Developing Digital Value Offerings in the Car Retailing Industry
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DEGREE PROJECT IN THE FIELD OF TECHNOLOGY DESIGN AND PRODUCT REALISATION AND THE MAIN FIELD OF STUDY MECHANICAL ENGINEERING, SECOND CYCLE, 30 CREDITS STOCKHOLM, SWEDEN 2021 Developing Digital Value Offerings in the Car Retailing Industry A customer-centric approach to innovation PHILIP BÖRJESSON KTH ROYAL INSTITUTE OF TECHNOLOGY SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
Developing Digital Value Offerings in
the Car Retailing Industry
A Customer-Centric Approach to innovation
Philip Börjesson
Master of Science Thesis TRITA-ITM-EX 2021:157
KTH Industrial Engineering and Management
Machine Design
SE-100 44 STOCKHOLM
Examensarbete TRITA-ITM-EX 2021:157
Utveckling av digitala värdeerbjudanden
inom bilhandelsindustrin
Philip Börjesson
Godkänt Examinator Handledare
2021-05-27 Sofia Ritzén Jenny Janhager Stier
Uppdragsgivare Kontaktperson
Börjessons Bil Henrik Börjesson
Sammanfattning
Bilhandelsindustrin genomgår för närvarande en omfattande transformation. Denna berörs till stor
del av att bilindustrin håller på att ändras från att producera bilar med förbränningsmotorer till
elbilar. Bilhandelsindustrin behöver förändras, precis som den generella bilindustrin, och
bilhandelns mest värdefulla tillgång är relationen till deras kunder. Transformationen påverkar
flera delar av bilhandeln och många omsättningsmöjligheter vattnas ur eller försvinner totalt
genom införandet av elbilar. Syftet med denna uppsats är att undersöka aktuella
branschförändringar och utvärdera hur bilhandlare kan utveckla innovativa värdeerbjudanden för
att hantera industriförändringar proaktivt. Resultat har framkommit genom att undersöka teori
kopplat till kundfokusering, digital transformation, och dynamiska förmågor, kombinerat med 25
intervjuer med kunder, intressenter inom industrin samt intern personal på Börjessons Bil. Dessa
intygar att kunder har förändrats avsevärt de senaste 10 åren, att digitalisering är en drivkraft för
transparens samt att bilhandlare behöver skapa nya omsättningsmöjligheter inom serviceindustrin.
Baserat på resultaten har två koncept på värdeerbjudanden utvecklats:
- Ett internt lojalitetsprogram, baserat på kundens livstidsvärde, som ger kunden bonusar
samt andra fördelar, samtidigt som det ger Börjessons Bil förbättrade kundrelationer och
mer data.
- En prenumerationstjänst för service industrin, som paketerar åtskilliga tjänster kopplat till
mobilitet, så som däckbyte och vindrutereparationer, till ett paket. Detta koncept kommer
att förse kunden med en smidigare upplevelse av att äga en bil.
Nyckelord: Bilindustrin, bilhandel, digital transformation, dynamiska förmågor, innovation,
kundfokusering, värdeerbjudanden
II
Master of Science Thesis TRITA-ITM-EX 2021:157
Developing Digital Value Offerings in the
Car Retailing Industry
Philip Börjesson
Approved Examiner Supervisor
2021-05-27 Sofia Ritzén Jenny Janhager Stier
Commissioner Contact person
Börjessons Bil Henrik Börjesson
Abstract
The car retailing industry is currently undergoing a significant transformation. This transformation
is due to the automotive industry switching from producing internal combustion engines vehicles
to battery electric vehicles. The retailing industry need to transform, like the rest of the automotive
industry, and their most essential asset is the customer relationship. This transformation is affecting
several aspects of car retailing, with many revenue streams being diluted, or disappearing
completely by the emergence of battery electric vehicles. The purpose of this thesis is to investigate
current industry transformations and evaluate how car retailers can develop innovative value
offerings to manage industry changes proactively. Results have emerged by examining theory
connected to digital transformation, customer-centricity and dynamic capabilities, combined with
25 interviews with customers, industry stakeholders and internal personal at the case company,
Börjessons Bil. These include that customer behaviors have changed immensely, that digitalization
drives transparency and that retailers require new revenue streams within the service industries.
Based on these results two value offering concepts were developed:
- An internal loyalty program, based on customer lifetime value calculations, providing
customers with perks and benefits, while giving Börjessons Bil strengthened relationships
and more data.
- A business to consumer subscription service, which bundles many services connected to
mobility, such as tire switching and windscreen repairs, into one package deal. This
concept will provide customers with a more effortless vehicle owning experience.
Key-words: Automotive Industry, Car Retailing, Customer-Centricity, Digital Transformation,
Dynamic Capabilities, Value Offering, Innovation
III
Foreword
First of all, I would like to thank my KTH supervisor, Jenny Janhager Stier for continuously giving
me inspiration and precious feedback during the development of the thesis. Your thoughts and
comments have been truly valuable.
I would also like to express my gratitude to Börjessons Bil and all of its employees who has been
extremely helpful in answering my questions and providing me with insights about the industry.
