rail vehicles (DIN EN 50128, DIN EN 50129, etc.), and for aviation (DO-178C, DO-254, ARP4754a, certification regulations, etc). The safety evaluation services include the checking of processes and safety organization related to functional safety within safety audits or the safety

assessment for the technical implementation of functional safety in products or components. Based on a successful safety assessment, the customers receive a technical assessment report “as basis for product release in accordance with ISO 26262 and a corresponding compliance certificate as evidence of the functional safety”. (Bosch Engineering Homepage. Keyword: Services. Safety Evaluation ).

According its homepage, the certification body of Bosch Engineering GmbH has obtained two accreditations, which refer to the testing and evaluation of products and management systems for functional safety of electrical/electronic systems. The standard ISO 26262 is the automotive-specific derivative of the standard for functional safety IEC 61508 and was elaborated specific to the development of electrical and electronic systems for the automotive industry. This standard covers the aspect of production (from small series up to mass production) and describes the requirements for the entire product life cycle of safety-relevant electrical / electronic systems for road vehicles, from the design phase to service and commissioning. For the elaboration of this standard, the experts have begun to work from 2003, first in Germany and France, then internationally from 2005. According Mr. Sauler Jürgen (2010, cited by Electronikpraxis Homepage, 2010), during the elaboration phase, also experts from Robert Bosch GmbH were involved. The standard was published in 2011, after the completion of the international voting within ISO community and entered into force in 2012, replacing standard for functional safety IEC 61508 for the automotive area.

Bosch Engineering GmbH presents itself in press, internet, new media, and is represented at prestigious events such as international motor exhibitions, professional conventions, racing events for motorsports (e.g. DTM, Le Mains 24- Hours Race, Formula 3 Euro Series, Grand Am).

The broad changes in the service portfolio and the international expansion of the operations of Bosch Engineering GmbH until today have significantly shaped the current business model.

The author of this thesis sees the business model of Bosch Engineering GmbH in 2013 as shown in the business model canvas below (see Fig. 28).

Fig. 28: Business Model of Bosch Engineering GmbH in 2013 (based on Business model Generation Canvas of Osterwalder and Pigneur, 2010)

The core business model in 2013 includes many new fields of application (compared to the business model had in 2003). The services are segmented corresponding to each field of application and are not offered as complete solution packages. Bosch Engineering describes on its homepage the service portfolio as a combination between individual solutions with the advantages of proven and tested large technology, (individual consulting is based on the benefits of know-how and expertise of the mother company, the Bosch Group).

By examining and comparing the canvas of the business model in 2013 and the business model for 2003, the following changes are in evidence:

a) There are much more customer segments addressed. The several customer segments can select from the broad range of services the desired ones. ´

b) Many new customer segments and maintenance of long-term business relationship are in focus (OEM’s luxury brands, OEM’s special models, OEM’s powertrain systems, and motorsport race series). The services offered for motorsport and classic car customers rely on the expertise in automotive technology of the mother company, which was involved since 1900 in the development and manufacturing of devices and components for racing cars,

and contribute in promoting the brand image of the company. c) New customers can enjoy a higher flexibility and wider range of services than 2003; there are cost implications for achieving and keeping the current performance but the high expertise and customer orientation increase the chances for new business. d) The partnership in research projects in new systems for alternative propulsions (such as e performance) contributes to the growth of know-how (gain of improved skills and qualifications within open innovation projects). e) Based on the long experience as developer of safety-technical systems, the company created a new service related to evaluation and assessment of management systems / processes and products (certification according the functional safety standards). The new service created also a new type of revenue stream, in completion to the others from the core business model of the company. f) Through the consulting services, the core competences of its employees are not limited only “to product development, but also to production, sales and distribution processes, as well as commercial tasks”. (Bosch Engineering GmbH Homepage. Keyword: Services.Consulting) g) The product and service portfolio dedicated for electronic systems in general aviation is covering a niche market segment. The sustainable growth is strongly influenced by the market-specific demand (and the projects have lower volumes than in the automotive industry). This can cause fluctuations in the utilization of capacity. h) The orientation towards applications for commercial vehicles and off-highway segment with support services for the electrification and the offer of connectivity hardware for commercial vehicles and off-highway systems follows trends of the automotive industry regarding the environmental regulations about reduction of emissions, and the extending of comfort applications with connectivity features (e.g. as mentioned in Chapter 5.1, page 64: dedicated to fleet management, condition monitoring, and vehicle locating for commercial vehicles).

