Tesla has innovated the automotive business model by focusing on electric power generation, storage and use rather than vehicle production alone. It entered the high-end market with the Tesla Roadster to prove electric vehicles could outperform gas cars, then plans to make EVs mainstream through cheaper models. However, profits have eluded Tesla due to high R&D costs and delays. For long-term success, Tesla may need to shift focus from mass market cars to expanding its profitable battery business, as driverless technology and other energy sources could disrupt the auto industry. Tesla also faces risks from falling oil prices, new EV competitors, expiring subsidies, and economic instability in foreign markets like China.

1. Winter 2016 MGMT 6120 GIS JustinPendleton
CASE STUDY: TESLA
“One secret to maintaining a thriving business is recognizing when it needs a fundamental change.”
Reinventing Your Business Model by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann
A NEW APPROACH
Although they began as such, Tesla is more than just an automotive company. While the majority of
companies in the automobile industry employ business designs inspired by some sort of vehicle whether
it be land, air, or aquatic craft, Tesla on the other hand has evolved into a company that revolves around
the generation, utilization, and storage of electrical power. I would argue that Tesla’s products to date are
just viable applications resulting from and by-products of their ability to harness the benefits of recent
technological advancements.
As it had been over 100 years since the last successful American start-up car company was founded, it
was necessary for Tesla to be innovative in their approach to attempting to break into the well establish
automotive industry if they were to even get off the ground. Tesla’s innovations to the core business
model of the auto industry is the reason why they are a household name today.
As a foundation for this discussion, an examination of the innovations to the Customer Value Proposition
(CVP) is needed. Tesla’s business model called for them to break into the auto industry by first building a
car that targeted the high-end of the market. Their ideal customer was affluent, planet conscious, and a
lover of sports cars. After entering the market at this segment and price point, Tesla’s business design
was to then bring electric vehicles (EV’s) to the masses by building cars with a targeted price point that
would make them viable purchases for the average new car consumer. Tesla’s goal was to make EV’s
mainstream. After entering the market with the Roadster, Tesla followed with a luxurious sedan, most
recently the SUV, and now are just a few short steps away from achieving their long stated goal of
producing a car that will sell close to the average new car price. They did not want to make an EV that
was simply not as horrible as the past and present offerings are, but to build EV’s that are superior in
every way imaginable. In order for their business model to succeed, Tesla’s electric sports car had to be a
"disruptive" technology. The Two-seater Tesla Roadster was designed to deliver the intrinsic values of a
high-end sports car at a lower cost to the customer and a lower resource cost to the planet. Tesla
delivered. The Tesla Roadster was more efficient and had lower total emissions than the best of their
competitor’s offerings. The Roadster’s acceleration was on par with the most revered sports cars, but
managed to yield six times the efficiency while producing a tenth of the pollution.
In contrast, the target market of the traditional automotive companies ranges broadly from anyone with
transportation needs with the means to afford a vehicle to enthusiasts and collectors. Essentially, their
focus depends on the customer being targeted which dictates the job to be done. This includes getting
from point A to point B in the most economical and efficient way possible to building models for the high
end luxury and sport car enthusiasts and everything in between. The traditional business model calls for
sports cars to employ larger engine displacement and more rapid fossil fuel consumption in order to
achieve greater levels of horsepower and acceleration. As far at the EV offerings from the traditional auto
industry, the vehicles clearly portray that the industry is becoming more planet conscious and recognizing
the need to turn away from gas powered cars. But in large part the offerings haven’t been aesthetically
appealing and efficiency appears to be the only focus. Earlier renditions of EV’s introduced to the market
by GM were not well received even though they spent over $1 Billion designing the car. This failure
ultimately called for them to scuttle their earlier EV ambitions.