I would like to direct a special thanks to Jens Hagman and Wilhelm Börjesson for assistance and
proofreading, and to Axel Peterzén for repeatedly giving me valuable insights and letting me sleep
on your sofa in-between interviews.
Finally, my gratitude goes to all people involved in making of this master thesis. Especially all
interviewees that has been extremely valuable by giving up their time and thoughts!
Philip Börjesson
Stockholm, May – 2021
IVAbbreviations
B2C Business to Consumer
BEV Battery Electric Vehicles
BRB Case Company - Börjessons Bil
CRM Customer Relationship Management
ICEV Internal Combustion Engine Vehicle
OEM Original Equipment Manufacturer
PHEV Plug-In Hybrid Electric Vehicle
VUCA Volatility, Uncertainty, Complexity and Ambiguity
VTable Of Contents
1.0 INTRODUCTION .................................................................................................................................................................... 1
1.1 Background ............................................................................................................................................................................ 1
1.2 Purpose ................................................................................................................................................................................. 3
1.3 Case Company - Börjessons Bil ...................................................................................................................................... 3
1.4 Research Questions ........................................................................................................................................................... 4
1.5 Delimitations ....................................................................................................................................................................... 4
2.0 FRAME OF REFERENCE ....................................................................................................................................................... 5
2.1 Digital Transformation ...................................................................................................................................................... 5
2.1.1 Customers ................................................................................................................................................................ 5
2.1.2 Competition ............................................................................................................................................................ 6
2.1.3 Data ........................................................................................................................................................................... 7
2.1.4 Innovation ................................................................................................................................................................ 7
2.1.5 Value proposition .....................................................................................................................................................................7
2.2 Innovation ........................................................................................................................................................................... 8
2.2.1 VUCA – Volatility, Uncertainty, Complexity and Ambiguity ...................................................................... 10
2.2.2 Dynamic Capabilities ............................................................................................................................................ 11
2.3 Customer-Centricity ....................................................................................................................................................... 12
2.3.1 Customer Lifetime Value..................................................................................................................................... 13
2.4 Issues that are of Interest but does not form a part of the theoretical frame of reference ........................... 13
2.5 Theoretical Summary ...................................................................................................................................................... 14
3.0 METHOD ............................................................................................................................................................................... 15
3.1 Research Process ............................................................................................................................................................... 15
3.1.1 Literature Review .................................................................................................................................................. 16
3.1.2 Interviews ............................................................................................................................................................... 16
3.2 Data Analysis ..................................................................................................................................................................... 18
3.3 Research Quality .............................................................................................................................................................. 18
3.4 Research Ethics ................................................................................................................................................................ 19
4.0 RESULTS ............................................................................................................................................................................... 20
4.1 Changed Customer Behaviors ....................................................................................................................................... 20
4.2 Change in Internal Competencies................................................................................................................................. 21
4.3 Industry Transparency .................................................................................................................................................. 22
4.4 Intrinsic Reluctance to Change within the Industry ............................................................................................. 23
4.5 Value Offering Opportunities ....................................................................................................................................... 25
4.5.1 Car Retailers as a Quality Experience ............................................................................................................ 25
4.5.2 Customer Loyalty Program ............................................................................................................................... 26
4.5.3 Digital Services ....................................................................................................................................................27
4.5.4 New Revenue Streams within the Service Industry .................................................................................... 28
4.6 Summary of Important Findings ................................................................................................................................ 30
5.0 INNOVATION CONCEPTS FOR CAR RETAILING ..................................................................................................... 31
5.1 Business Opportunities of Digital Transformation ................................................................................................... 31
5.2 New Value Propositions – Two Concepts for a Seamless Customer Experience ............................................. 31
5.3 Concept 1 – Internal Loyalty Program ....................................................................................................................... 32
4.3.1 Discussion of Concept 1 ......................................................................................................................................................32
5.4 Concept 2 – Subscription Based Bundling of Services Connected to Mobility ................................................ 33
5.4.1 Services Included in Concept 2 ....................................................................................................................... 34
5.4.2 Potential Features of Concept 2 ...................................................................................................................... 365.4.3 Discussion of Concept 2 ................................................................................................................................... 37
5.5 Synergies between both Concepts ............................................................................................................................. 38
5.6 Implementation of New Value Offerings – An Iterative Approach ...................................................................... 38
5.7 New Hires and Training of Current Personal ........................................................................................................... 39
6.0 DISCUSSION.......................................................................................................................................................................... 40
6.1 Research Questions ........................................................................................................................................................ 40
6.2 Purpose ............................................................................................................................................................................. 42
6.3 Method Discussion ......................................................................................................................................................... 44
6.4 Limitations and Future Research ................................................................................................................................ 44
7.0 CONCLUSION ....................................................................................................................................................................... 46
REFERENCES .............................................................................................................................................................................. 47
APPENDICES .....................................................................................................................................................................................
APPENDIX 1 – INTERVIEW GUIDE CUSTOMERS ...............................................................................................................................................
APPENDIX 2 – INTERVIEW GUIDE INTERNAL SALES PERSONNEL ...............................................................................................................1.0 INTRODUCTION
1.1 Background
All stakeholders within the automotive industry are facing a large and complex transformation.