For a better illustration of the changes in business model necessary to attain the recent performances, the analysis of the differences between both business model canvas (the business model from 2013 with the business model from 2003) uses “The Eliminate-Reduce-Raise-Create-Grid“ from the Blue Ocean Strategy according the interpretations of Osterwalder and Pigneur (Osterwalder and Pigneur, 2010:227) - as shown below in Fig. 29.

Fig. 29: The “Eliminate-Reduce-Raise-Create-Grid” Applied to Bosch Engineering GmbH’s Business Model from 2003 to 2013

5.3 Conclusion

Bosch Engineering GmbH, the 100% owned subsidiary of Robert Bosch GmbH, has established itself as a well known engineering service provider.

Regardless from the position in the ranking of global or European engineering service providers, Bosch Engineering has several competitive advantages: the close ties to the parent company provides access to its entire portfolio and the use of proven technologies and components for individualized solutions dedicated to projects with range from small volumes to mass-production volumes. Through these synergies, the company can offer innovative products and services with a special emphasis on optimum customer benefit.

The services introduced after 2003 changed the core business model through the broad extension to new application areas addressed with its new business units and growth of the range of its expertise for innovative solutions from automotive technology to transport technology, in a general approach. By offering more innovative products and services for more fields of application, Bosch Engineering tries to address more customer segments than its competitors.

The author of this master thesis considers, for example, both the addition of engineering services in the area of general aviation as well as the safety assessment services (certification services) at Bosch Engineering GmbH as examples of innovation in its services, and sees its current core business model as an extension of previous business model through innovative changes in its partial business models.

6 Business Case iPoint-systems GmbH

The author of this thesis has selected iPoint-systems GmbH as the third business case related to service innovation at Tier 1 suppliers in the automotive industry, motivated by its high grade of innovative sustainability solutions developed with strong focus on trends in product regulation. iPoint-systems GmbH is a software integration and consulting expert for environmental product compliance and sustainability in the automotive industry.

The areas of activity of iPoint-systems GmbH comprise solutions for three integration task categories:

− Environmental Product Compliance, − Sustainable Business Systems and − Process and Supply Chain Integration

The iPoint services are used by both OEM’s and suppliers. iPoint tools provide “automated and secure sharing of relevant information across the entire supplier chain – from product concept over the production and use, to recycling and reuse.” (CNW Canada Newswire, 2012).

The innovative capability of the company was honored several times since its foundation (the company was awarded four times with the quality seal “Top 100” as the most innovative medium-sized company in Germany). On the occasion of the award in 2012 a press release that was published on the iPoint-systems Homepage, cited from the speech of one of the “Top 100” – jury members, who at the ceremony had highlighted: “iPoint-systems convinces by its ability to react to changing circumstances quickly. Due to its excellent monitoring processes, the company can detect new market developments. Moreover, customers are involved in the developing projects. Overall, the company’s management level excels in its extraordinarily strong commitment in innovation management.” (iPoint-systems GmbH Homepage, 2012b).

6.1 Short History of its Business Model iPoint-systems GmbH was founded in 2001, as privately owned company. In the year of its foundation, the company implemented the compliance tool “iPoint Automotive Agent”. One year later, in 2002, the company has founded its office in Great Britain. 2003 has inaugurated its office in France and made the first installation of IMDS solutions. The efforts for innovative solutions were rewarded for the first time in 2005, with the award of the quality seal “Top 100”. In 2006 was awarded with the German Internet Award, with the El-Bank Prize for young enterprises and with the Deloitte Award “Technology Fast 50” as fastest- growing German technology company 2006 (cf. iPoint-Systems Homepage).

