Is Tesla Disrupting the Automotive Industry or not?

(this was my Final Paper for the June 2016 HBX Disruptive Strategy course, a course I can highly recommend to anyone)

Description of the company

Tesla Inc.  is an electric car building company that was founded in 2003 in Silicon Valley with the purpose of building sustainable energy cars. It launched the Tesla Roadster (an electrical sports car) in 2008, the Model S (an electric luxury sedan) in 2013 and the Model X (an electrical SUV) in 2015. The latest model, the more affordable Model 3, will be launched in 2017. At an average of less than 20,000 vehicles a year, production is very low compared to the traditional car industry.

A lot of the incumbent car companies were working on getting their cars more efficient, but didn't really want to invest in electrical cars. With Tesla shaking up the luxury sedan market at first and now also aiming at the "lower end" market with the model 3, some of incumbents like Mercedes, Audi and BMW are aiming more and more on the electric market through a "subunit" strategy.

The incumbents from the combustible car industry also attacked Tesla by trying to prohibit Tesla to sell cars through changes in local regulatory measures and by attacking the company on social media.

The major challenge for the electrical car industry is battery range/efficiency and battery life. While the traditional car companies attacked this problem from within their own resources, processes and profit formula (RPP) by building hybrid models or adding a small combustible engine as a “range extender”, Tesla attacks this problem in a whole different way, which will be discussed later.[1]

Current situation

The “Job to be done”

Tesla’s “job to be done” was initially to provide customers with a safe, sustainable energy powered car that wouldn’t have the hassle of the range and battery issues, which was based in a larger vision of helping expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy as a primary, but not exclusive, sustainable solution.

Tesla entered the industry by attacking the incumbents on sustained innovation, which seems counter-intuitive through the lenses of the disruptive strategy, or to say it in Elon Musk’s own words: “Starting a car company is idiotic and an electric car company is idiocy squared.”

However, in the 2006 Tesla mission statement, the reason to do this is provided: “The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.” So the aim with the Model S was to raise “good money” (slow growth, high profit) to provide the funding of a low-end product focusing on “over-served” customers.

So, to answer the title question, Tesla’s disruption of the industry is probably yet to come… but disruption of what industry? This will be discussed later in this paper.

Resources, Processes and Profit Formula

Tesla wanted to optimize the customers experience by building an exclusive car offering top-end technological innovations to get the job to be done right. The major issue was “range anxiety” (the customer’s fear of running out of battery power), for which Tesla developed an integrated solution by a Supercharger network and destination charging network (providing fast and free charging), more efficient battery usage through software updates, and planned “battery-swap”-stations.

A second important goal is to build a safe car, focusing of the job to be done to improve road safety. Besides delivering the first car to get an overall 5-star rating from the National Highway Traffic Safety  Administration (NHTSA) and the European New Car Assessment Program (Euro NCAP), Tesla is trying to improve the customer experience by integrating the “Autopilot” system, a “self learning” system (through data collection from worldwide users), which is not yet a fully autonomous car (the ultimate goal), but has so far succeeded in getting better numbers on deaths by mile driven than the traditional car industry.[2]

By focusing on these jobs to be done, Tesla is building a purpose brand for sustainable, reliable, innovative and safe electrical cars.

Strategy development and management process

Tesla Motors is still very much interdependent, focusing on reliability and functionality of its cars, while integrating forward by controlling as much as it can: building its own “Gigafactory” battery plant, keeping control of sales by an online ordering system instead of retailers etc.

Still being in the market creation phase, the focus on “good money” with patience for growth while looking for fast profits that are funded back in research and development for low-end products makes sense. While its deliberate strategy is to make sustainable, reliable, innovative, safe electrical cars, the company is always looking for emergent strategies that match the profit formula.

Future

As the electric car industry continues to develop further, Tesla will have to be aware when the company will arrive at its decoupling point (this would be when electric cars can be build easily and cheap by competitors). At the decoupling point, the company will have to disintegrate by outsourcing overhead and focusing on performance-defining components. In this view, the energy/batteries are no doubt being performance-defining.

And in comes Tesla’s recent mission statement from 20th July 2016…

In the mission statement Tesla describes its mission as follows: “The point of all this was, and remains, accelerating the advent of sustainable energy, so that we can imagine far into the future and life is still good”. The strategy to complete this mission is build around four components:

• Integrating energy generation and storage
• Expanding the product line to cover all segments of terrestrial transport
• Autonomous driving cars
• Sharing cars

Energy Generation and Storage

By building its battery “Gigafactory”, Tesla aims at becoming the largest battery producer worldwide, producing possibly more capacity than needed for its own cars, but by this setting a standard for the industry and thus creating a dominant market position. As is stated in the mission statement, Tesla “actually make the factory a product”, so the company “skates to where the money is” and turns a resource into a performance-defining component.