Their original business plan indicated Tesla expected to be able to break even by selling just 300
Roadsters per year. They planned to control costs by outsourcing the manufacturing and design

2. Winter 2016 MGMT 6120 GIS JustinPendleton
responsibilities. Presumably, profits were anticipated if demand for the Roadster exceeded the 300-unit
mark annually. However, profits have continuously eluded Tesla, causing their profit formula to evolve
over time. Currently, Tesla estimates that they will be able to reach profitability when their annual auto
sales reach 500,000. Part of the reason Tesla hasn’t been able to stay on track with their initial and
updated projected profitability is due to the constant capital expenditures into R&D which have proven to
be useful but have kept the company from reaching financial maturity. Additionally, Tesla did not adhere
to their plan of having the majority of the assembly outsourced. They ended up being responsible for
much more of the assembly than originally anticipated. Whereas, the profit formula employed by the
traditional auto industry is tried and true. Costs are kept in check by the enormous economies of scale
enjoyed by traditional auto companies. These companies outsource much of the responsibility for making
many of the components of the finished product to further reduce costs. This in turn allows them to price
cars competitively and earn profits by selling large volumes of cars with a predetermined and pinpointed
margin per unit. Therefore, the main hindrance to achieving greater profits appears to be limited demand
for their products.
The manner in which Tesla deployed their Key Resources illustrates their innovations to the core
business model of the auto industry. These key resources begin with its people. The company’s founders,
Marc Tarpenning and Martin Eberhard, can be described as visionary engineers. They sought an
investment from and partnered with Elon Musk, a visionary himself. While these men shared the vision of
creating superior electric cars, they all lacked the knowledge needed to actually design, manufacture, and
sell these cars profitably. Therefore, the partnerships and alliances they formed were crucial to getting the
company off the ground. To build the Roadster, Tesla built an alliance with Lotus so that they could build
upon and within the existing Lotus platform of the Elise. They licensed powertrain technology from AC
Propulsion to avoid spending years and capital in efforts to replicate their technology. These partnerships,
coupled with Tesla’s proprietary technology, allowed Tesla enter the automotive industry with a product
that was actually a new car. This detracted greatly from the established protocol for introducing “new”
models by the large auto companies like GM whose “new” cars consisted of parts from vehicles that
already existed but with different configurations and body panels. As a start-up, Tesla recognized that
they didn’t want to sell their cars via the traditional dealership network as established car companies do,
because they would miss the opportunity to get feedback directly from their customers. Although now that
Tesla is no longer a start-up, they would like to establish a dealership network but have been effectively
blocked from establishing said networks due to the lobbying efforts of large, established automakers. The
lithium ion battery used to power Tesla’s vehicles is the core aspect of their business model which
separates them from the traditional automotive business design. Tesla’s strategic partnership with
Panasonic is the backbone for their “Gigafactory” where these batteries are produced. The Gigafactory is
powered by renewable energy sources in order to achieve net zero energy. The majority of Tesla’s
manufacturing processes are done at a central location, which is designed to reduce costs and waste,
while fostering further innovation. Not only does Tesla sells cars, they also produce energy storage
systems called Powerwalls and Powerpacks which are products that are completely outside the scope of
anything being produced by traditional automotive companies. Tesla’s visionary culture and products
have created a valuable brand. This brand has inspired billions of dollars of investments compiled of both
equity investments and governmental subsidies and appears to be responsible for keeping the company
afloat when companies with a lesser brand would have been forced out of the market.
Tesla employs a number of Key Processes which are innovative and separate them from the traditional
auto companies. Key among these processes is the way the founders of Tesla went about designing their
products. Whereas the traditional auto companies design their cars to take advantage of current
technologies, Tesla’s design philosophy is to anticipate advancements in technology and design their
products to use the technological advancements expected to be in place when their products are in the
beginning and intermediate stages of the product life cycle. Essentially, their competitors’ products will
already be using comparatively old technology when they go into production while Tesla’s products will
feature cutting edge technologies at the time of production. Tesla has also moved to the philosophy of
open sourcing their technology with the hope that it will inspire competition and promote advancement of

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these technologies to the benefit of the consumer. The open sourcing of technology is not a common
practice in the core automotive business model. Tesla’s marketing strategy was innovative as well as they
marketed the benefits of decreased fossil-fuel usage to the left while touting the path their cars paved to
energy independence to the conservatives.
