Case Study 2: Tesla Motors Business Model Configuration, Case Reference 314-132-1, Institute of Management, University of St Gallen (2014).

How has Tesla departed from existing auto industry practices? What made Tesla to be listed ninth among the “most innovative companies” in a recent global innovation study?

Innovation in the business model provide competitive advantage compared to process innovation [1]. Strategically invest in management practices in-line with business model innovation to have business agility. Tesla implemented business process innovation to disrupt the automobile industry. The main value drivers for Tesla was the novelty of a product in automobile industry. The vision of “Zero Emission Electric Vehicle” by including the luxury touch was the key success of Tesla. This vision was beyond the traditional trend of automobile manufacturing companies. The study provides support to the argument that company who provides integrated products were higher performers compared to the company who provide product varieties [1]. Also, the main value drivers for a business innovation are novelty of the business, lock-in to control the customers and complementariness of having supporting business. In case of Tesla, they manufacture battery, and implemented the charging station throughout the major highways and selling the cars directly by the Tesla without dealers support the whole business ecosystem.

Tesla’s business model very different from the conventional automobile manufacturing companies. The following are the core competencies, made Tesla to be the ninth innovative company during the year 2013 in the world:

Battery technology – Tesla manufacture electronic powertrains including battery using state of the art technology to have a long range for mileage and fast changing techniques.

Software technology – Tesla is the first auto manufacturing company who control the complete function of a car using software with control mechanism, changing dashboard and software push technology.

Charging infrastructure – Tesla deployed charging centers along major traffic area throughout US and Europe. This helped the customer to drive Tesla with free of tension for a long travel.

Energy Management and Storage: Developed by partnering with SolarCity small electric storage device using solar energy to supply power during the peak hours. Along with software Teals implemented energy saving and management software to control the energy usage from the grid.

Human resource management – Tesla was very selective in his resource recruitment process. Tesla recruit very talented and innovation oriented engineers and other staff members with good compensation and provide highest importance to human capital for the company. Compared to other automobile companies Tesla hold 80% less staff.

The highly dynamic pace creates a business environment in which sustained competitive advantage is difficult, if not impossible, to achieve. How do you expect the industry to evolve? What do you think about the idea that Tesla’s future portfolio will include low-cost version (Tesla for the masses)?

Tesla differentiated their business by introducing zero emission electric vehicle in luxury class automobile sector. Competitive advantage is achieved where a company implementing a value creating business strategy that simultaneously not available in the completing firms [3]. Tesla is a winner in that case. However, the sustainable competitive advantage can be achieved when a firm identify a value creating business that rivalry firms didn’t have simultaneously and other firms couldn’t duplicate this strategy to get benefited. Next, option available to Tesla is how to segment this market for a large mass of people those who can afford to busy and concentrate on the volume of the product selling to make profit and maintain the sustainable competitive advantage. This can be achieved by the low-cost version of the vehicle that Tesla planning to assemble.

The industry should evolve from value creating business model value drivers [1]:

Novelty – the newness of the product. Example: Zero emission EV vehicle of Tesla

Lock-in – innovate linked products. Without one other cannot function. Example: Tesla make the complete eco system for the EV vehicle, manufacturing, battery, software, over the air software push for maintenance, selling, Manufacture of charging devices/stations, charging centers, power storage devices and solar power based charge station.

Complementariness – business enhancing and profit-making support services. Example: Tesla sell their battery to other companies

Efficiencies – Cost saving using value chain mechanism. Example: Tesla’s, human resource planning, remote software update.

Then, the following questions to be answered before adopting a business model innovation [1]

What perceived needs can be satisfied by the new business model design?

What novel activities are needed to satisfy these perceived needs?

How could the required activities link each other in a novel way?

Who should perform each activity that are part of the business model

How values are created through the novel business process for each of the participants?

What revenue model fit for the company’s business model to appropriate part of the total value it helps to create?

This digitization also helps for new opportunities, leverage strong customer relationship and increase the cross-selling opportunities. When Tesla plan for the masses the other infrastructure including charging network along the roads, technical support and maintenance center, alternative energy production to charge battery also need to be planned and installed. This can be established by engaging partners along their business model.

The business world is increasingly innovating in the digitization process. The increases in the digitization innovations challenged the industry for creating new opportunities by disrupting the existing. In other words, it a business opportunity for innovations and venturing into new business ventures. It was estimated next five years 30% of the business is under threat from digitization disruption [1].

Reflect on the statement of VW CEO Herbert Diess at https://electrek.co/2017/05/09/vw-ceo-electric-car-tesla-model-3/ ““We are confident that in this new world we will become a market leader,” he added. “[Tesla] is a competitor we take seriously. Tesla comes from a high-priced segment. However, they are moving down,” Mr. Diess said, referring to the $35,000 Model 3, which enters production this summer. “It’s our ambition, with our new architecture, to stop them there, to rein them in.”

This is a very valuable statement and demonstrated that in future, there will be a high competition among the automobile companies to manufacture inexpensive vehicle to support mass crowed economically. At the same time preserving the nature. If we consider the developing and under developed countries the current price of EV vehicle cannot make any difference. However, the business growth is these countries considering the volume. So, the automobile companies to concentrate developing a vehicle to make profits based on volume rather per piece. In that scenario, VW CEO Herbert Diess message was very promising. These types of market change in the automobile industries was already witness in other part of the world. Example: Tata company in India by introducing 2000-dollar car (gasoline fuel based). The quote from the article [1] “when you innovate, look at the forest, not the tree”. This quote explains the depth and width of an innovation to make differences in the society.

Reference:

Raphael Amit and Christoph Zott (2012), “Creating Value Through Business Model Innovation” is an article published in the MIT Sloan Management Review, summer 2012

Pete Weill and Stephanie L Woerner “Thriving in an increasingly Digital Ecosystem” is an article published in MIT Sloan Management Review, summer 2015

O’Shannassy (2008), “Sustainable Competitive Advantage or Temporary Competitive Advantage”, Journal of Strategy and Management, 1(2).