Michelin vs. the Meteors: Facing Off Against Upstarts, Amazon

Among the people I see every day in Silicon Valley and San Francisco, it’s a fundamental article of faith that physical size and scale don’t determine success. People in my world frequently use the metaphor that large physical incumbents are lumbering dinosaurs, seemingly powerful but vulnerable to the next meteor that will wipe them off the earth.

I think the dinosaur metaphor has gotten out of hand. After six years of teaching my “The Industrialist’s Dilemma” class at Stanford’s Graduate School of Business, I can confirm that many leaders of established companies are neither old, slow, nor prehistoric in their thinking. Instead, they are making the most of their size and scale – what I call “muscles” – while never assuming that size and scale alone guarantee future success. They tend toward paranoia rather than complacency, knowing that at any moment some unknown catastrophe might come hurtling at them. Their risk awareness and lack of hubris help them leverage their muscles as a true advantage, even in situations when being big might seem like more of a burden than a blessing.

Here, we’ll look at how Michelin is leveraging its enormous size and strength, on a global scale, to stay relevant, to thrive, and to survive whatever meteors might be approaching.

Confronting an Identity Crisis

When I researched Michelin and interviewed some of its senior executives in 2018, I was struck by the consistency of its 130-year history of innovation and leadership in the tire industry. In short, the company’s existing muscles were very impressive. Yet its leaders, including COO and future CEO Florent Menegaux, told me that Michelin urgently needed to build up new and different muscles.

By 2018, the tire industry was rapidly fragmenting with the rise of smaller, cheaper tire manufacturers that made it harder to sell premium tires at premium prices. The rise of electric vehicles (which cause tires to wear differently) and ride sharing (which changes the life cycle of tire purchases) made traditional business plans outdated. Various cost pressures were also coming to bear in different countries, especially the complex but huge market of China.

As Menegaux told my Systems Leadership class in April 2019, Michelin couldn’t think of itself as a tire company anymore. It needed to excel at additional products and services, or risk becoming increasingly commoditized as a component supplier.

In June 2017, Michelin had announced its first global reorganization in more than 20 years, and it set aggressive goals for three non-tire units that would have to become more entrepreneurial and experimental: services & solutions, high-tech materials and experiences.

The goal was to grow the revenue contribution of these non-tire businesses from about 10% to about 25% within five to seven years. Let’s look at how Michelin attempted to leverage its muscles in its core tire business, while making those three other units an increasingly big part of its identity.

The Innovator’s Dilemma and the Amazon Effect

Michelin’s priority had always been to sell the safest and highest-quality tires. But those high standards became harder to maintain as the tire market fragmented over the past two decades, with many new players emerging in developing countries such as China and India.

Meanwhile, electric cars such as Tesla’s had higher torque than gasoline-fueled automobiles, which led to heavy wear on tires and more frequent replacements. The boom in ride-sharing companies like Uber and Lyft eliminated many rider preferences regarding tire brands. And consumers who still bought their own tires were increasingly influenced by cost and fuel efficiency rather than brand name and perceived quality. All of these trends started to make tires more of a commodity than a differentiated product, an example of Clay Christensen’s “innovator’s dilemma,” in which a high-priced/high-quality brand finds (to its horror) that most of its customers are OK with an inferior but cheaper substitute, if it continues to improve over time.

Another source of pressure: e-commerce giants like Amazon and Alibaba posed a threat to Michelin’s value chain by getting in between the tire-maker and its customers. People were increasingly saving money by shopping online rather than at car dealerships or car supply stores, both of which had an incentive to push more expensive tire brands. This was an example of the so-called Amazon effect, in which a producer loses contact with its own customers and is increasingly at the mercy of a powerful intermediary.

All of these forces pressured Michelin to cut prices, just when raw materials for tires were becoming more costly. Most of the industry’s newer entrants and disruptors did not have an existing brand to protect, which gave them the flexibility to compete on price. Michelin seemed to be playing catch-up, and there was some internal concern whether the company could maintain its product leadership position.

Applying Historical Scale to the Digital Leading Edge

During the 2010s, Michelin’s corporate customers began to seek advanced services along with their tires, including maintenance and scheduling alerts and detailed information about performance and durability. The Services & Solutions group fulfilled these needs, and Menegaux described it as “absolutely essential” and the key to staying connected with fleets and preventing third parties from coming between them. His mandate to the group was to create unique, custom-tailored products and services that would justify premium pricing to these corporate customers.

Michelin had already made several deals to expand Services & Solutions, and it was innovating by connecting tires to the Internet of Things and offering “tires as a service.” These and other new offerings were only possible because of Michelin’s scale, especially its massive database of information on tire usage, arguably the best in the industry.