This is supported by a great deal of research e.g. (Winkelhake, 2018; Fojcik et al., 2019; Dau et
al., 2021; Schulze et al., 2015). According to a recent report, the four most significant megatrends
are called ACES; Automation, Connectivity, Electric Vehicles and Shared Mobility (Dau et al.,
2021). These trends are hugely influencing the automotive industry in several different ways.
Firstly, many companies are exploring how to create value from autonomous driving: “Roughly
45 percent of the costs of operating an e-hailing vehicle relate to the driver; taking him or her out
the equation offers early adopters a huge competitive advantage” (Grosse-Ophoff et al., 2017).
Secondly, with connected vehicles, a unique customer experience will be created “while
simultaneously delivering cost and revenue benefits to mobility companies, including OEMs
(Original Equipment Manufacturers), suppliers, dealers, insurers, fleets, tech players, and
beyond” (Bertoncello et al., 2021). Thirdly, the transitioning to Battery Electric Vehicles (BEVs),
being accelerated by politicians to reduce global emissions, is currently experiencing a significant
rise in sales. BEVs are starting to become widely adapted and costs of owning one are similar, or
even lower, to those of owning an Internal Combustion Engine Vehicles (ICEV) (Hagman, 2020).
BEVs will reduce car retailer revenue from services since BEVs require less maintenance than
ICEV, hence the retailer service market is a shrinking one (Söderholm, 2021; Fojcik et al., 2019).
Finally, shared mobility is initially struggling in Sweden, but services, such as M (former Sunfleet)
and Aimo, are gaining momentum (Jelica, 2018). These trends may disrupt and change the way
cars function and our perception of them in the upcoming decades.
The Original Equipment Manufacturers (OEMs) are trying out new business models and services
due to these vast transitions. But this is not the first change in the history of car production and
retailing. Vertical integration, a strategy where a company owns or controls suppliers, distributors,
or retail locations to manage its supply chain (Hayes, 2021), was the first choice for Henry Ford
when the industry was in its cradle during the early 20th century. Ford Motor Company managed
everything from rubber, tires, shipping companies to retailers selling the cars (Mitchener, 2006).
After only a couple of years, car dealerships became the industry choice since independent local
dealerships knew their customers the best and could develop the sales channels superior and more
efficiently than the OEMs (Mitchener, 2006). This sales model is called the car dealership model.
The car dealership model led to a vast network of dealerships connected to different brands
worldwide, which have worked more or less the same since they were introduced around 100 years
ago (McIntosh, 2017). In car retailing, one reason for the significant transition that we see today
is due to the American OEM Tesla. Some success factors, which have led to an extreme market
capitalization of Tesla compared to other OEMs, include selling only BEVs and cutting out the car
dealership retail model in favor of smaller showrooms and own distribution (Shipley, 2020). Hence
leaving out relationship-building and large amounts of personal service has led to cutting costs. A
illustration of the Tesla and the car dealership sales model can be seen in figure 1 below. What
Tesla has done is to accelerate the conversion to BEVs but also disrupted traditional car sales
models by influencing global OEMs to change drastically. The OEM Daimler, for example, has
1tried their concept of Best Customer Experience 4.0 through direct sales, thereby not using the
retail model (Dau et al., 2021). Volkswagen group has implemented digitized experiences and tried
out several direct sales models in Europe (Dau et al., 2021). And the majority of OEMs have gone
from focusing solemnly on ICEV and Plug-in Hybrid Electric Vehicles (PHEVs) into launching
their own BEVs and announced many more in the future (Car and Driver, 2021). In Sweden, Volvo
recently announced that by 2030 all cars would be BEVs (Volvo Group, 2021). Volvo also recently
terminated the contract with their largest retailer in Sweden, Bilia (Olander, 2020). Many of these
actions suggest that vertical integration is finding its way back to the automotive industry, which
will heavily influence the future of car retailers.
Figure 1. Traditional vs Tesla sales model, adapted from Shipley, 2020.
If the ACES trends influence the automotive industry in general, digitalization and the e-commerce
of cars are influencing the retailers in particular. How digitalization is affecting the car retail
industry has been investigated by many reports, e.g. (Genzlinger et al., 2020; Dau et al., 2021). A
recent study concludes that one out of six customers would be interested in buying a car online
without seeing it first (Johansson, 2021). With digitalization, the car retailing industry is going
against more complex customer relationships, and the growing e-commerce of cars will change
the business as we know it. But digitalization will also enable possibilities to create new value
streams for the retailers by working closer to the customer (Dau et al., 2021). To survive and thrive
in the future, car retailers need to develop new strategies and value offerings to cope with industry
changes. Dau et al. (2021) explain: “Of the surveyed automotive executives, 88 percent expect that
some dealer groups will not survive the upcoming disruptions related to innovative mobility
concepts, digitized retail formats, and new market entrants”. The majority of academic research
is focusing on OEM’s and how they can adapt to future mobility challenges, although some articles
have been written connected to car retailers, for example (Albuquerque & Bronnenberg, 2012;
Fojcik et al., 2019). Fojcik et al., 2019 explain: “While the manufacturers are already reviewing
options for new retail systems beyond the traditional car retail, many car dealers are passive and
pursuing a ‘wait and see’ policy.”
