In the past 18 months, Volkswagen announced delays in the launch of two crucial models, first the eighth generation of its perennial bestseller, the VW Golf, and then its flagship electric car, the ID.3, both due to glitches in software. Herbert Diess, Chairman of the Management Board of Volkswagen Group, was asked to give up his role as VW brand chief, in part because of these slipups.
Executives at the giant German automaker were aware of their limitations. Mr. Diess had acknowledged the company’s inadequate software capabilities saying, “Tesla belongs among the competitors which has abilities that we currently do not have. Around half of Tesla’s engineers are software experts, while at VW’s core brand it is a much lower proportion.” And Board member Jürgen Stackmann stated, “We’ve never hid the fact that software, an area of extreme importance for products in the future is a serious challenge for us.”
The software imperative
The importance of software to cars wasn’t unexpected. GM Engineer Jonas Bereisa wrote in 1983 that “software development will become the single most important consideration in new product development engineering.” In 2009, IEEE Spectrum published This Car Runs on Code, which noted that premium cars required around 100 million lines of code and that the software would only get more complex.
Volkswagen’s experience shows just how fundamental software has become to the fortunes of a giant automaker. And it’s not just car companies that need to worry about code. As I have been arguing for many years, every company is effectively a software company. Businesses must build a core competence in software. Yet, many companies have still to do so and that leaves them vulnerable. CIOs can and should be looking for ways to address this fundamental weakness.
Strategy professors C.K. Prahalad and Gary Hamel, originators of the concept, noted that long-term competitiveness derived from core competencies rather than from expertise in product markets. They argued that “the real sources of advantage are to be found in management’s ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.” A core competence represents the “collective learning in the organization.”
In today’s digital world, proprietary software is a vital asset for every company, one that will only grow in importance. It isn’t all software though; rather it is the software that allows a company to be distinctive. But the scarce resource isn’t the technology, which is often available to all. It is the set of capabilities needed to create unique value with software.
Tesla’s Autopilot, Abbott Labs FreeStyle Libre connected glucose monitor, and Peloton’s spin bike are examples of software-powered products with superior and distinctive value propositions that have redefined their markets.
Tesla provides a particularly vivid example. Not only was Tesla first to market with Autopilot, its autonomous driving software, the product continues to be far ahead of its competitors. The company has 300 highly talented engineers—200 in software and 100 chip designers—on the Autopilot team. Reflecting its importance, CEO Elon Musk meets with the team weekly.
Steps to building core competence in software
Core competence in software is not the capability to write sophisticated code though it may require that. It is the ongoing capability to enhance or reinvent a company’s offerings with software in existing and new markets.
With this in mind, consider the following actions:
- Start at the top. Senior executives must possess a vision of the digital future, the ability to envision what software can do for their businesses, and importantly, understand how it enables novel, more productive business models.
- Develop the organizational capability to assess and deploy next-generation software technologies. Today, advanced software like AI and machine learning, augmented and virtual reality, blockchain, and big database technologies, have the potential to yield new value.
- Great technology architects are crucial. To be inimitable, a software-enabled product or platform must integrate multiple underlying technologies and production skills in the present, and be flexible enough to adapt to future needs.
- Domain experts with software savvy are essential. Success with software is about exploiting a company’s distinctive knowhow–what it knows how to do better than its competitors—to offer a superior customer value proposition.
- Build superior execution capabilities, from responsive project management approaches like agile to development, testing, and operations. Unfortunately, bad code is observed in many critical projects, which can then cause serious problems downstream. Focus on techniques to deliver reliable and efficient code.
- Establish strategic alliances and perhaps even acquire critical technology capabilities. Few companies will be able to build a core competence in software alone. From advisors and technology expertise to software development teams, identify and collaborate with strategic partners to accelerate the development of software as a core competence.
Companies should consider having a unit dedicated to software excellence, encompassing the recommendations above. Each company must determine the scope of this unit based on its size, the technology intensity of its industry, and available resources.
From articulating strategic intent, cultivating a core-competency mind set, prioritizing investments in technology, acquiring and developing human capital, to managing strategic alliances, good governance is vital.
Recognizing its strategic weakness in software, Volkswagen formally committed to building software as a core competence in 2019, accelerating its already large commitment to software excellence. It launched Car.Software, a new brand-independent organization, with 3,000 digital experts and a budget of $7.8B. The company’s goal is to establish one uniform software architecture for the Group and for 60% of its cars’ software stack to be proprietary to Volkswagen. It has even dedicated a Board position to software governance. Volkswagen is driving forward with software. Are you?