Tesla – Winner winner chicken dinner
Tesla is an example of successful disruptive company derived from effective alignment between business (“BIG DREAMS”) and operating models (“EXECUTION”)
Business model
Quoted from Elon musk, Tesla’s mission is to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.
Looking at this mission, the firm intends to create value by:
- Producing sustainable product that address issue of global warming and depletion of fuel resources
- Product and sell product that Is accessible to mass market (re: Cheap enough)
- Innovate as soon as possible and try to address sustainability issue “Now” vs. in the “Future”
Tesla also tries to capture value by:
- Becoming the “first-mover”
- Build competitiveness of product against fuel-based car through continuous innovation
Operating model
Tesla’s key operating model is designed very strategically and well-executed.
First, Tesla overlaid clever & gradual business plan that determined allocation of capital, labor, and R&D, and equipment through a step-by-step process:
Source : Waitbutwhy.com
This master-plan is just brilliant. In its inception, Tesla is just like a start-up, and Tesla needed to quick-win to ensure buy in from people, and they did. Since the launch of high-end product (roadster) in 2008, Tesla has shifted to Model X (launched 2012), and Model X (launched in 2015) that have a more affordable price for consumer.
Second, Tesla focuses and deliver on innovation. Tesla is not about making big promise and dreams. Tesla delivers too. Just recently in 2015, Tesla announced auto-pilot features for current Model S and Model X (distributed in 2016).
This is example of innovation that Tesla strive for: Not only they made breakthrough in electric car, they go beyond extra miles on innovation by creating auto-pilot feature. The application of this auto-pilot is so great that it might just re-shape the taxi industry (read: Uber/traditional taxi without driver).
Third, to reduce cost, Tesla has strategically made vertical integration move by building Giga-factory lithium-ion batteries factory in Nevada that will help Tesla to [1] deal with production capacity and [2] reduce cost or production of battery packs by 30%. To portray the size of this new factory, it will increase Tesla headcount by 50% from current employee (~11k to 17k).
Lastly, Tesla also has great digital & direct sales and distribution model that made them able to [1] ensure customer has the highest convenience of getting its product and [2] gain customer that has high commitment to purchase. Tesla owned its own store and it also leveraged e-commerce channel using tesla website to get lead/inquiry, schedule test-drive, and order online. Ordering Tesla car & its accessories are only 3 steps away using the website (Select, enter details, pay).
In addition to all of this, Tesla asked customer to commit by paying upfront upon reservation that implies Tesla can save a huge amount of net working capital from this engagement. In example of Model X (produced 2015, distributed in 2016), Tesla even asked potential customer to put $5,000 deposit in 2012 without announcing prices.
Value creation and synergy from alignment of business and operating model
Car industry has experience long innovation draught before Tesla. Through up and down journey, Tesla proved that realization of big dream is possible. It has not yet achieved the dream yet, but it’s getting there with a blazing speed and the market knows it.
Let me show the value proof by looking at perception from marketplace:
| USA BIG 3 vs TESLA | Founded in | Market capitalization (in bn USD) | Years of existence |
| Ford | 1903 | 57.6 | 112 |
| GM | 1908 | 56.7 | 107 |
| Fiat / chrysler | 1925 | 18.4 | 90 |
| Tesla | 2004 | 30.6 | 11 |
Market cap as of 11/27/2015
It’s very astonishing how market are really bullish on Tesla now. However, I would want to point out that the journey for Tesla has not been very smooth. In 2008, due to recession, the company almost went bankrupt but Tesla managed to thrive and stick to its business principle and operating model. Since then the number of electric passenger cars have been significantly increased and are still on the uptrend.
To conclude, from Tesla’s story, one possible pathway of value capture and creation can start from business model (step 1), putting in place the right operating model (step 2), and consistently executing with persistency (step 3). We learned that Step 3 is particularly important because in Tesla’s example, if Elon musk gave up in 2008, he would miss the 30 USD-bn market capitalization that is really favorable towards Tesla now.
Winner winner chicken dinner : Tesla has somehow managed to successfully shape the world, how about you?
Source :
http://www.theguardian.com/business/2015/oct/21/tesla-car-autopilot-self-driving-car
http://kirillklip.blogspot.com/2015/10/lithium-race-teslas-jb-straubel-most.html
https://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me
https://www.teslamotors.com/blog/your-autopilot-has-arrived
https://www.teslamotors.com/blog/mission-tesla
http://waitbutwhy.com/2015/06/how-tesla-will-change-your-life.html
https://my.teslamotors.com/fr_CA/forum/forums/tesla-motors-growth-workforce-doubles-2014
Great company choice. I fully agree, Tesla positioned itself as an innovator and is consistently working on developing its image as such. Judging by its sustainable plant and business expansion plans, I believe Tesla has managed to stay consistent with its business model.
Hi Gheed,
Thanks! Yeah I think the road-map, business strategy, and execution are truly remarkable… I hope they can expand more too..
Aldo
Thanks for educating us on Tesla Aldo! I’m curious for your take on how government subsidies, and potential losing them, impacts Tesla’s business model? A good summary of the current US subsidies is here: https://www.teslamotors.com/support/incentives. I think by diversifying into lower-cost models that are more accessible to the general public Tesla will be able to ebb the flow of any leakage due to lost government support.