THE CROSSROADS
Certain key elements of Tesla’s Customer Value Proposition are due to change in the near future. One
such element is the “job to be done”. The current primary goal of bringing EV’s to the masses is certainly
a worthy goal, yet the possible applications of their energy storage/battery division will cause Tesla to
reconsider which important need and which target customer will be the focus of their future efforts.
Another key element related to the CVP headed for change is the current vehicle offering. As driverless
technology becomes commonplace, automobile design as we know it will likely no longer be relevant
within the next 10-15 years. Change in this aspect is certain.
Tesla’s Profit Formula is due for another change in short order as their current formula is challenged to
put it mildly. Tesla will look first to their cost structure for improvements and identify opportunities to
improve their economies of scale and reduce costs associated with design and production delays with a
strategic alliance or two. Once the cost structure is acceptable, they will be well positioned to grab larger
and larger shares of the auto and energy storage markets. The profit formula will also realize the benefits
of Tesla adding to its arsenal of Key Resources by investing in competing technology. Tesla will diversify
their research efforts and begin to consider alternative power supply options such as hydrogen fuel cells.
Tesla made a splash in the industry utilizing disruptive technology and they will come to understand that
the next disruptive technology (which would threaten their existence) is always just around the corner.
Instead of attempting to remain steadfast that they’ve found the greatest solution, they will see the
wisdom in keeping an open mind; doing their due diligence by fully researching the imminent next
possible disruptive technologies in order to remain at the forefront of the energy revolution.
Of general importance for Tesla’s success, is their need to shorten or eliminate delays in bringing their
products to market. This could possibly be achieved by employing senior executives and/or project
managers who have a track record of guiding innovative products from the design to the production stage
within promised or expected time frames. This would reduce investor anxiety and keep competitors from
bringing products infused with Tesla’s innovative ideas to the masses of the market before Tesla does.
This sort of move would be on par with the stabilization the company realized when it removed Eberhard
as CEO and replaced him with the seasoned executive, Michael Marks.
More specifically, a strategic shift may be of the utmost importance to Tesla’s future success. The
automotive industry was a logical start for Tesla as the problems plaguing the industry were abundantly
clear creating an environment ripe for disruptive technology to shake things up a bit, take a foothold in the
industry, and target a share of the climbing total global sales of passenger cars which hit an estimated
73.9 million vehicles in 2015.1 Although the intention of the founders was for Tesla to enter the market
with the two seater sports car and then move into more accessible markets bringing electrical cars to the
masses, it may be a bit pre-mature from a strategic standpoint for Tesla to be doing so now. Tesla has
struggled to earn profits in their automotive division, yet their battery division managed to be profitable in
the first quarter after product launch shipping Powerwall and Powerpack batteries.
While I wouldn’t recommend abandoning the Model S and Model X platforms at all nor would I
recommend ignoring their core business, which is automobiles, Tesla would appear to be better served
1
http://www.statista.com/topics/1487/automotive-industry/

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by expanding its battery/energy division. The majority of their current capital allocation and primary R&D
focus should be on improving its Powerwall and Powerpack products and increasing market penetration
into the home/business/community energy storage supply industry. Tesla could leverage their brand
awareness to position themselves as the world leader in the residential and commercial energy storage
markets. This may allow Tesla to grab the largest market share of an industry in its relative infancy. There
is no shortage of competitors in the energy storage industry. Therefore, it would appear as if Tesla would
benefit from taking definitive action sooner rather than later. Once Tesla has grown their company to
financial maturity and has strung together profits in consecutive quarters, they could go back and attempt
to realize the dream of the company’s founders and make cars that are available for the average
consumer. However, with the advent of driverless technology, a global demand for a different type of
automotive design is surely on the horizon. Additionally, it is also very likely that the transportation
industry in its entirety will experience massive changes in the next few years as a result. This is certain to
force all automakers to spend considerable amounts of time and money on designing their products to
meet the demands of the new industries to be. If true, these factors point to a missed opportunity for
Tesla to maximize their resources by foregoing entering the mass auto market at this juncture in history
and allocating the resources reserved for that venture to a business model that has proven to be
profitable for them instead. Even if Elon Musk has already formulated this thought himself at any time in
the recent past and recognized the need for a fundamental change to his business model, it’d be unlikely
he’d act swiftly on it as his ego appears to be an obstacle at times for Tesla. The possibility of being
ridiculed for backing down from launching a long promised product and delaying said product for an
undetermined amount of time while pursuing a different revenue stream may be too much for him to bear
unfortunately for him and his long-term investors. Even still, it may not be too late. Tesla may well be
more resilient than most companies and be able to withstand an error of this magnitude. They could
possibly survive long enough to turn the ship in the right direction because of the, as some would say,
cult-like following the company enjoys.