In 2007 iPoint-systems made its first OEM installation for the Life Cycle Assessment (LCA) application, with its product iPoint Compliance Agent, which was adapted for the requirements of the European Reusability/Recyclability/Recoverability directive. (CLEPA Homepage. Keywords: Events. IMDS Group, 2011). In the same year, the company founded its office in North America and was awarded for the second time with the award of the quality seal “Top 100” as Top- Innovator German medium-size enterprise 2007.

2008 has founded its office in China. In November 2008 iPoint-systems has implemented its Value Chain Agent at the tire manufacturer Pirelli. (cf. Automobil Industrie, 2008).

In 2009 was honored with the award of the magazine Impulse as “Deutschland Kundenchampion 2009”, and for the third time in five categories with the award of the quality seal “Top 100” as Top-Innovator German medium-size enterprise 2009. In spring 2009 iPoint-system improved a module of its software-tool Compliance Agent with additional features and re-named it; the former “Product Compliance Checker” got the new name “Compliance and Substance Inspector” after the tool improvement. The module‘s settings are based on pre-defined legal and customer-specific rules. Thus the check of substances used in manufacturing processes can be done not only on their attributes, but also for their compliance with national and international

72 environmental laws. (cf. automotiveIT , 2009b). According further press releases published 2009 in the magazine automotiveIT, the iPoint Compliance Agent has been implemented at the automotive supplier Dräxelmaier Group and at the OEM Aston Martin has begun to use the iPoint Compliance Agent. (cf. automotiveIT, 2009a and 2009c)

In 2010 iPoint has expanded its operations to Taiwan, founding an office, was awarded with the quality seal “Top-Arbeitgeber 2010” as top-employer, and has acquired the Austrian company KERP GmbH. (cf. iPoint-systems Homepage, 2010)

At its acquisition in 2010, KERP GmbH (company name is an abbreviation in German for “Center of Excellence Electronic & Environment”) was an established Austrian company founded in 2002 and specialized in research, development and consulting for electronics and automotive industries. KERP GmbH had the focus on the implementation of software solutions for life cycle assessment (eco-balance), the fulfillment of the requirements of the RRR EU- directive and carbon footprint. According the news release published in October 2010 on the website of KERP GmbH, the KERP-solutions will be integrated into iPoint’s already existent tool iPoint Compliance Agent. (cf. KERP Homepage, 2010) KERP had until 2010 several collaborations in research projects and initiatives related to waste prevention; the most significant examples are as follows: - a cooperation with the Technical University of Braunschweig, Germany, related to the software ProdTect , which allows manufacturers of electronic devices to control recycling effect of various materials from the planning stages through the determination of recycling quotas and “end-of-life” costs until 2005 (cf. KERP GmbH, 2005). - a project until 2006 with the Fraunhofer -Institute for Process Engineering and Packaging (IVV) related to the recycling of contaminated mixed plastics, which are generated in large quantities as shredder residue by the metal recovery from electrical or electronic waste (cf. Fraunhofer -Institute for Process Engineering and Packaging IVV Homepage, 2006) - a project based on an advancement of the existent software-tool ProdTect for application in a life cycle assessment module for the automotive industry; this research project was a cooperation with the Technical University in Braunschweig / IWF (Institute for Machine Tools and Production Engineering) and Magna Steyr Fahrzeugtechnik (Magna Steyr’s business unit for vehicle

technology). The result of this research project, the enhanced software-tool ProdTect eco was presented in May 2007 at the Conference “ECO-X- Sustainable Recycling Management & Recycling Network Centrope” in Vienna (Austria) and in August 2007 at the 16th International Conference of Engineering Design in Paris (France). ProdTect eco was presented as a software for environmental friendly automotive development, which meets the requirements of the European directive 2000/53/EG on end-of-life vehicles and 2005/64/EG on the type approval of motor vehicles with regard on RRR. (cf. Frad and Revnic , 2007)