Definitely Simeon. Losing the incentive might affect the market demand, but to my suspicion, it wouldn’t be as much. I said this because the market penetration for electric car has not been saturated yet, and there is still high demand indicated by consumer’s willingness to just put deposit money (i.e for model x) without any clear price transparency nor commitment on release of product.
To build on Simeon’s comment, do you think political environment/incentives in the US (driving for electric car adoptions) versus Europe (driving for energy-efficiency) affected business and operational decisions that Telstra made? How do you think Tesla reinvent the historically dealer-heavy commercial distribution model in the industry? Do you think the rise of hybrid cars and energy-efficient cars by established brands would hinder future growth?
Wow thanks for the interest and a lot of questions :
1) I dont really think it affected the decision making of the company that much. Elon musk is a very unique person, and he started the company by wanting it (“I want to have sustainable car”). From there then he designed the operating model that would make sense to support his business model / ambition.
2) Telsa really wanted to have direct control of distribution and so they tried to lobby state government one-by-one to get permit. Some rejected, some accepted.
3) My take is that it might be a slight hindrance only. As hybrid cars producers invent new model and innovate, so will Tesla. Along the way, Hybrid brand will be more energy effective & probably cheaper, but Tesla will do so too. So looking at this, highly likely Telsa can still maintain similar level of comparative advantage against those brands.
Great article – very thorough analysis! I think it’s also interesting to note that Model S and X are effectively the same chassis, further reducing complexity in operations, increasing automation and decreasing overall costs. The direct to consumer model also minimizes channel conflicts, if regulation passes.
Nice job, Aldo. To me the big question is – will Tesla’s car be like the iPhone? Apple’s iPhone had first mover advantage, changed consumer behavior to use smartphones, but entrants immediately came in to develop other smartphones. The iPhone could have gotten crushed by its competitors, given its higher pricing and margins, but it didn’t. Tesla’s EV has first-mover advantage, but if Tesla succeeds in changing user behavior, will its high pricing get crushed by its future competitors? I think yes. There will be future competitors since EVs aren’t “that” hard to make – that’s why Chevy and BMW have EVs. Once other car companies see consumers want EVs, they will make EVs too.
I see two reasons why cars are not like smartphones. First, people don’t use cars to communicate with each other. Smartphones are meant for communication, so scale matters. People use either iOS or Android, and that’s pretty much it. Apps are written for iOS or Android, and that’s pretty much it. If a phone-maker came out with a new operating system today, it wouldn’t gain traction. This protects the iPhone from competition. Tesla’s EV have no similar protection.
Second, car companies burn more cash than electronics companies. R&D, capex, manufacturing, shipping, distribution of cars is more expensive. It’s more expensive to iterate on design. Researching the next technological innovation that other car companies don’t have will be more expensive. Tesla takes advantage of its high stock price to raise equity and also convertible debt. How much longer can that last? Competitors have more cash. Telsa has struggled to meet its production goals in the past. It effectively loses money on each Model S (http://www.reuters.com/article/us-teslamotors-cash-insight-idUSKCN0QE0DC20150810).
I think you bring up some interesting points. I think your comparison between Tesla and Apple makes sense. Many new competitors flooded the smartphone market, and while Apple no longer enjoys near-monopoly status, they are still able to charge a premium. I think the reason for that is Apple’s innovative capabilities, and given Tesla’s big leap in the automotive industry, I think there is significant bench strength in that area.
Your first point about network effects in smartphones is valid, as they limit new entrants in consumer electronics, but to your second point, the capital intensity of automobiles also limits new entrants into automobiles. As long as Tesla can distinguish itself from competitors, presumably through innovation, I think they can maintain premium pricing.
I think your second point is quite salient. If the Model S is priced below variable cost, that’s a huge problem, especially if Tesla has a weak cash position. That doesn’t seem consistent with the pyramid diagram of using Model S revenues to fund Model 3 development.
Nice article Aldo! I’m very curious to follow their development. Especially like the pyramid idea: first you develop a car that is very fancy, making it a cool brand, and then slowly you go down to the base of the pyramid with a much higher quantity (capturing the extra brand equity that you built).
One of their major challenges will actually be to built out the infrastructure in time (most resources will go into that in the coming 2 years). Especially urgent is making sure that its operational by 2016 (that’s their goal). If they do no succeed, consumers further down the pyramid might not be convinced to go fully electric (“What if I run out of battery?”). How do you think they could make this happen, without diverting too many resources?
ps. Love the title 😉
Aldo,
Thanks for such an interesting analysis on Tesla. I am a big fan of what the company has done and the way in which Musk has aligned Tesla’s value proposition with its operating model (as you well point out).
My main area of concern is that the company might not be able to modify its complex operating system enough in order to offer the Model 3 at sustainable prices for mass consumers. I know that you mentioned that Tesla will reduce operating costs by building the new Giga-factory and presumably will be able to transfer some of the savings to its new consumers (via lower Model 3 prices). However, do you think this will suffice? What other initiatives is Tesla introducing to its manufacturing processes or raw materials in order to offer lower price points to its customers?