Recent MIT CISR research found that an obsessive focus on innovation is a characteristic of CIOs of top-performing firms.[foot]P. Weill and S.L. Woerner, “Top-Performing CIOs in the Digital Era,” MIT Sloan CISR Research Briefing, Vol. XVI, No. 5, May 2016.[/foot] There are now more ways than ever that a firm can be disrupted by and disruptive with digital innovations. Indeed, a growing number of firms and individuals are using increasingly powerful digital technologies and figuring out ways to develop better products and services, better customer and employee experiences, and new business models. The new digital imperative is to compete with more types of digital innovations—and IT units must refine approaches to producing them. Based on an in-depth case study,[foot]N. Fonstad and M. Mocker, “Expanding Digital Innovation at Audi,” MIT Sloan CISR Working Paper No. 415, October 2016.[/foot] this briefing takes a look at how German car manufacturer AUDI AG has expanded its portfolio of digital innovations.
How IT Drives Digital Innovations at Audi
The new digital imperative is to compete with more types of digital innovations—and IT units will have to become good at several approaches to producing different types of digital innovations. Based on an in-depth case study, this briefing takes a look at how German car manufacturer AUDI AG has expanded its portfolio of digital innovations.
Digital Innovations at AUDI AG
Product and process innovations have been core to the success of AUDI AG.[foot]In 2015, Audi Group sold 1.8 million Audi-branded vehicles, and generated revenues in excess of €58 billion and operating profit close to €5 billion. Among all brands owned by its parent the Volkswagen Group, Audi contributed by far the largest share of operating profits.[/foot] In 2011, with its “Smart Factory” program, Audi employed digital technologies mostly to improve the efficiency and quality of its manufacturing processes. But digitization had extended the scope of competitors from traditional automobile manufacturers to leaders in the sharing economy (e.g., Uber) and autonomous and electric vehicle production (e.g., Google, Apple, Tesla).
To compete, in the past five years Audi has significantly expanded its portfolio of digital innovations and IT has been key.
Audi took the offensive with a significantly expanded portfolio of digital innovations. By 2016, the company was working on at least four new types of digital innovations: (1) digitization of customer touchpoints, (2) the driving experience, (3) new business models, and (4) employee experience. These innovations differed not only in their objectives but also in the approaches to implementation. And IT has been key to realizing each of these types of digital innovations.
Digital Innovation for Customer Touchpoints: Audi City
In parallel with operational innovations such as Smart Factory, Audi embarked on realizing three types of customer-facing innovations. The first type, customer touchpoints, consists of innovations focused on making it easier for customers to configure, buy, and maintain automobiles. An ex- ample is “Audi City”: digital showrooms where customers can experience their personal dream car virtually in a lounge-style atmosphere. Using large, touch-sensitive tables, customers can configure a car, then explore it as it is displayed life- size and in detail on floor-to-ceiling screens. Audi reported that since the opening of the first Audi City showroom in London, vehicle sales there increased by 70%, with 60% of customers being new customers for the Audi brand.
Marketing & Sales had originally launched the Audi City initiative as a shadow IT project because the traditional innovation approach was considered too slow.
The problem of shadow IT is once you bring such a system to life, you need to connect it to all the backend systems—otherwise you have these standalone solutions.
Sven Schuwirth, Head of Brand and Sales Development
In response, Audi IT introduced a faster approach to producing customer-facing innovations that do not affect automobiles. It uses an iterative, agile methodology that follows Scrum and involves end users to ensure that innovations are compelling to customers. Projects are initiated by Marketing & Sales, which then teams with IT to deliver them. While members of teams are co-located for the duration of a project, and those from each function have distinct responsibilities, from afar they are indistinguishable. A key role of IT is to facilitate vertical integration of innovations—ensuring, for example, that the innovations have access to product and inventory data and backend systems.