In 2011 iPoint has expanded its operations to Sweden with the partner company Coresource AB, located in Stockholm. In summer 2011 gained certification in ISO 9001 and ISO 14001, as “recognition for the company’s systems for quality and environmental management”, as stated in the news release dated 05.08.2011 (iPoint systems Homepage, 2011a). According the newsroom information from the company’s Homepage, between September and December 2011, iPoint was actively involved in several international events: − participated as sponsor at the “IMDS and Compliance Summit”, organized by the American Association of Automotive Industry, named Automotive Industry Action Group (AIAG) in Dearborn, Michigan (U.S.A) (cf. iPoint-systems Homepage, 2011b) − contributed to a workshop related to shared global e-Business test bed infrastructure at eChallenges-Conference in Florence (Italy) (cf. iPoint-systems Homepage, 2011c) − participated as sponsor at the “IMDS Supplier’s Group Meeting” organized in Stuttgart (Germany) by CLEPA, the European Association of Automotive Suppliers.(cf. iPoint-systems Homepage, 2011d)

In a press release from September 2011 published in the Austrian business daily newspaper ‘Wirtschaftsblatt’, KERP GmbH, the Austrian member of the iPoint- systems Group, announced the intention to create a database for a new web based service for a more efficient recycling. For this project KERP GmbH cooperates with the Technical University in Vienna. (cf. Wirtschaftsblatt, 2011a).

In December 2011, the same Austrian daily newspaper ‘Wirtschaftsblatt’ has

74 published an article about KERP GmbH’s growth strategies and expansion of operations to the international markets. KERP GmbH had in focus the growth market China. By 2013 In China is expected to introduce a burden of proof in connection with substances and materials that are used for manufactured products, such as introduced in Europe. KERP GmbH had already contact with Chinese manufacturers. (cf. Wirtschaftsblatt, 2011b).

In February 2012 started the research project ‘Sustainability Data Exchange Hub’ (or simply shortened , SustainHub); some members of iPoint-systems Group are among the 16 European project partners (with iPoint-systems GmbH, KERP GmbH and CoreSource AB). SustainHub is a collaborative research project, which is funded by the European Commission under the 7th Framework Programme. (cf. SustainHub Homepage) In a press release of iPoint-systems published 2012, the goal of this research project is described as to develop “an integrated network solution for managing product compliance and sustainability data across entire supply chains.” (iPoint-systems Homepage, 2012a) .

In May 2012 iPoint-systems contributed to an article published in the international news magazine SIGNAL; the article contained the proposed SEC Conflict Minerals Rule, The U.S. Securities and Exchange Commission (SEC) was that time already scheduled to release the final rule regarding the Dodd-Frank Act regulation, a mandatory reporting of the so called ‘conflict minerals’. According this regulation and the SEC rules, all publicly traded US companies have annually to provide a disclosure report on conflict minerals. (Boland, 2012). Also in May 2012 Gartner, the information technology research and advisory company, included iPoint-systems in its report ‘Cool Vendors in Green IT and Sustainability, 2012’. Concerning the challenges of iPoint-systems, the Gartner report mentioned: “perhaps the most fundamental shift may be needed, to sell sustainable production as a managed service with appropriate service provision partners, instead focusing on dedicated software sales channel” (Mingay and Stokes, 2012).

In June 2012 the Quality seal ‘Top100’ honored iPoint-systems as Innovator of the Year 2012 (was one of the main award winners). (cf. iPoint-systems Homepage, 2012b).

