From point A to point B
At the core of any successful innovation, there is the ability to perform a ‘Job to be done’ better than it could be done alternatively. Framing innovations around fulfilling the job to be done allows companies to spot opportunities for innovation: ‘How might we help to execute on a Job to be done better?’. The Job that consumers of a Tesla are trying to get done is in essence to move from point A to point B in efficient, comfortable, and safe manner. By any measure, this is not a new objective and many solutions have come before. From boats to trains and cars, all have been solving for this job to be done to get from point A to point B. However, with developing technologies new opportunities have arisen; smart Electric Vehicles (EVs). The objective of Tesla is not new. Rather, the way to fulfill the job to be done is.
Tesla, originally called Tesla Motors, is a well-known US based automotive production company founded in 2003 and launched its first car in 2008 (Roadster). Tesla’s mission statement is ‘to accelerate the world’s transition to sustainable energy[1]’ and their vision is to ‘create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles’. In Q3 2022 Tesla has delivered over 300k cars and holds a >60% EV market share in the US. Tesla employs 110.000 people worldwide.
Is Tesla disruptive?
Often, Tesla is referred to and seen as a disruptor in the automotive industry. Bringing high quality EVs to the market at mass – driving the era of electrification in automotive. By some accounts this might be seen as disruptive… However, the question of disruption is one of relativity as well. What is disruptive to some, might by Sustaining Innovation[2] to others. Exemplary is the introduction of online booking platforms for flights, which was not disruptive to the airline companies selling the flights, but a big disruption for travel agents who were essentially carved out of their share, as intermediaries selling these tickets. In the case of Tesla, what is at first glance disruptive to the naked consumer eye, might better be described as Sustaining Innovation in the Automotive industry. Clayton Christensen opposes these terms when looking at performance, customers, and the business model. Sustaining Innovation is defined as improving performance in most attributes deemed important to the consumer aimed at people that are willing to pay for improved performance and maintaining a profit margin as part of its business model by making use of current competitive advantages. With another lens, the entrance of Tesla in the market could also be viewed as New Market Disruption. Tesla was challenging the incumbents in the industry by serving an underserved market segment (demand for electric vehicles and more sustainable alternatives to cars was growing), which was emerging as technological capabilities improved.
Entering a market as Sustaining Innovator is quite a rare sight, since it is mostly the large incumbents that win at this game. Often, they are more capable of serving the most valuable consumers in the market incrementally better over time by improving on their products or services. Considering that Tesla needed to develop both a core of technical knowledge as well as develop the more traditional automotive production capabilities, I see that large initial funding and deep pockets are what made this Sustaining Innovation entrance possible. According to innovation theory[3], usually when companies face disruption, incumbents will move upmarket and focus on their most valuable clients, pursuing higher profit margins and leaving relatively low profit margins for the disruptor to take. However, as can be observed in the market currently with the rapid introductions of EVs by major automotive brands, Tesla is being challenged by the large incumbents that start to catch-up on the level of knowledge and EV production capabilities. The question is if Tesla’s head-start on technical knowledge is strong enough to stay ahead of the pack.
Considering Tesla as established player in the market, what then should be their direction of travel?
With Tesla now delivering >300k cars every quarter[4] and with a valuation of 600B dollars[5], it is safe to say that Tesla is an established player in the market. In H1 2022 Tesla accounted for >70% of the EV market in the US[6]. They successfully transitioned from challenger to incumbent over time, which is an incredible performance on their account. However, with other incumbent (mainly non-electric) car production companies now in the race of competing to gain share in the EV market, an interesting question to consider for Tesla is what their strategy should be going forward.
Following innovation theory, now that Tesla became the incumbent in the EV market, and that they are being challenged by large automotive companies entering the EV market – Tesla would be expected to chase higher profit margins by looking to serve their most valuable clients. One way to do so would be to focus on the high-end EV market, gaining a higher profit margin per produced unit. However, with their success to capture the EV market, so grew shareholder expectations of Tesla to maintain a steep growth curve. As I see it, Tesla is faced with the challenge that their valuation is based on (a) maintained dominance and operational growth in the EV market, and (b) the potential to deliver on future alternative business models (e.g., Full Self-Drive (FSD), autonomous taxi[7]).
Harnessing the future value of Full-Self Driving capabilities
If ones deliberate strategy is to execute on everything at the same time, ones strategy is to execute on nothing in particular. Following innovation theory, I would like to put forward two key strategic recommendations for Tesla to adopt: (1) increasing focus on the most profitable client-segment, (2) explore FSD business models under a different business unit.
(1) increasing focus on the most profitable client-segment
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Tesla got to benefit from their head start in the EV market. However, lately we have seen other major brands catching up. Large automotive companies that already have the infrastructure and production capabilities in place are eating away at Tesla’s market share, by introducing lower-cost alternatives to Tesla’s EVs. Although their market share is still strong at 64%, it was reduced by a magnificent 11%[8] since the start of the year (2022). As theory suggests, when facing low-end market disruption, whereby competitors are targeting lower market segments with a more efficient operating model, it is best to shift focus to the higher client segments. Entering the market at the low-end is easier since consumers are more cost-driven and expect less value of the product/service. In other words, they tend to be less demanding. In the low-end part of the EV market, a car with medium-range, basic parking assistance and no autonomous driving abilities could be enough to satisfy the needs of the consumer.
Furthermore, with a rapidly developing market it is crucial to remain nimble and allow for emergent strategies to form. Increasing focus on higher value clients allows Tesla to maintain high profitability, which in turn can be used to fund R&D and the chasing of revenue opportunities for the next years.
(2) explore new FSD business models under a different business unit
A threat that Tesla faces, recognizing that part of the company value lies in their ability to successfully bring new technologies to market, is that their current focus on production and efficiency could go at the cost of their ability to introduce new disruptive technologies. Innovation theory suggests that for new disruptive propositions to flourish, they must be setup in an environment that is not dictated by the status quo existing out of People, Processes and Profit Formula. In case a disruptive innovation is brought into an existing business, the existing environment is not capable to allow for the new business model to develop effectively. One such example of a conflicting profit formula might be that robo-taxi’s are increasing the productive use of EVs and that therefore the overall need for vehicles is reduced – which contrasts the existing business model, driven by the number of cars sold.
Referenced sources in this article
[1] Source: Tesla About us webpage
[2] Source: HBS Disruptive strategy webpage
[3] Source: HBS Disruptive strategy webpage
[4] Source: Quarterly report Tesla 2022 Q3
[5] Source: Yahoo Finance - TSLA
[6] Source: E-Vehicle Info
[7] Source: Tesla Press release Q1 2022
[8] Source: Electrek Article - October