Nevertheless, the group’s growth was just 10 to 15% in its first few years, not enough to reach Menegaux’s targets. The head of Services & Solutions, Executive Vice President Sonia Artinian-Fredou, was concerned that the problem was finding the right talent for a high-tech, service-oriented unit. Michelin had long emphasized promoting from within, but now it needed to recruit outsiders with fresh perspectives.

Unfortunately, some potential new hires still perceived Michelin as an old-school, industrial tire company. As Artinian-Fredou put it, “The new generation, they are not so excited to join a large company like Michelin.” Menegaux agreed that hiring remained a big challenge for the higher-tech units, but was optimistic that hiring would become easier as Michelin’s brand evolved.

Spreading Innovation to Other Industries

Most people have no idea that Michelin has long been a world leader in materials science and its applications. With the 2017 reorganization, the company recognized that this competency has the potential to become a significant source of revenue beyond the tire industry, rather than just an internal R&D function.

To add extra muscles to the High-Tech Materials group, Michelin entered into numerous partnerships with smaller companies. For instance, a 2015 joint venture with French machine manufacturer Fives Group led to Fives Michelin Additive Solutions, which offered industrial customers a complete metal 3D-printing solution. A 2019 joint venture with French automotive technology company Faurecia—called Symbio— would develop hydrogen fuel cell systems for light vehicles, trucks and other applications of “hydrogen mobility.” And a 2020 joint development agreement with the Canadian firm Pyrowave would industrialize an innovative plastic waste recycling technology by combining Michelin’s expertise in materials science with Pyrowave’s research in recycling.

New Polish for an Old 'Jewel'

I was surprised that Menegaux considered the Experiences group, especially its world-famous Michelin Guides, to be the “jewel” of Michelin’s brand and an emotional boost to the entire company. The first Michelin Guide, which rated restaurants and hotels on a three-star scale, was published in 1900 as a giveaway item to encourage the new fad of driving in France. The Michelin brothers never imagined that this little side project would evolve into the world’s most prestigious rating organization, with a three-star Michelin rating becoming the holy grail for chefs around the world.

By the mid-2010s, Michelin was selling 13 million maps and guides per year, plus 20 million licensed lifestyle products. ViaMichelin, a trip-mapping service, calculated over 200 billion kilometers of trips for customers. In 2016, diners booked 39 million tables through Bookatable, the company’s restaurant reservation application. Michelin expanded its Experiences group in 2017 by acquiring a 40% stake in Robert Parker’s Wine Advocate, an international reference for wine reviews. With this acquisition, the company hoped to establish a firm position within the fine food and wine market. Several months later, it added a 40% stake in Guide du Fooding, an annual restaurant guide and event marketing company.

Putting resources into the Experiences group made sense because it was another way for Michelin to leverage its worldwide reputation. Not only were the Michelin Guides the oldest and most prestigious brand in restaurant and hotel reviews, but they were the first to be truly global. A guidebook about a single country can’t match the impact of a worldwide series.

The jury is still out on Michelin’s efforts to strengthen and retrain its muscles so it can continue to thrive during the most competitive global climate in its long history. The company’s many investments within Experiences, High- Tech Materials and especially Services & Solutions have been a big bet, but not making those moves would have meant taking an even bigger risk. The key question is how long it will take for Michelin’s non-tire initiatives to pay off, and if they will pay off at scale all over the world.

Getting Scale Right

Many industries now have global incumbents—such as AB InBev, CNN, Visa and Michelin—that face daunting challenges from new competitors. In addition to facing start-ups that have the advantage of new technologies and business models, some also face unfair competition from China that receives protection and support from the government. It would be easy for these incumbents to feel like lumbering dinosaurs surrounded by faster, leaner, more agile newcomers. But incumbents can also become faster, leaner, and more agile while simultaneously operating at scale.

Despite its ongoing challenges, Michelin is a role model for leveraging scale to build new competitive advantages through the use of data, efficient global supply chains and distribution excellence.

Reprinted by permission of McGraw-Hill. Adapted from The Brains and Brawn Company: How Leading Organizations Blend the Best of Digital and Physical by Robert E. Siegel. Copyright 2021 Robert E. Siegel. All rights reserved.

Robert Siegel is a lecturer at Stanford Graduate School of Business, where he researches strategy and innovation. He is a general partner at XSeed Capital, a venture partner at Piva and sits on the boards of several startups. He has previously held leadership positions at GE Security, semiconductor firm Pixim Inc., and Intel Corp.