In September 2012, a few weeks after the final implementation of the Dodd-Frank Act by the U.S. Securities and Exchange Commission, iPoint-systems published its iPoint Conflict Mineral Platform (iPCMP). The new web based data management tool iPCMP enables the identification of the so called ‘conflict minerals’ in products. According a press release from September 2012, the publication of this new tool came at an optimum time. Following the globalization of the supplier chains, the reporting requirements implemented through the Dodd-Frank Act regulation and the SEC rules also affect companies out of the U.S. borders (more than 280.000 companies worldwide). (cf. ’wallstreet:online’, 2012). At the same time a news release published on iPCMP-Homepage highlighted that the iPCMP-tool was developed in close cooperation with the American Association of Automotive Industry (Automotive Industry Action Group/AIAG) and provides the entire supplier chain a solution to meet the challenges of this regulation. (iPoint Mineral Platform Homepage, 2012) .

According the information presented at the CLEPA Supplier’s Group Meeting in December 2011, iPoint-systems had expected to expand in 2012 its international operations with new offices in Brazil and India. The iPoint-system Homepage mentions in 2013 only the new office in Brazil among its locations.

Approximately 7 months after the final implementation of the Dodd-Frank Act by the U.S. Securities and Exchange Commission, in March 2013, the European Commission launched a public consultation concerning on so-called “Conflict Minerals”. (cf. European Commission Homepage, 2013).

6.2 Analysis of Existent Business Model

In 2009, iPoint-systems has already implemented two main software-tools (the Automotive Compliance Agent and the Value Chain Agent) and operated in 4 countries (Great Britain, France, the United States of America, and China).

The services, such as consulting, implementation and training, were continuously improved, monitoring actively all new developments in the environmental laws and industry trends.

Considering the business model of iPoint-systems in 2009, the illustration can be shown as in the below business model canvas (see Fig.29).

Fig. 29: Business Model of iPoint-systems GmbH in 2009 (based on Business Model Generation Canvas of Osterwalder and Pigneur, 2010)

According the iPoint-systems Homepage, the service portfolio 2013 comprises areas such as: - consulting services, - customized implementation of software solutions/tools for compliance, sustainability, and process integration - training services for administrators and users - regular hosting of usergroups - SAP competence center for the integration of iPoint solutions in SAP systems - 24hours/7days customer support (through extended service contracts)

As an additional service on Environmental Product Compliance, the Austrian partner and member of the iPoint-system Group, KERP GmbH, offers free access to the ‘EnvironLex’ legislation portal, an online database of environmental legislation for Electronics and Automotive Industry. (cf. EnvironLex Homepage)

For the services offered through the iPoint Conflict Mineral Platform (iPCMP), the business model is different. iPCMP is a Software as a Service cloud-based solution, developed for the use along the entire supply chain, and since its publication runs on

77 a separate platform with all-in-one-place online data storage. The website of the iPoint Conflict Mineral Platform (iPCMP) has multi-language support (in English, Japanese and Chinese). According the information from the flyer available on the iPoint Conflict Mineral Platform Homepage, the iPoint-systems Group offers for training purposes free bi-monthly webinars, customized training and coaching, and workshops for impact analysis. Besides of reporting services, the iPCMP-solution offers also additional data care services for handling of data from the supply chain. (iPoint Conflict Mineral Platform Homepage, 2013). The tool is available as fully functional test version for a free trial period of 30 days. The licensing comprises two types of features: a basic license and a premium license. The licenses are awarded for one calendar year and have to be renewed after the end of period. (cf. iPoint Conflict Mineral Platform Homepage)

According a press release published in the finance magazine ’Wallstreet:online’ in September 2012, under preparation is the integration of the iPoint Conflict Mineral Platform (iPCMP) in a comprehensive compliance and sustainability software package that supports companies to comply with the full range of reporting requirements. (cf. ’wallstreet:online’, 2012)

The author of this thesis sees the core business model of iPoint-systems Group in 2013 as shown in the business model canvas below (see Fig. 30).

