Theory of the Dealership

White Paper Theory of the Dealership by Carlos Mora with Kurt Crisman, Jeff Walter EXECUTIVE SUMMARY Automotive manufacturers face many challenges when evaluating and optimizing the performance of their dealership channel. Comparing music and dealer channel performance provides insight into a theory of the dealership that can inform managerial decision-making. A theory of the dealership would identify the critical variables in all areas of interest and how those variables impact business goals. Latitude’s channel optimization framework provides a structure to develop and apply a theory of dealership by making technology investments that identify and manage critical operational variables. 1 How well can an organization measure dealer behavior, discover and communicate problems, and coordinate solutions? How effectively can manufacturers and dealers use this information? The extended enterprise can identify low- and high-performing dealers by their bottom line, but gaining insight into why dealers perform as they do and increasing their performance proves to be more difficult. Comparing music and dealer channel performance provides insight into a theory of the dealership that can inform managerial decision-making. When creating music, composers arrange different notes to create a composition. Each composer strives to create a masterpiece that will be performed with consistent, desirable results, but several attributes introduce variation into each performance of the composition. • Music based on multiple voices, themes, and complex forms Many performances by many different orchestras and musicians Performances potentially affected by wide range of factors (location, musician skill level, instruments, etc.) The composer does not directly participate in most performances • • • These factors should sound somewhat familiar to a manager of dealer operations or the large, independent channel of another knowledge-intensive business. The attributes of these channels include: • Complex products with many moving parts (physical or virtual) and different models or configurations, like an automobile. © Latitude Consulting Group 888-577-2797 www.latitudecg.com LATITUDE CONSULTING GROUP WHITE PAPER Theory of the Dealership • Many sales and service transactions performed by many different dealerships and dealer staff. Dealership performance dependent on a wide range of factors (location, skill level of technical workforce, dealership systems and processes) Corporate staff do not directly manage dealership owners or staff Composers, however, do not employ advisors to monitor orchestras. They can achieve their desired quality, because they understand music theory, which provides a structure to analyze, understand, compose, and perform music with predictable, consistent results. • The theory establishes rules that eliminate trial-and-error composition, so a wider range of options can be considered and composed without playing. Musical notation captures the rules of the theory and represents the composition in a musical score that establishes a single point-of-truth for composer and orchestra Theory provides the basis for methodologies that train musicians in general and instrument-specific skills required for a composition Applies equally to all composers, musicians, and instruments • • Traditionally, automotive manufacturers and other organizations with large partner channels have built field organizations to control performance variation. If musical composers adopted a similar approach, they would send assistants to advise each orchestra. However, this approach does not address all the noise that can affect performance. • • Composition may be flawed Composition not the right fit for most orchestras (wrong mixes of instruments, skills of musicians) Misunderstandings occur to varying degrees between advisors and orchestras • 2 • • • Substitute composition for dealer performance or operational plan, and substitute advisors for field staff and orchestras for dealerships. Again, the similarity is apparent. Note that the first two items relate to a problem with the original composition or plan, and the last item relates to the execution of that plan. With this approach, performance at some dealers may sound OK, but without additional control, there is still a lot of noise in the channel and strategic objectives are not met. Music theory works because it embodies scientific theories of sound and physics that explain the interdependencies between different waveforms. Those in charge of dealer operations do not have a dealership theory because all the interdependencies of all the relevant variables in the life of a dealer have not been discovered. What the extended enterprise needs is a good theory that provides a structure to analyze, understand, control, and optimize partner channels. © Latitude Consulting Group 888-577-2797 www.latitudecg.com Developing the Theory In automotive manufacturing, final inspection was the dominant model for quality control until it was demonstrated that it made more sense to focus on the processes. It is easier to locate the true cause of a failure, or potential failure, in the process rather than in the final product. Returning to the musical composition metaphor, music theory provided the structure to understand what sound will result from process—playing a particular single note, combination of notes, or sequence of notes. A theory of dealership would establish rules and identify patterns in the interdependencies among channel activities that optimize performance. While a single organization is unlikely to develop a comprehensive channel theory any time soon, it can develop a model to understand what rules and patterns apply to its own channel. The extended enterprise can use an understanding of the rules and patterns to make valid inferences about the effectiveness of the activities; they can know where to improve and how to allocate resources and effort. lessons from Six Sigma and efficient asset management from JIT, automotive manufacturers can improve business results for both the automotive manufacturer and its dealers. A structural equation model (SEM) provides one statistical method. Building a structural equation model involves measuring all the factors that might affect a performance metric and then bringing their joint effect together using advanced statistical methods. The resulting model provides coefficients for each measured factor that describe how much the factor impacts the relevant performance metric. One Causal Network—A Study One automotive dealership study contained a detailed analysis of an evaluation system used by an automotive manufacturer to measure dealer compliance to the manufacturer’s standards. Independent of the compliance scores, the study obtained eight dealer performance measures, including unit sales, part sales, market share for two different vehicles, and customer satisfaction with the sales, parts and service departments. Out of more than 107 items used in the manufacturer’s dealer evaluation system, only 17 showed consistent relationships with business results. This analysis provides an example of a disconnect between assessment instruments and the dealer performance measures they are purported to improve. 3 Statistical Methods In the manufacturing industry, Six Sigma and Just-in-Time (JIT) production were two developing concepts that improved quality (Six Sigma) and reduced costs (JIT). Six Sigma is a measurement of process quality using statistical procedures to continually improve manufacturing processes. Both Six Sigma and JIT continue to significantly impact the automotive industry and can be applied to dealer operations. By leveraging statistical process improvement © Latitude Consulting Group 888-577-2797 www.latitudecg.com The relevant items could be grouped into three categories: • Certified training. (Non-certified training did not appear to affect dealership performance) • Social capital (participation in professional organizations) • Anticipatory behavior. (For example, prior to arranging a service appointment, a service manager verifies that a required part is in stock and orders it if it is not.) dealership activities affect each other and the performance objective. Based on the results, the organization can ‘compose’ a plan to achieve the desired performance objective. Making Technology Investments The lower tiers a modular approach that helps identify where the theory can be applied through selective information technology investments that will yield the greatest benefit to the channel operations. • A balanced scorecard tracks performance and provides a single point-of-truth between the organization and all its dealers. Organizational performance objectives are tied to the actions dealer staff need to take. A channel portal with single signon and common processes and data provides the best instruments for uniform operational efficiency. Portal applications may be developed for both enterprise-dealer and dealer-only processes. Knowledge transfer through an extended, enterprise-wide learning and certification system ensures that dealer staff can easily acquire the understanding and information they need to take action and meet objectives. Applying the Theory Latitude Consulting Group developed a strategic framework based on the key findings of the dealer study to develop and apply a dealership theory for a specific channel. The framework integrates five areas of dealer channel optimization with knowledge transfer at the foundation and clearly-defined performance objectives at the peak. • 4 Causal Network A key tier of this framework is the notion of the causal network. At this step, an organization uses statistical methods like SEM to develop a theory of dealership for its channel. Dealer management systems, evaluation systems, and other sources can provide data for the statistical analysis. The results provide the basis for a theory, a causal network that maps how different • © Latitude Consulting Group 888-577-2797 www.latitudecg.com