RISKS AND CHALLENGES IN A GLOBAL CONTEXT
Tesla faces many risks and challenges in global markets including lower oil prices, automobiles powered
by alternative power methods, competition in the EV market from major players in the automotive
industry, the phasing out of government subsidies in governments around the world including the U.S.,
and the precarious economies of foreign countries.
The price of oil has fallen precipitously as of late. The cause of this fall in prices is multi-faceted but
regardless it has the potential to threaten the portion of Tesla’s target market that would consider
purchasing one of their vehicles in an effort to reduce the amount of money they spend on fueling their
vehicles.
GM and LG are partnering up and positioning themselves to compete with Tesla. Their goal is to build
EV’s better, more efficiently, and more cost effectively than anybody else. Toyota’s FCV hydrogen fuel
cell car offers comparable range to Tesla’s Model 3 in the neighborhood of 300 miles per “fill up” while
only taking an estimated 3 minutes to refuel versus the reported 58 miles of range per hour of home
charging or the 170 miles of range per half hour of supercharging at a public station for Tesla’s vehicles.
Apple’s car project should be of concern to Tesla as Apple has a reputation for making radically
innovative products available for the masses with a very intense focus on being user friendly and giving
great value to the end user as of recent years. The luxurious BMW I8 and the lesser known Fisker Karma
are targeting the same high-end buyer as Tesla’s model S. The economical BMW I3, GM Bolt, and
Nissan Leaf will all compete with Tesla’s Model 3 for customers. Competition fosters litigation. In 2008,
Tesla sued Fisker Automotive, accusing them of stealing Tesla’s technology and using it to develop their
own hybrid automobile, which ended up being the Fisker Karma. Tesla alleged that the that the design
work done by Fisker for the Model S was substandard, and that Fisker saved their best ideas for their
own production vehicle, the Karma. Ultimately, Tesla lost and was ordered to pay Fisker in excess of $1.1

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Million for legal fees.2 These companies, with the possible exception of Fisker, all hold the competitive
advantage of the economies of scale over Tesla.
The tax incentives given by governments for the purchasing of alternatively fueled vehicles was never
meant to be permanent and will be expiring here in the U.S. relatively soon. The expiring of government
based incentives world-wide will threaten their projected global sales volume as the up-front economical
savings for purchasing these vehicles will disappear.
It appears Tesla was and still is banking on China being a major consumer of their automobiles. However,
their current Model S hasn’t sold as well as expected in China due to cultural preferences in car height.
Furthermore, the sale of the Model X and Model 3 in China may not meet projections either due to
China’s impending financial issues which appear to have been caused by lax banking regulations and
shadowy business practices at financial institutions eerily similar to the recent financial crisis that plagued
the U.S. A protracted financial crisis would force lenders to tighten credit restrictions which would further
choke China’s already slowing economic growth placing Tesla’s route to profitability in peril.
Threats themselves can be viewed as opportunities. Credible threats should cause a company under
siege to examine their operations and attempt to identify non-value adding activities in order to eliminate
or augment them. Tesla has found itself at a crossroad and the future of the company is at stake. Will
they continue down a path they have committed to or will they react to the global challenges in front of
them, make the necessary fundamental changes to their business model, and capitalize on the
opportunities that have presented themselves?
2 https://en.wikipedia.org/wiki/Fisker_Automotive