Fig. 30: Business model of iPoint-systems GmbH in 2013 (based on Business model Generation Canvas of Osterwalder and Pigneur, 2010)

By examining and comparing the canvas of the business model in 2013 and the business model for 2009, the following changes are in evidence at iPoint-systems:

a) There are more customer segments addressed. The target customers remain in the automotive industry and electronics.

b) Between 2009 and September 2012 (the date of publication of the iPCMP), the sales activities had in focus the western and central European countries, Northern Europe including the Baltic States (through Coresource AB), Great Britain, Unites States of America and started to accelerate the market entry in China, Taiwan and Brazil. Through the web-based services of the iPCMP, iPoint-systems could expand its global activities regardless of frontiers and of presence of local sales teams. In 2013, according the contact information from the iPoint-systems Homepage, KERP GmbH coordinates the international sales activities.

c) The core products, such as for example the Compliance Agent, are continuously extended and optimized. According the information from iPoint- systems’ Homepage, the adjustments for the iPoint Compliance Agent Release 9 were discussed with the user group. The customers’ feedback is important for the improvements of their solutions.

d) The structure of processes within the company allows an extensive monitoring of changes concerning markets and legislation. The company structure enables also the quick implementation of changes regarding environmental legislation or the IMDS platform in the iPoint tools. The success of iPoint- systems is influenced by their innovative capabilities and the ability to react and adapt quickly their business.

e) iPoint-systems is meanwhile a global acting leading expert company in environmental product compliance and sustainability. As an example of the acknowledgement of its competences and know-how in the environmental issues, iPoint-systems was designated by the American Automotive Industry Action Group (AIAG) as Planning Committee member and Platinum Sponsor at the “IMDS and Compliance Summit” in 2011.

79 f) The efforts for the creation of the IPoint Conflict Mineral Platform were considerable, considering the short development until its publication. The arising costs for this creation, maintenance and extension of this Platform can be balanced by the sales potential (as mentioned on page 76, about 280.000 firms worldwide may be affected by the reporting requirements for conflict minerals implemented through the Dodd-Frank Act regulation and the SEC rules). g) The active participation to expert conferences, events, fairs, etc. and their expertise in compliance and sustainability issues help to increase the notoriety of the company. h) A special attention to the relationship with its customers is underlined by the several meetings with iPoint-systems involvement. Many special events dedicated to OEM’s and Suppliers from the automotive industry are sponsored by iPoint-systems. (e.g. at CLEPA IMDS Suppliers’ Group Meeting in 2011, and at automotiveDAY at CeBIT in 2012 and 2013). Other events that are dedicated to separate customer segments are organized at the iPoint-systems headquarter in Reutlingen (e.g. the yearly iPont Compliance Agent OEM Customer Meeting). An important part of the more than 170 customers of iPoint-systems are manufacturers and suppliers in the automotive industry. i) The partnership in research projects such as SustainHub (international project with participation of three iPoint-systems Group members), or MoveRec, Green Innovation, and SmartResponse (with KERP GmbH and Austrian projects partners) contributes to the growth of know-how. j) The new services implemented between 2009 and 2013 contribute to improvement of customer relationships (through more know-how transfer, more involvement of customers in projects and strengthened partnerships with research institutions). The automated services, the creation of user group communities and dedicated personal assistance co-exist in the core business model 2013. By reviewing the press releases published before 2010, which are mentioned in the bibliography, the author of this thesis has estimated that the business model of 2009 had no hosting of user groups.

For a better illustration of the changes had in the iPoint-system business model, the analysis of the differences between the business model from 2013 and the business model from 2009 uses “The Eliminate-Reduce-Raise-Create-Grid“ from the Blue Ocean Strategy according the interpretations of Osterwalder and Pigneur (Osterwalder and Pigneur, 2010:227) - as shown below in Fig. 31.

Fig. 31: The “Eliminate-Reduce-Raise-Create-Grid” by Comparing iPoint-systems GmbH Business models from 2009 and 2013

6.3 Conclusion iPoint-systems has an innovative bundle of unique selling propositions: the selling of compliance and sustainability solutions as added value for the customers.