By integrating Solar City (a solar cell production company) into Tesla, which already provides battery packs called Powerwalls, Tesla is actually integrating sustainable energy production and storage, creating a solution for one of the major problems of sustainable energy being energy storage.

Looking through the lenses of disruptive strategy, it seems quite odd to integrate Solar City into Tesla and not to set up a separate business unit. However Solar City itself is not a disruptive business but rather an asset to Tesla. Furthermore, RPP for Tesla and Solar City would largely be similar (having  a comparable mission and vision and even the same charismatic CEO), so it would make sense to make the integration.

Expand to Cover the Major Forms of Terrestrial Transport

Tesla is planning to expand the electric vehicle product line to address all major segments, including public transportation, which Tesla plans to innovate by smaller, “on call”, autonomous vehicles.

This would be Tesla’s own sustained innovation, increasing the market share in the automotive economy. It remains difficult to predict if Tesla will be able to compete with the incumbents for market share, but it might as well do so if it will be able to disrupt the market with the low-end Model 3. Moreover, as Tesla’s mission is to redesign the market altogether, its share in the new market might be larger than expected since the company will be the one that changed the market.

Autonomy

Tesla admits that the Autopilot system is still in the development phase, but the company intends to increase its capabilities quickly through the data generated by its users (called “massive fleet learning”). The generation of this “big data” is probably the main reason Tesla already launched this “suboptimal” product, but the company also reasons that “when used correctly, it is already significantly safer than a person driving by themselves and it would therefore be morally reprehensible to delay release simply for fear of bad press or some mercantile calculation of legal liability”, focusing on the job to be done of providing a safer and more reliable car.

Also, as soon as the product is “good enough” for low-end customers, this might help disrupting the market.

Sharing 

Tesla is aiming on customers to share their cars when they are not using them. Tesla states that “most cars are only in use by their owner for 5% to 10% of the day, so the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not”. By sharing autonomous driving cars, Tesla is creating an opportunity for customers to actually make profit out of their car on one hand, and by offering non-customers the possibility to “own” the service of a personal car (at least for the time they need it), thus making the use of a personal car more affordable for non-customers. This also would disrupt the market, although the future of this principle depends largely on customers’ willingness to share their car, and it is doubtful that the mere financial profit created for the customer will be sufficient to overcome this threshold.

Conclusion

Ultimately, the job to be done Tesla is focusing on is having customers get access to sustainable and reliable energy, and to provide novel ways of transportation that are more comfortable, safer, cheaper or even profitable than the current solutions.

Tesla’s vision on a larger scale is to change the energy economy towards more sustainable energy, the question might be asked if there is really a job to be done for the customers in this.

Global warming (be it heavily debated), but most of all the future shortage of fossil energy sources will indeed make this a job to be done for customers in the future, and by deploying different emergent strategies to get this job done Tesla is likely to become a great business.

So to finally answer the title question: Tesla is actually not disrupting the automotive industry at this moment, but the company might just as well disrupt it in the future and create a far bigger change by disrupting the energy and mobility economy.

Sources:

Tesla sales:

https://insideevs.com/monthly-plug-in-sales-scorecard/

Nissan Leaf:

https://www.autoblog.com/2016/06/28/nissan-will-introduce-range-extender-in-new-compact-ev-soon/

Tesla mission statement 2006:

 https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me

Tesla mission statement 2016:

 https://www.tesla.com/blog/master-plan-part-deux

NHTSA report:

https://www.nhtsa.gov/About+NHTSA/Press+Releases/nhtsa-2015-traffic-deaths-up-07012016

Solar City mission statement:

https://vimeo.com/92981479

[1] One particular company in this view is Nissan, who were one of the first to launch a fully electric car (the Nissan Leaf), but who now is changing its strategy to adding a "range extending" combustible motor to the car. Nissan is readjusting the initial emergent-deliberate strategy of all electric cars to the strategy of a range extender, a strategy that other companies like BMW have followed and that might be more suitable for its RPP. This is probably because there still is a "range anxiety" amongst customers when considering buying an electrical car for their "job to be done", which is getting from A to B without any hassle.

[2] Numbers provided by Tesla and the NHTSA. Tesla states that its numbers of deaths per mile driven on Autopilot are half of those the NHTSA report provides. Although the NHTSA report doesn’t make the distinction between miles driven on Autopilot or not, given the low market share of Tesla it is safe to assume that the NHTSA numbers mainly consider “traditional” cars.