This thesis proposes an extension from previous literature to facilitate the transformation of car
retailers into a digitalized world by facilitating the transitioning to BEVs. ICEV has a fuel-to-wheel
efficiency ratio of 12-30% (where most energy is lost to heat), while BEVs efficiency ratio is
between 77-100% (EPA, 2021). Hence the question is not if the transition from ICEVs to BEVs
will be made but rather when it will be made. The low margins of the retailing industry will be
pressed even further with the transition to BEVs (Fojcik et al., 2019). Service and maintenance
costs will decrease since BEVs do not have as many moving parts as ICEVs. It has emerged from
the pre-study conducted during this thesis that according to one estimation, 80-85% of car retailer
profits are connected to service and maintenance (Bilia, 2020). The OEMs who have related
retailers might follow Tesla’s model, entirely shutting retailers out of the value network, which is
of great concern to the car retailers. A recent study by PWC (2018) about the German retailing
2market, concludes that 82% of dealers believe direct sales from OEMs possess the most significant
threat to the traditional car market. The same study concludes that 63% of customers would buy
directly online from the OEM, further facilitating this replacement (PWC, 2018). Furthermore, on-
demand services within the car (such as vehicle software updating the sound or lightning system)
are being sold by OEM’s to the customer, with car retailers getting a disproportionate piece of the
revenue pie. What car retailers own is the relationship with the customer, and to thrive in the future,
this relationship needs to be strengthened further. One long-term vision for the retailers is to build
a genuinely customer-centric mobility industry (Dau et al., 2021). A vision that is far from
impossible since most customers still want a physical delivery point and a personal connection to
the car retailer: “that final handshake still has a certain emotional appeal” (Furcher et al., 2020).
To conclude, retailers need to transform from being reactive to become proactive. A commitment
to innovate new solutions is of great importance, and the time to start is now.
1.2 Purpose
The purpose of this thesis is to investigate current car retailing industry transformations and
evaluate how car retailers can develop innovative value offerings to manage industry changes
proactively.
1.3 Case Company - Börjessons Bil
Börjessons Bil (BRB) is a car retailing firm selling cars and trucks from a global OEM in Sweden.
It was founded in 1955 and has grown organically since then. They currently employ around 400
people and have physical retailers in many smaller populated urban areas, with about 50 000
inhabitants. BRB has several divisions and services spanning new car sales, truck sales, second-
hand car sales, sales of all-terrain vehicles, service, maintenance, backup parts, financing, and tires
with over 2 billion SEK in yearly revenue. The business to consumer (B2C) market for BRB can
be divided into three sections: sales of new-vehicles, sales of second-hand vehicles, and service
market. These can be seen in figure 2.
Figure 2. Three B2C areas of Börjessons Bil.
Furthermore, BRB has its own financing company, BRB Finance, that competes with the financing
company of the OEM. Lately, private leasing has been a strong market, which has proved the
financing company successful. BRB, like many other car retailers, has had demands from the OEM
on building and renovating real estate, transforming them into car halls. This has resulted in BRB
owning around 20 different properties hosting car halls, service and maintenance halls, tire
maintenance etcetera. In recent years, investments have been made to cope with digitalization.
These investments have resulted in a new website and a better digital infrastructure. They currently
3sell less than 1% of cars online. Their current strategy is that of organic growth and potential future
consolidation to gain market shares.
1.4 Research Questions
The automotive industry is undergoing an extensive transformation. Car retailers have historically
been reactive in response to changes, having a conservative mindset of ‘wait and see’. To
understand what changes are happening connected to car retailing and customer behaviors and to
aid retailers to better leverage digitalization and new value propositions, the purpose of this thesis
was developed: to investigate current car retailing industry transformations and evaluate how car
retailers can develop innovative value offerings to manage industry changes proactively. This
purpose led to the development of two concepts.
To develop these two concepts, two research questions connected to how the industry has changed
over time were defined as:
RQ1: How has car retailing changed in the last ten years?
RQ2: How have customers connected to the automotive industry changed in the last ten years?
Furthermore, the intention of this thesis is to investigate what the car retailing industry could look
like in the future, based on witnesses descriptions from professionals within the industry.
1.5 Delimitations
The delimitations for this study include not investigating the car retailers’ relationship with the
OEM. The OEM heavily influences car retailers. As can be seen regarding the Volvo - Bilia case,
having contracts with the OEM terminated is a plausible risk for any car retailer. Since the decision
of potential future termination of contracts relies almost entirely on the OEM, risks connected to
this will not be analyzed. Since OEMs are the owner of data connected to cars and minimal
amounts of these are shared with the retailer, value offerings, strategies, or optimizations based on
driving data, geographical positions of the car, etcetera, will not be discussed. BRB is not present
in any of the major cities. Because of the proximity to rural areas, some factors that will influence
car retailers in major cities have not been considered. The trend of Shared Mobility will mature
firstly in places with a high population density (Winkelhake, 2018) and will not be discussed in
this essay. Finally, the focus of this essay will be connected to BRB’s B2C business. Therefore
sales of trucks will not be discussed.
