Lessons From the Microchip Shortage

April 05, 2022

This article was originally published on WardsAuto.

For years, the auto industry has focused on “bolt-on innovation” rather than driving meaningful change and renewal. After years of downplaying the rise of electric vehicles and autonomous driving, this lack of innovation has now crashed ashore in the form of a semiconductor shortage.

There’s no good way to sugarcoat the negative impact of the chip crisis on automotive. It has been projected that the scarcity of chips cost the industry $210 billion in revenue in 2021 alone. The lack of chips is also having a chilling effect on performance and new-product development. And the problem is here to stay with some semiconductor component companies – like Sumco – already sold out for years.

Instead of scrambling for a quick fix that doesn’t exist, the auto industry needs to take stock of what went wrong, and then take strategic steps to fix the underlying problems. On both counts, it’s important to understand that today’s supply-chain woes are symptoms of a deeper issue: lackluster innovation.

The Future Has Arrived; There Will Be Consequences

Today’s cars already operate as computing products just as much as they are “driving machines.” As such, one might expect automotive CEOs to prioritize the semiconductor supply as a strategic asset. But automakers have been too busy focusing on legacy priorities, hitting sales targets and shaving costs. They may have incorporated computer chips into their cars, but they did so as a bolt-on, not the central focus of a fresh approach.

In the 1990s and 2000s, this bolt-on mentality worked fine, but the world has changed. Over the past decade, a new industry model has been forming – which at its core is both digitized and electrified. The automotive industry as we’ve known it for decades is dying, but it is also being reborn.

There is a growing need for a grand pivot, and legacy OEMs and suppliers alike must struggle to catch up. The consequences of inaction already have manifested themselves in numerous ways and more problems are likely to follow.

Strategic Innovation Is the Answer

Most automakers are spending gobs of money on innovation – just look at General Motors, Ford and Mercedes-Benz. Unfortunately, too many companies throw money at innovation without building the necessary practices internally. In most cases, this is a failure on two levels:

  • Failure to distinguish between Core and Strategic innovation.
  • Failure to orchestrate Strategic innovation activities properly.

Strategic innovation is the ability to drive longer-term bets with the potential for paradigm-shifting change. The defining characteristic is the generation of novel growth options for the company’s future and a “portfolio” mentality, to manage the high degree of uncertainty associated with it. It is different from Core innovation, where the goal is to improve growth prospects within the current business.

This may sound obvious in theory but requires discipline to implement. Many companies simply add more “strategic” verbiage into the Objectives and Key Results (OKRs) for their current R&D and innovation teams. The problem is that the existing operation is staffed and optimized heavily for Core innovation and thus they lack the proper processes, talent, and other key factors that strategic innovation success hinges on. And in return, businesses continue to miss opportunities and waste significant money on shoddy innovation bets.

The Strategic Innovator’s Playbook

Make no mistake: These problems flow straight from the leadership level because they are failures to fully commit the organization to a strategic innovation mission.

That’s a real shame because our research has shown that companies with well-developed strategic innovation practices – including dedicated Tech Scouting and Corporate Ventures teams – consistently outperform their industry peers.

The recipe for success, which we’ve seen work at a corporate-wide level in vanguard firms, entails both investment and enablement, capability-building and coordination:

  • Strategy. Articulate an evolving vision for where the industry (and the company) must innovate. Use longer-term scenario-based predictions to launch strategic innovation programs in specific high-leverage domains.
  • Organization. Build a strategic innovation team whose full-time job is to disrupt the status quo – in line with the corporate innovation vision. Allow this team to “own” the strategic innovation portfolio – both by direct action (incubation) and through cross-functional coordination.
  • Capabilities. Imbue the strategic innovation team with the necessary and sufficient capabilities for success – Foresight, Scouting, and Ventures at a minimum.
  • Coordination. Create governance, metrics, and processes that connect the innovation team’s efforts back to the overall corporate mission.

The critical question is not how much money a company spends buying startups or launching new Innovation Centers. The crux of success is how the company innovates. And in this respect, automotive companies remain in deep trouble. One negative consequence, a chronic shortfall of semiconductors, already has surfaced. It will not be the last.

Image by Cristian Ibarra from Pixabay



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