Volkswagen’s electric car ambitions: a Sense & Respond case study

“What they didn’t consider: Electric vehicles are more about software than hardware. And producing exquisitely engineered gas-powered cars doesn’t translate into coding savvy.”

source WSJ

This damning statement from the Wall Street Journal’s profile of VW’s struggling electric car program is the raw truth and painful realization of nearly every legacy corporation trying to “transform” into a digital organization. It’s been four years since Sense & Respond, the second book Josh Seiden and I wrote together, was published. If you haven’t read it (you should) here is the simplest breakdown of the thesis in that book:

1. Every business of scale or that seeks to scale is a software business at its core — you cannot reach mass market success or maintain it without technology and software driving every aspect of your business. This includes how you deliver value to and continue to optimize your product or service for your customers.
   
   
2. Software is continuous — the modern nature of software is systemic. Software is dynamic, not static. There is no end to your software projects. They are products and services you provide in perpetuity. You are not in the software manufacturing business. In fact, the quantity of software you produce is irrelevant. Producing more software guarantees you only two things: more software and technical debt. That’s it. The actual goal is to develop as little software as possible knowing your teams will have to maintain that code forever.
   
   
3. Continuous software provides us with a unique opportunity to learn continuously — Amazon ships code to production every second. In Sense & Respond we wrote that it was every 11.6 seconds. That was true. 5 years ago. Shipping code continuously into the hands of your customers allows you to learn how that code impacts their behavior equally as fast. Customer expectations are changing rapidly particularly due to the mass market usage of popular services like Google Maps, Facebook, Amazon, iOS and many others. In addition, usage of your products evolves over short periods of time and ultimately emerges from the ongoing interaction with that system. Behaviors you never predicted or expected show up as users attempt to manipulate your product to do what they really need it to do. Shipping continuously allows us to sense continuously what people are doing with our products or services. We then have an obligation to respond to what we’re sensing with updates, optimizations, rollbacks or perhaps brand new systems. In essence, we can now have a continuous conversation with our customers in real time.
   
   
4. Managing a software-based business is fundamentally different from a traditional company — If you can ship software every second (and you can), the delivery of software becomes a non-event. In other words, any kind of manufacturing process, incentive or optimization makes no sense in a software-driven business. What you measure, manage and reward must change to support the continuous improvement of your products and services. Your customers expect this and will take their business elsewhere if the software is broken, doesn’t improve and has a bad user experience. Managing your teams to deliver high-quality software is only half the battle. They must also be incentivized to understand their customer so they can accurately determine which features, upgrades and improvements to ship. This impacts how you frame work for your teams, measure their success, determine their performance criteria, empower them to make evidence-based decisions quickly and celebrate their ability to adjust course quickly based on the evidence they collect as they ship, sense and respond. 

The Volkswagen story illustrates the benefits of every aspect of this thesis. VW assumed their manufacturing expertise and vast resources ($50 billion dollars!) would guarantee their success in the electric vehicle market. The comparisons to Tesla are obvious perhaps but it’s worth pointing out the key difference — Tesla is a software company that makes cars. Elon Musk is a technologist first and foremost. Software is in Tesla’s DNA. Infusing that in VW’s DNA is proving difficult. 

Ultimately, VW is taking steps in the right direction. “In order to be successful in this new world and secure the prosperity of many people…VW must completely change,” Herbert Diess, CEO of VW said in a LinkedIn post. As the WSJ article points out, software has been in cars for years but it’s never been centralized as electric vehicles demand. The complexity of building a centralized operating system for an electric car requires technical expertise VW has lacked to date. “You can’t just flip a switch and be a software company.”

To become a software-driven business, VW is now doing the hard work of digital transformation and reorganization. They are consolidating the various software teams under one roof. They’re bringing the majority of their efforts in-house — and out of the hands of over 19 external vendors. They hold regular collaboration workshops and adjust prioritization based on learning that emerges as the next version of their electric car, the ID.4, is being developed.  They continue to struggle with culture change as the company is technically successful and profitable. These new ways of working are challenging veteran staff and leadership who don’t feel the pressure to evolve into a truly software-driven company. 

The thing that still strikes me as VW’s achilles heel(s) in this effort is the people they’ve chosen to lead this change and the late stage at which they’ve adopted some of these ideas. It’s now 2021 but it took VW until 2020 to realize Clayton Christensen’s ideas in The Innovator’s Dilemma (first published in 1997!) are the right way to frame their innovation efforts (they’re carving out a separate team and business unit called Artemis to work on the customer experience of the ID.4). In addition, these digital transformation efforts are being led by auto industry veterans from Audi, BMW and VW itself. These folks have vast institutional knowledge but it’s exactly The Institution that is getting in the way of their building a modern, software based business. 

Transformation is risky. Moving away from your core expertise in manufacturing to one based in technology poses many risks. Compared, however, to the existential risk of losing market share and industry irrelevance, companies have no choice. The VW story continues to evolve but is a cautionary tale for other legacy companies, not just in the automotive industry. If you don’t build a customer-centric, tech-driven approach to your ways of working you will be disrupted. Previous success is not an indicator of future success. And, as Professor Rita Gunter Mcgrath, continues to remind us the end of competitive advantage is here. Sense, respond and evolve or fail.