42.0 FRAME OF REFERENCE
2.1 Digital Transformation
There are several ways of managing digital transformation, and this topic has been researched
broadly, e.g. (Bican and Brem, 2020; Rodgers, 2016; Boardman et al., 2017; Winkelhake, 2018).
New technologies and digitalization change the circumstances under which all business strategy
processes operate, and more importantly: it changes how organizations create value offerings to
their customers (Rodgers, 2016; Winkelhake, 2018). Digital transformation opens up new
networking possibilities and utilizes cooperation between several actors (Boardman et al., 2017).
Digitalization also changes the speed at which organizations operate and need to stay competitive.
Business speed is not a new concept. Igor Ansoff (1957) opens his classical and much-cited
Strategies for Diversification with:
“The Red Queen said, ‘Now, here, it takes all the running you can do to keep in the same
place. If you want to get somewhere else, you must run at least twice as fast as that!’
So it is in the American economy. Just to retain its relative position, a business firm must go
through continuous growth and change. To improve its position, it must grow and change at
least ‘twice as fast as that.’ ” – Ansoff (1957)
However, the concept of growth and change takes a whole different meaning in the age of
digitalization. For example, products can be tested faster on a larger market (Rodgers, 2016). The
world is becoming an increasingly complex network of different initiatives and industry borders
merge (Rodgers, 2016). One significant part of digital transformation states that: “Digital
transformation is not about technology—it is about strategy and new ways of thinking” (Rodgers,
2016). Five different domains are affected by digital transformation (Rodgers, 2016). These
specific domains will serve as a foundational theory for this thesis and be explained further to
analyze and discuss the purpose and the two research questions. The domains are customers,
competition, data, innovation, and value offering.
2.1.1 Customers
The main focus of this thesis will be about working closer to the customer. This insight was derived
from the fact that what car retailers ultimately own is the customer relationship. They need to
nourish this relationship to thrive in the digital world. According to a recent article, disruptive
high-tech players will change the automotive ecosystem with new business models quickly, but:
“Dealers can survive - and thrive - by putting the customer at the center and pursuing dynamic,
new ways of working” (Inampudi et al., 2019). Changes connected to strategic assumptions within
the domain of customers can be seen in table 1.
5Table 1. Changes in Strategic Assumptions connected to customers,
table adapted from Rodgers (2016).
As shown in Table 1, what digitalization has brought is a more dynamic relationship between
customers and retailers. Customers are no longer passive consumers who can be negotiated into
buying any car or other goods, but rather “nodes within dynamic networks - interacting and
shaping brands, markets, and each other” (Rodgers, 2016). Since this thesis aims to discuss the
requirements and challenges to realize the value proposition connected to solid customer
relationships, a narrower framework is needed. This will be discussed further in section 2.3,
customer-centricity.
2.1.2 Competition
The second domain, competition, has in the digital age become more fluid, and industries are
merging, overlapping, and changing each other dynamically (Boardman et al., 2017). The
distinction between rivals and partners has been blurred. Researchers argue that building platforms
to cope with competitors is of great importance (Ruggieri et al., 2018; Winkelhake, 2018). A
platform is defined as “a business that creates value by facilitating direct interactions between
two or more distinct types of customers” (Hagiu and Wright, 2015; 2016). Platform business works
by bringing together two or more parties who create and exchange value through the business
rather than create all value themselves (Rodgers, 2016). A platform business model could be
described as a dynamic ecosystem of different stakeholders influencing each other while
exchanging value with each other rather than a traditional business model where value and
influence are unidirectional.
A critical notion within competition is that of disintermediation. It is defined as “the removal of
an intermediary or middleman from a series of business transactions.” (Ladd, 2021).
Disintermediation disrupts and reconfigures business relationships. One practical example of this
is the case with Volvo, as has been mentioned in 1.1 project background. By reducing the risk of
being disintermediated from the supply chain, organizations can create unique value from a wide
range of origins such as brand equity, network effects, and anything that creates additional value
for the final customer (Rodgers, 2016). When managing a successful organization in the digital
age, businesses must have a dynamic comprehension of competitiveness and cooperation. The old
and straightforward view of harsh and direct competitors is outdated. Instead, focus lies in bringing
together different parties and driving new value creation (Rodgers, 2016). These interactions will
produce streams of information and lead the way to new opportunities by creating an entirely new
6product to maximize value captured and better understand internal and external environments. This
product is called data.
2.1.3 Data
Understanding the utilization of data is a crucial domain and strategic asset for Digital
Transformation. The most significant challenge lies not in extracting data but in turning it into
valuable information. Another challenge is to develop a clear vision of data strategies and the
growing capability needed to put data to work in service innovation and value creation for both
businesses and customers (Sestino et al., 2020).
“Data allows us to experiment, learn, and test our ideas continually. This means data can
do more than power products, optimize processes, and deliver more relevant customer
interactions; it can also help change the way organizations learn and innovate.“
Rodgers (2016)
The focus of this thesis will be that of customer transactional data and how it can be leveraged to
create internal firm value. This will be discussed further in section 2.3.1 Customer Lifetime Value.