Digital Innovation for the Driving Experience: Audi connect
Digitization also enables Audi to engage continuously with owners of automobiles as they drive. Since 2011, Audi has been developing a second type of customer-facing digital innovations: a set of services called “Audi connect,” aimed at providing a better driving experience. By 2015, Audi had developed twenty-six digital services that Audi car owners could access for a subscription fee. These services transform the car into an internet-connected mobile device customized for driving needs and allow some of the car’s functions to be accessed via a mobile app. For example, the driver can have emails read aloud, or use a mobile app to lock the car’s doors remotely.
Audi IT developed a private cloud, and a platform called Modularer Backend-Baukasten (MBB)[foot]Modularer Backend Baukasten translates to “modular backend kit.”[/foot] that links and brokers specific connected car services with each car. Every request from the car to a service has to pass through the MBB. This way, services can be easily activated, deactivated, and exchanged. New Audi connect services can be scaled rapidly and integrated coherently with other services. In fact, one of the IT unit’s major contributions was to introduce architectural thinking, decoupling hardware from software to increase modularity and thereby flexibility and independence from specific parts vendors; software progresses more quickly than a car’s development cycle, which takes about five years.
With the introduction of architectural thinking, IT became core to generating innovations.
Two important way that IT can tale the lead in increasing innovations are (1) introducing new approaches to innovating and (2) architecting integration.
Before the introduction of the MBB, IT was really a service provider. We invited them, we told them what to do for us. They only fulfilled specifications. Now with in-car IT, we had to drill the IT people that they need to think with us about improving the customer journey rather than just fulfilling the specifications.
Marcus Keith, Director Development Operating Systems / Audi connect
Audi maintains dedicated Audi connect employees in each of the three involved units—Engineering, IT, and Marketing & Sales. These employees stay in their respective units but work together cross functionally.
Audi connect services that affect the design, manufacturing, or driving performance of an automobile (which in 2015 accounted for roughly 20% of new services) must adhere to the strict, slower, engineering-based product innovation process. This required learning on behalf of IT, which typically uses a fast track approach.
Digital Innovation on Business Models: Mobility Services
In 2012, Audi launched a third type of customer-facing innovation: a set of experimental mobility services enabling transport outside of car ownership and usage. An example is “Audi at home,” which offers select residences a shared pool of Audi cars in the properties’ parking garages.
Each of the mobility services innovations represented a completely new business model for the car manufacturer. Audi now had to manage ongoing relationships with a new type of customer: users, rather than owners, of cars.
It's not only getting the users registered, it's also always every day, every month animating the people to use your service. Otherwise, you will not have the traffic or utilization. And utilization is key for the business success of a service.
Felix Breitstadt, Manager of Cooperations & Long-Term Strategy, Audi mobility
Originally, a team located within headquarters had worked on mobility services. But after eighteen months, Audi decided to develop these services from a separate but wholly-owned subsidiary company called Audi Business Innovation GmbH (ABI), located in Munich instead of in Audi’s home base of Ingolstadt.
By early 2016, ABI employed seventy-five people—many of them new to the overall Audi brand—including its own IT people. Audi’s CIO, Matthias Ulbrich, is a member of ABI’s management board.
For all its innovation projects, ABI relies exclusively on design thinking and an agile approach. It estimates innovation cycles for mobility services to be less than two years. And because mobility services are new for both Audi and its customers, making requirements unclear and dynamic, ABI’s IT people work very closely in an iterative prototyping mode with other ABI employees and with customers. The market for a promising service is tested with a minimum viable product (MVP) that includes only the essential features. Then features are refined, added, or removed based on the lessons from those experiences—a process not seen in traditional car manufacturing.
At the core of all of ABI’s digital mobility services is a single digitized platform called the Mobility Service Infrastructure (MSI) that consists of a growing number of shared services on which most of ABI’s services rely, including the hand- ling of authentication and payments and management of a fleet of individual cars. The MSI is also connected to the MBB platform that supports the secure connection to Internet-enabled Audi cars. This way, ABI services can access car-related data like location that is important for displaying the whereabouts of all available cars within a fleet. The use of the MSI and MBB platforms helps give ABI’s services a competitive advantage, especially in terms of speed to market, scale, and robustness, and number of integrated features.