According a iPoint-systems product brochure from 2011 referring to their solutions, these “improve innovation and network capability, secure competitive advantages and minimize product risks, thereby boosting the sustainability and value” of their customers. (iPoint-systems Homepage).

According the same source as mentioned above, the iPoint-systems solutions have an average ROI (return of investment) “of less than six months”.

The creation of the iPoint Conflict Minerals Portal marked an innovative new service, which runs in parallel to the existent other products and services of the company. The new service changed partial business models of the core business mode, for examples such as: - customer model (new target groups, new channel type), - market offer model ( new product/services) - new revenue stream with differentiations (2 types of license: Basic and Premium for extended services)

The core business model has been changed through an extension of the existent business model, without to apply an aggregate disruptive change on it. The author of this thesis sees the new business model of iPoint-systems created via iPoint Conflict Minerals Portal as running separately from the business model had before, as part of a multiple business model that use synergies of the business model created before September 2012.

7 Critical Discussion Regarding the Conclusion of Research and Outlook

A conclusion on the research of this thesis can be provided by reviewing its research question:

What is the impact of service innovation on the business models used in the Automotive Industry between Tier1 suppliers and OEM’s?

In all the three case studies the creation of new services contributes to change of core business model. The innovative aspects of the new services are basically different, following the strategic move directions of each company at the creation of new market space.

Comparing the three cases studies regarding Value Innovation, the author of this thesis summarized the strategic moves of the analyzed companies as shown below (see Fig. 32):

Fig. 32: Comparison of the Three Case Studies regarding Value Innovation (Summary Using Elements According to Six-Path Framework (cf. Kim and Mauborgne, 2005: 79)

In case of Magna Steyr, the initial core competences were based on the experience of over 100 years in the design and assembly of cars. The harsh competition in case of contract car manufacturers and need to secure the economic efficiency accelerated the improvement of service portfolio offered for the development of systems and complete vehicles (including the virtual product development and the development collaboration within global engineering network OpenLink) had a significant contribution to the innovative change of the Magna Steyr’s business model between 2001/2003 and 2013. According the Magna Steyr Homepage, its innovation strategy has in focus the “customer needs and the brand-defining features” offering innovation “where projects and customers need it”. Through its continuous growth of its technological expertise in various areas (design, lightweight materials, powertrain technologies) proven by its concept car family MILA and the active cooperation to national and international research projects, the service portfolio of Magna Steyr can be steadily extended and thus new business opportunities with new market segments are opened (e.g. aerospace). The contract car manufacturer company is adapting its business strategy in line with the newest trends regarding technology and market, and even strives for the creation of new technological trends.

In case of Bosch Engineering GmbH, the engineering service provider founded 14 years ago by its parent company that has 102 years tradition in automotive technology, the innovative aspects are not only based on the classical engineering services dedicated to the automotive industry. New services changed the core business model through the broad extension to new application areas addressed. By offering more innovative products and services for more fields of application, Bosch Engineering tries to address more customer segments than its competitors. The author of this thesis sees the engineering service activities offered at Bosch Engineering GmbH in the area of general aviation and the safety assessment services (certification services) as examples of innovation in its services. The new service portfolio opens new business opportunities with new customer segments (general aviation industry, and other industries respectively) striving to create uncontested new market space. The driving forces that shape the business model of Bosch Engineering GmbH are: markets, technology and regulations. Through its technological expertise in the automotive industry and the advantages

84 provided by the close ties to the parent company, Bosch Engineering GmbH has even contributed as expert consultant company to the elaboration of the new standard ISO 26262, which is related to functional safety for automotive area. With the new services Bosch Engineering focuses a competitive position within its industry and at the same time looks across new products and services for customer segments of other industries.