2.1.4 Innovation
According to Rodgers (2016), the fourth domain of digital transformation is innovation: the
process by which new ideas, by constant experimentation, are developed, tested and brought to the
market by the organization. This will be discussed extensively in section 2.2 Innovation.
2.1.5 Value Proposition
The term value proposition can be defined as a “concept that defines the benefits received by a
customer from a company’s offering” (Lanning and Michaels, 1998). Adapting the value
proposition of an organization is the last domain of digital transformation, it is closely related to
the purpose of this thesis, and therefore of utmost importance. Changes in strategic assumptions
connected to analog and digital value propositions can be seen in table 2.
Table 2. Changes in strategic assumptions within the analog and digital world,
table adapted from Rodgers (2016).
Börjessons Bil (BRB) is in a declining market with shrinking profit windows, as mentioned in
section 1. According to Ansoff (1957), there are three ways out of a declining market: new
customers with the same value, new value to old customers, and new value to new customers. This
can be seen in figure 3 below. The first way, finding new customers with the same value, would
7be extremely difficult and is therefore not an option for this thesis since the value proposition itself
is outdated. “In the digital age, a mature business that is facing decline is less likely to uncover
some previously unreached markets for its same products and services. Digitization has simply
removed too many barriers to entry for markets” (Rodgers, 2016). The two upper squares of figure
3, new value for same customers and new value for new customers will therefore be the focus of
this thesis.
Figure 3. Ways out of a declining market, adapted from Ansoff (1957).
The second way out of a declining market is to find new value to the same customers by adapting
the value proposition to changing customer needs (Ansoff, 1957). This will be of great focus to
this thesis since organizations must adapt to customers’ rapidly evolving habits and needs. This
will be done effectively by delivering a value proposition that is irreplaceable in the customer’s
minds in terms of relationships, service, or other features (Inampudi et al., 2019). The third way
out of a shrinking market is to find new value for new customers (Ansoff, 1957). This would
encourage a radical shift of a firm’s value proposition and is therefore extremely difficult, but far
from impossible, as it implies capturing an entirely new market with entirely new customers.
An unchanged value proposition is inviting startups and eventual disruption by competitors:
“Although industries will vary as to the exact timing and nature of their transformation by new
technologies, those who assume it will be a little farther down the road are most likely to be run
over” (Rodgers, 2016). Customer value connected to their behaviors and needs is of paramount
focus. Customer value will lead to organizations becoming more knowledgeable of which
customer segments are of most significant value. This will be discussed further in 2.3 Customer
Centricity. A great value proposition is a constant evolution of solving customer problems and
needs. Therefore, it is imperative for businesses in the digital age to proactively divest from
declining sources of advantage and adapt early to stay ahead of change.
82.2 Innovation
Innovation can be defined as any change to a product, service, or process that adds value to the
customer or organization, ranging from a minor improvement to the launch of something radically
new (Rodgers, 2016). Innovation can also be defined as the process of bringing a product or service
to the market (Schoemaker, Heaton & Teece, 2018). Innovation is not a new topic and has been
researched extensively. One of the most fundamental insights about innovation, according to many
studies, is that innovation is not necessarily about new things but rather about new value creation
(Mangelsdorf & Posner, 2017). Instead of starting with an appropriate solution, organizations need
to start with the problem, and from there, develop, test, and learn from several iterations to form
several feasible solutions (Schoemaker, Heaton & Teece, 2018). A shift in innovation from analog
to digital can be seen in table 3 below.
Table 3. Innovation strategy changes from analog to digital,
table adapted from Rodgers (2016).
Iterative and learning-based models have been successfully implemented for many organizations
(Ries, 2011). Instead of focusing and launching a novel product, the imperative is to constantly try
out different solutions to reach a product-market fit and learn extensively along the way (Ries,
2011). This will enable gaining market feedback quickly at the very beginning of the process.
One transformation that could potentially happen to the retailing industry is that of digital
disruption. Digital disruption enables innovative companies to leverage digitalization in order to
grasp market shares (Rodgers, 2016). This is also called disruptive innovation (Dau et al., 2021).
A podcast, Digital Disruption (2019) on the topic explains:
“Everyone loves the Airbnb & Uber examples, but digital disruptions are most often not very
disruptive. It is rather often digital and agile startups that, by seizing the opportunities of
minimal entry barriers [because of digitalization], take 1-2 percent from larger companies’
profit margins and are satisfied with it. The problem is that those percentages were what the
larger company was supposed to reinvest in new value offerings. [...] With a short-term
perspective, you can buy financial improvements, but organizations need clear strategies
aligned throughout every hierarchical level with a long-term perspective. You need to focus
on fewer goals and become more proactive in the realization of these goals”
- Digital Disruption (2019)
9Disruption is one of the most significant managerial fears connected to the future (Bonnet, et al.,
2018). Digitalization and technologies have lowered the entry barriers to compete within industries
which have resulted in an increase of disruption. The average tenure of a Fortune 500 company
was 60 years in 1960. In 2010 this number was 12 years, and it is expected to diminish even further
into the future (Bonnet, et al., 2018). The interest over time of googling the word ‘disruptive
innovation’ can be seen in figure 4 below. What this figure shows is that larger organizations are
more interested than ever before to tackle disruption by becoming more innovative, agile, and
proactive (Bonnet, et al., 2018). This can be done in practice by trying out new value offerings and
not relying on a reactive mindset when dealing with change.