Digital Innovation for Employee Experience: Enterprise 2.0
Integral to becoming more customer centric was a fourth type of digital innovations: a set called “Enterprise 2.0” focused on improving the experience of employees and on making Audi an even more attractive place to work. By 2013, Audi IT had earned the trust of Audi’s board of directors to lead the Enterprise 2.0 initiative. Within two years, IT had introduced and integrated five social media tools to deliver team workspaces, wikis, social networking, document sharing, and a landing portal.
Audi then used the Enterprise 2.0 tools to run contests for generating ideas for innovating work, and to tap into employees who also own Audi vehicles in order to involve them in the process of innovating new services for customers.[foot]In 2015, Audi won a German Digital Transformation Award for how much it had accomplished in less than eighteen months with its Enterprise 2.0 initiative.[/foot]
Enterprise 2.0 has helped transform the culture at Audi from being traditionally hierarchical and automobile-centric to focused on improving the experiences of both customers and employees. It encourages employees to experiment and develop solutions—and have fun in the process.
The imperative to compete with a broader variety of digital innovations is an opportunity for IT. The Audi example demonstrates there are two levers at IT’s disposal to take advantage of this.
- Introduce and adapt new approaches to innovation. Audi IT introduced processes for innovating that are cross functional, iterative, and evidence based, and that involve end users. The company has adapted processes for each type of digital innovation, enabling teams to develop innovations that enhance products and services and the experiences of customers. Audi IT has had to learn to apply different approaches for producing different innovations (see table), from the stricter product development process to a fast-paced agile approach; and from integrated, co-located teams to the separated ABI start-up.
- Architect integration to boost competitiveness. A critical role of IT across all the types of digital innovations was to introduce architectural thinking—ensuring that innovations connect with existing platforms, and when necessary, building new platforms to facilitate integration across innovations within each type (e.g., the services that comprise Audi connect). In contrast to standalone efforts, integrated innovations have proven easier to scale and more difficult for competitors to imitate.
|Digital Innovation Cluster||Customer Touchpoints: Audi City||Driving Experience: Audi connect||Mobility Services: Audi Business Innovation||Employee Experience: Audi’s Enterprise 2.0|
|Objective: Use Digitization ...||... to make it easier for more people to buy and maintain a car||... to enhance car owners’ driving experience||... to earn revenue from mobility services for transport outside car ownership and usage||... to simplify the day-to-day collaboration of employees in all areas|
|Business Value||More revenue per product||More revenue per customer||New revenue from new customers||Employee (not just process) productivity|
|Team Structure||Co-located teams of Marketing & Sales and IT||Multi-functional teams; workers dedicated, not co-located||Unit separate from HQ with its own IT people||Communities of employees|
|Dominant Approach to Innovation||Fast-tracked, iterative approach, starting with the customer journey||Multiple tracks: services that are automobile impacting follow stricter, slower process; others follow fast-track||Fully agile, iterative approach with early involvement of customers using minimum viable product, experimentation, fast failure||Innovation contests, social technology-facilitated collaboration|
|Architecture||Unique customer IDs in addition to unique vehicle IDs Use of existing platforms, e.g., to access product data||Innovations are based on a newly developed digital “product” platform (MBB) to ensure a consistent and coherent experience across all services within a set||Innovations are based on a newly developed digital “service” platform (MSI) that consists in part of reused services and components from MBB||Innovations are based on a single shared platform pieced together from five social media tools to ensure a consistent and coherent experience across multiple employee-led initiatives|
© 2016 MIT Sloan CISR, Fonstad and Mocker. CISR Research Briefings are publish ed monthly to update MIT CISR patron s and sponsors on current research projects.
About the Authors
© 2016 MIT Sloan CISR, Fonst ad and Mock er. CISR Research Briefings are published monthly to update MIT CISR patrons and sponsors on current research projects.
Founded in 1974 and grounded in the MIT tradition of rigorous field-based research, MIT CISR helps executives meet the challenge of leading dynamic, global, and information-intensive organizations. Through research, teaching, and events, the center stimulates interaction among scholars, students, and practitioners. More than seventy-five firms sponsor our work and participate in our consortium.