In contrast to the previous two case studies, the service innovation aspect at iPoint- systems GmbH is different. iPoint-systems is a software system integrator and consulting service provider for automotive industry, electronics, and chemical & pharmaceutical industry. The innovative services offered by iPoint-systems contain a bundle of unique selling propositions (solutions for product compliance and sustainability). The creation of uncontested new market space is based on the high expertise in environmental regulations and the permanent monitoring of markets, information technologies and external trends (regulations). The permanent monitoring activities support the anticipation of trends in new services (are the source of the quick adaptation or extension of the service portfolio in order to cover the market potential). The iPoint Conflict Mineral Platform offers innovative services, which changed the business model in innovative manner. The new software as a service is also a result of participation to the shaping of external trends (as expert consultant company in the consultation phase prior to the final implementation of the Dodd-Frank Act by the U.S. Securities and Exchange Commission). The services offered via iPCMP address via cloud-based solution also customers beyond the borders of the country that initiated the regulation about reporting requirements for conflict minerals. These opened for iPoint-systems new business opportunities with OEMs and suppliers from the automotive industry and manufacturers of other industries that use minerals that could be supplied from conflicts zones around the world.

Not only differences but also similarities characterized the three business cases. In all these cases, the extension of the service portfolio in an innovative manner is followed by the change of the business model and the efforts to ensure the increase of their competitive advantages by accessing new market space.

In the case of the three Tier1 suppliers involved in the automotive industry the services that can be considered innovative are based mainly on redefining the boundaries of the target markets around new products created on technological innovation and growth of expertise. The new innovative service concepts for the product and service suppliers in the car industry can open new business opportunities with customer segments from other industries. The driving forces that change the established business models in the automotive industry are generally same as for other industries (technology, market, regulations) but follow in their weighting the specific of the industry. The Tier 1 suppliers in the automotive industry need innovation in products and services for preserving or creating of competitive advantage. The most innovative services appear by anticipating new external trends (completely new markets, creation of new cutting edge technologies, anticipation of new regulations or even contribution to their creation).

As seen in the theoretical part of the thesis, business models have value propositions in tangible and intangible form (products and services) among their basic components. By creating or reinventing services also new or extended business models are generated. Looking at business models extended through innovation in services in the automotive industry, the Value Innovation comprises in the differentiation of the corresponding business models from the business models of competitors regarding more added value and their related cost.

The findings of the analyzed business cases confirm the research hypothesis: innovative services that can develop to core competencies of a Tier1 supplier are basis for innovative business models.

The three case studies have presented tremendous changes in the way of doing business of Tier1 automotive supplier within a period of approximately one decade. What changes can provide the future prospects for the Tier 1 suppliers? As mentioned in Chapter 2.6 related to the future changes expected for the business models from the automotive industry, innovative services offered by Tier 1 suppliers become a key importance: − The need for more cost-efficiency and the new technological trends

(lightweight materials, fuel-efficiency, car-to-X connectivity, alternative fuels and electrification) demand innovative solutions and at the same time create new opportunities for extending the service portfolio − The shift in the division of labor between OEM’s and suppliers regarding manufacturing and engineering services is expected to continue and to influence the business models in the automotive industry − The need for new mobility solutions offers new opportunities by extending the traditional automotive value chain. The realization of the infrastructure for new mobility projects makes necessary co-operations between the established players (OEMs and Tier1 supplier) and non-automotive companies (energy service providers, telecommunication firms, ICT companies, etc.) − Sustained patent activities and the potential services based on these can offer an economic stability and growth in volatile markets − Extension of competences through mergers and/or alliances with other companies for strengthening the positions of supplier companies on the national and international markets can open new business perspectives − The alternative powered vehicles are expected to increase as market share; not only the engineering efforts on the side of Tier 1 suppliers but also their contributions to the standardization of new technologies related to these are key − Autonomous driving is no longer just a dream; as non-automotive company Google presented its version. Is not yet clear when can be possible the introduction on large scale of Self-driving cars in the future. Nevertheless this seems to be also an interesting area for innovative services for the automotive engineering and manufacturing.

The outlook for the future business models is as challenging as the times we live. The automotive industry, which had caused so much progress for the mankind, needs innovative services for innovative business models in order to make future advancements.

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