Enterprise Value Awards Grand Winner - Highway to Value

1 2 Page 2
Page 2 of 2

But at the time, OnStar was growing. The system was available in more than half of all new GM models and had 2 million customers. However, there were already signs of trouble. While the company had no problem getting customers—GM was giving OnStar away for all intents and purposes—it was struggling to hold them. According to OnStar, the retention rate was below 50 percent. Industry analysts placed it as low as 20 percent or 30 percent. "[The telematics vendors] thought that people wanted to replicate the PC in a car," says Thilo Koslowski, an automotive analyst with Gartner Research. "But being in a car is about getting from point A to point B." In August 2001 Koslowski published research showing that there was very little demand for Internet-based services. OnStar’s bubble was about to burst.

The Right Direction

According to the Bureau of Transportation Statistics, single-occupant vehicles account for around 40 percent of the miles driven in the United States. While there are probably an infinite number of services that would appeal to your passengers, often it’s just you in the car. Hopefully you’re not watching a movie.

Koslowski’s research showed that what customers wanted were services that would improve safety and ease of driving. Around the same time, Huber’s focus groups were starting to tell him the same thing. When he asked people why they hadn’t renewed their OnStar subscriptions, they told him that they never used any of the concierge-style services. "We’d say, ’What about the part that saves your life?’ And they’d say, ’Oh, it does that too?’" In its rush to create more services, OnStar had strayed from its core value proposition: safety and security. "We had to undergo a complete revision about how to create a brand and what a brand stands for," says Huber.

In January 2002, while OnStar was re-reinventing itself, Ford folded Wingcast, writing off $100 million in the process. Wall Street, bullish about telematics just a year before, did an about-face. But GM’s senior leadership stood by the division. "Our next announcement was that we were going on more vehicles, and then finally it was like, Maybe there is an approach here that works," Huber recalls.

In 2003, according to AdWeek, OnStar spent $45 million on advertising, including a TV campaign launched in September of that year featuring real calls to OnStar service centers. The campaign returned OnStar to its focus on safety. By the start of 2004, OnStar had 2.5 million customers and claimed that its renewal rate was more than 50 percent. Tom Keery, president of Frost Motors, a Cadillac dealership in Newton, Mass., says that the advertising campaign resonated with the public. "People will now walk in because of OnStar," he says.

Meanwhile, OnStar was finding other ways it could add value to GM. By 2004, the system was so well integrated with the car’s central computer that OnStar could detect hundreds of vehicle problems as they happened. The current version improves the system’s data collection capabilities by using sensors to gather information from parts of a vehicle that aren’t connected to the computer. OnStar can diagnose approximately 1,600 problems, and GM uses this information three ways.

First, OnStar helps consumers service their cars. If the engine light goes on, a customer can call an OnStar operator, who downloads the car’s diagnostic data, tells the driver what the problem is and lets him know whether he should pull over immediately. In addition, OnStar recently launched a remote diagnostics program that sends customers a monthly e-mail about what’s happening inside their cars: everything from whether the oil needs to be changed to how antilock brakes are performing. This idea was a result of market research. "I still remember the tapes of this woman in Phoenix," Huber says, recalling one focus group. "She said, ’I don’t want diagnostics. I want triage. Take my vehicle and put it in one of three buckets,’" green, yellow or red, which will tell the driver whether a part is fine, needs attention or is an immediate risk. "We architected the whole vehicle diagnostics program around what this lady said."

The diagnostics data also allows OnStar to become, in effect, a giant CRM system. Rather than limiting its interactions with customers to the point of sale and the times the customer comes to the dealership for service, GM has an opportunity to interact with its customers every single day. Not only can this build brand loyalty in customers but the company now has a much richer understanding of how people use their cars. Wagoner says that incorporating OnStar data into the company’s business processes has become a required practice for everyone at GM in the United States and Canada, from dealers to engineers.

Real-time information about the vehicles also gives GM early warning of problems that may be a result of design flaws. Industry analysts say that most automakers don’t learn about such problems until at least 18 months after the car has gone to market. That’s how long it takes for owners to discover a problem and take the car to the dealership, for the dealership to pass that information back to the manufacturer, and for the manufacturer to understand what that data is telling them and decide whether a recall is warranted. A large recall can cost a car manufacturer billions.

If an OnStar-equipped vehicle has enough sensors, there is virtually nothing the company can’t learn about it. Huber says that GM has been "aggressively capturing all kinds of operating characteristics" from test models driven by GM engineers, and that this information has already resulted in design changes before the vehicles reached production. GM executives do not like to provide details about what they do with this information because they believe the data gives the company a competitive advantage. GM executives also worry that customers would view this data collection as a privacy violation, even though GM says it collects it only in aggregate (see "Big Brother on Wheels?" on Page 69). However, both Huber and Szygenda acknowledge that the data has the potential to save the company billions of dollars by avoiding manufacturing defects and recalls.

The Road Ahead

This year 3 million GM vehicles will come equipped with OnStar. The system will be standard in every GM car by the end of 2007. Huber says that the renewed emphasis on safety, and the accompanying advertising campaign, has helped drive customer retention rates up to around 66 percent. Also, a few years ago, the division reached a deal with Verizon to provide wireless telephone services to customers, bringing in extra revenue and making the OnStar service more appealing. The OnStar phone is one of the 3-watt clunkers that early adopters used to carry around like a briefcase, so it gets reception in areas that handheld phones, which typically have only 250 milliwatts of power, do not. Voice-activated dialing makes calling safer.

As OnStar stepped up its advertising campaign, focus group testing showed that the public’s association of the brand with GM increased. In recognition of this, OnStar changed its name to OnStar by GM in 2004. The company is no longer trying to get OnStar into other automakers’ vehicles. Other automakers aren’t keen, either, to deploy a competitor’s technology. Audi, Subaru and Volkswagen have stopped installing OnStar in their cars.

GM’s new strategy for OnStar recognizes that OnStar’s value is not as an independent product but as a tool for manufacturing. "We can save GM a lot of money," says Huber. With the ability to help improve vehicles during preproduction and differentiate them post-production, OnStar could improve GM’s bottom line.

At this point, says Szygenda, OnStar’s capabilities are limited only by its engineers’ imaginations. For all its sophistication, "it is an immature application," he says. "We have been running computers to assist the business for longer than I’ve been around [GM]. But we are just learning what we can do in the vehicle."

Ultimately each decision about OnStar will be made according to the lesson about value that it took GM nearly 10 years to learn: Focus on your core business, and don’t get seduced by what technology allows you to do. "We have an IT capability," says Szygenda, "but we are a car company."

Related:

Copyright © 2006 IDG Communications, Inc.

1 2 Page 2
Page 2 of 2
Watch out for these 6 IT management traps to avoid