Figure 4. Trends of the word “disruptive innovation” (Google, 2021).
Summarized, to innovate and stay competitive against potential disruptions, organizations must
experiment continuously and allow fast and cheap failures. Only then can they compete with faster
startups in creating new value in a rapidly changing world. It is imperative to go from being
reactive to becoming proactive, by adapting and improving value offerings close to customers
when they can instead of when they must.
2.2.1 VUCA - Volatility, Uncertainty, Complexity and Ambiguity
“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of
fear is fear of the unknown.” - Lovecraft (1927)
In the late 1990s, the U.S. military coined the acronym VUCA - volatility, uncertainty, complexity,
and ambiguity - and since then, it has become adopted by management firms for conditions that
any leader may encounter (Whiteman, 1998; Schoemaker, Heaton & Teece, 2018). With many
transformations currently happening in the automotive industry, it could be defined as a industry
exposed to VUCA conditions. VUCA awareness needs to be adopted by managers to think
differently and proactively handle complex industry changes. The presumption is to manage
unfathomable deep uncertainty instead of quantifiable risk (Schoemaker, Heaton & Teece, 2018).
This leads to a shift in decision-making by managing innovation and competition simultaneously.
“VUCA conditions call for entrepreneurial leaders who can architect new organizational
capabilities that stimulate innovative offerings and new business models” (Schoemaker, Heaton
& Teece, 2018). In order to approach VUCA conditions, internal dynamic capabilities need to be
developed, which will be discussed further in the next section.
102.2.2 Dynamic Capabilities
An essential aspect of innovation is creating dynamic capabilities to profit under VUCA conditions
(Schoemaker, Heaton & Teece, 2018). A distinction between ordinary and dynamic capabilities is
necessary in order to understand the concepts. Ordinary capabilities are critical for organizations
and include producing and selling a defined number of products and services within the current
corporate environment (Schoemaker, Heaton & Teece, 2018). This can be derived through, for
example, “efficient manufacturing, effective marketing, strong partnerships, and capable
operational leadership” (Schoemaker, Heaton & Teece, 2018). Ordinary capabilities include
reacting to the business environment.
“Ordinary capabilities enable identification of important process innovations, and dynamic
capabilities help identify new products and services, potentially opening new markets where
rivals have not yet appeared”. - Schoemaker, Heaton & Teece (2018)
Dynamic capabilities are connected to a proactive mindset when managing for change. It is a way
to stand out from the competition since it is an intangible asset not easily copied. Some of the
foundations of dynamic capabilities include unique problem-solving techniques, internal culture,
risk-taking, tolerance for failure, experimentation, and learning (Schoemaker, Heaton & Teece,
2018). Dynamic Capabilities can be divided into three clusters: sensing, seizing, and transforming
(Schoemaker, Heaton & Teece, 2018). Firstly, sensing can be divided into 1) anticipation and 2)
challenge. Sensing capabilities are essential in a greater understanding of the external environment,
such as market changes and competitors. They are accessed through traits like curiosity, flexibility,
and a drive for continuous learning. The second cluster of dynamic capabilities, seizing, includes
3) interpretation of the external environment and 4) deciding how to respond to this change.
Critical aspects of seizing opportunities involve a commitment to change and prioritization of a
limited amount of goals, not just in a new product or market strategy but also through repeated
execution and follow-ups. The last dynamic capability cluster, transforming, can be divided into
5) alignment of the organization and 6) learning. In order to transform an organization, alignment
is crucial in the communication of a clear message connected to where the firm is and where it
must go. A study of 124 organizations revealed that only 28% of executives and managers
responsible for executing strategy could list three of their companies’ strategic priorities (Sull et
al., 2018). This strategy leakage is more significant further down in the organizational hierarchies.
Hence, alignment and clear internal communications are vital in making sure the whole
organization is committed to change and serves as a stepping stone for change management,
strategy execution, and knowledge sharing throughout the organization. Finally, learning is
important in order to adapt a humble mindset during successes as well as failures. The components
of dynamic capabilities and how they connect to the VUCA environment can be found in figure 5
below.
11Figure 5. Dynamic Capabilities and its components, adapted from
Schoemaker, Heaton & Teece (2018).
To stay competitive and gain financial profits, businesses must combine ordinary capabilities with
proprietary assets (Schoemaker, Heaton & Teece, 2018). Dynamic capabilities help organizations
identify profitable assets and orchestrate these to be further exploited with the help of innovation
and agility. Ordinary capabilities enable important process innovations but possessing these on
their own will not be adequate in order “to support long term competitive advantage, particularly
in VUCA worlds, and they can even distract from preparing for the future” (Schoemaker, Heaton
& Teece, 2018). Dynamic capabilities are of great importance since they open up potentially new
value offerings in a proactive manner to stay ahead of change. It is about creating a change-oriented
organizational culture and leveraging timing to reap the fruits of new product and process
development connected to future business environments and technological opportunities.
2.3 Customer-Centricity
Customer centricity is derived from the fact that not all customers are of equal importance to the
firm since they do not bring the same recurring value. Instead of focusing on product development
or operational excellence, customer-centricity is scrutinizing customer segmentation and customer
relationships. Many customer behaviors depend on several predetermined factors that an
organization or brand has a relatively small amount of control over (Fader, 2018). Some customers
will always be better than others, and organizations need to gather the correct metrics to sustain
and not lose these precious customers. To become more customer-centric is to focus on the correct
customers to gain strategic advantages. It is defined by Fader (2018) as:
“... a strategy that aligns a company’s development/delivery of its products/services around the
current and future needs of a select set of customers in order to maximize their long-term financial
value to the firm.”- Fader (2018)
Customer centricity consists of better knowledge of the customer through data use and focusing
on the ones that will bring the most long-term profit to the organization. This is done through the
leverage of customer engagement and will lead to customer advocacy and driving new
opportunities (Rodgers, 2016). By driving a customer-centric agenda, organizations can maximize
12long-term financial value and long-term success by outlining the current and future customer needs
to guide the value captured from products and processes.
2.3.1 Customer Lifetime Value
Customer Lifetime Value is a crucial building block for a customer-centric strategy. It is a
measurement that predicts the future net worth of a customer relationship based on several factors
(Fader, 2018). It is critical to understand that Customer Lifetime Value is essentially an estimation
of an unknown, not a calculation of a known. There are many different estimations of Customer
Lifetime Value and levels of sophistication to the statistical formula. One standard estimation is
shown in figure 6 below.
Figure 6. Customer lifetime value estimation, illustration adapted from Fader (2018).
One of the critical factors derived from calculating Customer Lifetime Value is creating loyalty
programs (Rodgers, 2016). Loyalty programs are crucial to create robust customer networks of
engagement and advocacy. A global study of 15,000 consumers by Edelman (2014) showed that
consumers want much more than a transactional relationship: when they see an organization
approach them, they are more prepared to defend it from critique, advocate for the organization,
share personal information and purchase from them.
“In an age when data is in constant surplus and often free, the imperative for businesses is to learn
to turn it into a truly strategic asset. That requires both assembling the right data and applying it
effectively to generate long-term business value.” - Rodgers (2016)
Furthermore, it is more efficient to invest in the retention of customers than the acquisition of new
ones (Fader, 2018). Loyalty programs can be used to increase customer retention and total
spending over time, and additional value also lies in accumulated data generation (Rodgers 2016).
With the explicit consent of the customer, this data will track behaviors and make organizations
better at understanding unique customer interests (Rodgers, 2016). It is important to notice that
customers with lower Customer Lifetime Value still are the majority and acts as a stabilizer for a
company by providing recurrent revenues. These normal customers are important and should not
be left out (Fader, 2018).
2.4 Issues that are of Interest but do not form part of the
Theoretical Frame of Reference
Business model innovation is a subject that is of great interest but is not a part of the theoretical
frame of reference. The reason behind this decision is that BRB has several business areas, with
several business models, and business model innovation would become increasingly complex,
since the business model differs from area to area. Various methods of quantitative theory is also
of great interest connected to, for example, business intelligence or data science. These are not
13included in the frame of reference since this thesis is based on qualitative research. Furthermore
theoretical frameworks such as design thinking could be very valuable in order to harness new
ideas and develop new products and processes. It has not been chosen for development of processes
since those of digital transformation seemed superior when answering the research questions and
purpose. Finally, data discussed in this thesis relates mainly to customer transactions. Other types
of data such as supply chain data, human resource data or product data is of great interest to analyze
further in order to optimize business operations and reduce risk. Other types of customer data than
transactional ones such as customer surveys, reviews and comments on social media or customer
search behavior and browsing patterns on websites are also of great interest, although not to answer
the specific research questions proposed.
2.5 Theoretical Summary
Digitalization is a discontinuous change which leads to the inevitable instability of market
dynamics. Strategies for digital transformation can be divided into five sections: customers,
competition, data, innovation, and value offerings (Rodgers, 2016). Digital transformation sections
have in common that they have made the world more complex and ambiguous, while it offers new
methods for experimentation in order to keep companies ahead in a rapidly changing environment.
Bringing a new product or service to the market which adds value to a customer or organization is
called innovation (Rodgers, 2016). Innovations are crucial in order for companies to continuously
reinvent themselves and create new value offerings. Furthermore, To form digital strategies, firms
need to adapt their dynamic capabilities to an external Volatile, Uncertain, Complex and,
Ambiguous (VUCA) environment (Schoemaker, Heaton & Teece, 2018). Dynamic capabilities
are connected to being proactive, by trying to anticipate and interpret change and thereafter make
new decisions (such as launching new products or services) based on first intuitions. Furthermore,
alignment in the whole organization on where the company is, and where it is going (such as a
vision statement), and learning from failures as well as successes are both crucial parts of dynamic
capabilities. Finally customer centricity is a strategy that helps companies to focus on the best
customers, those who brings the most reoccurring revenue to the organization, and treat these in a
superior way (Fader, 2018). Some customers are just better than others and organizations often
have little or no power to change this fact, hence these are required to be treated better in order to
gain better long-term success and value.
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