CASE 13
Tesla Motors: Disrupting the Auto Industry
TEACHING NOTE
■ SYNOPSIS ■
Tesla Motors was the first start-up company to enter volume automobile manufacturer in the US since the
1930s. Under the leadership of legendary entrepreneur, Elon Musk, Tesla goal was to “accelerate the
advent of sustainable transport by bringing compelling mass market electric cars to market as soon as
possible.” Tesla’s first model, the Roadster, launched in 2007 was the first all-electric, plug-in, highway-
capable car to be marketed in the US during the 21st century.
The case offers insights into how a pioneer of innovation can establish itself in an industry dominated by
much better resourced firms. It demonstrates the role that a media-savvy entrepreneur can play in building
the excitement and anticipation that can attract resources to the company—notably finance and talented
designers and engineers—and can build market demand for the product. It also raises some interesting
advantageous for an innovator?
■ TEACHING OBJECTIVES ■
Reading and discussing this case allows students to gain expertise in:
Identifying the strategy and business system—the “business model”—of an innovative newcomer
to an industry and comparing to the business model of established industry leaders.
The factors that determine the best technology strategy for an innovative firm—in particular, the
■ POSITION IN THE COURSE ■
I use the case in the part of my strategy course that addresses innovation and strategies for
technology-based industries.
■ ASSIGNMENT QUESTIONS ■
1. What is the strategy of Tesla Motors? How does its business model differ from that of the leading
auto makers?
■ READING ■
R. M. Grant, Contemporary Strategy Analysis (9th edn.) Wiley, 2016, Chapter 9, “Technology–based
Industries and the Management of Innovation.”
■ CASE DISCUSSION AND ANALYSIS ■
What is the strategy of Tesla Motors? How does its business model differ from that of the
leading auto makers?
The principal features of Tesla’s strategy are:
A “niche to mass–market” growth strategy. Tesla began with a luxury sports car targeting
California’s “glitterati”—Hollywood stars and Silicon Valley entrepreneurs. By 2015 it has
company Solar City on batteries and the use of solar power, and joint venture with Panasonic.
Top-class human resources: Tesla has used its high profile image and reputation for innovation to
attract leading automotive designers and engineers and software developers.
Backward integration: In producing components and subsystems—notably batteries, but also
software, electric motors, seats, and display modules—Tesla is much more vertically integrated
than other vehicle manufacturers
Distribution: Tesla has rejected the conventional franchised dealership system in favor of wholly
owned retail outlets, typically located in downtown shopping locations.
We can compare Tesla’s oval approach and configuration of activities, i.e. its business model, with that of
other auto makers:
MAJOR AUTO MAKERS
TESLA
Revenue sources
Sale of cars, spares, and financial
services
Sale of cars; sale of components
and technology to other auto
makers
Distribution
Franchised dealers
Directly owned and managed
retail showrooms
Components and technology
Mainly outsourced
High proportion produced in-
house
Product range
Wide
Narrow (2 models in 2015)
Fueling
Supplied by third parties
Wholly owned proprietary
network
Customer interaction
dealers
Direct and frequent
How do the resources and capabilities of Tesla compare to those of the established auto
makers?
The key advantages of the major automakers derive from their size and scale, their range of technical
capabilities, and the fact that most of them have been involved in developing electrical vehicle
The size of the disparity is indicted by the following comparison:
TOYOTA
TESLA
Units produced 2015 (forecast)
11.2 million
0.05 million
Sales revenue 2014
Operating profit
$24,600 million
However, in the market for electric vehicles, Tesla does possess some distinctive resources and
capabilities which—in certain circumstances—may prove superior. In particular:
Brand: Tesla has achieved a positioning in regard to technology and environmental sustainability
that is superior to that of all but a few car companies.
Technology: in batteries, charging, and electric motors—Tesla a leader.
The rationale for Tesla’s strategy
The key to Tesla’s strategy is utilizing its relative strengths vis–à-vis the established auto companies to
build its competitive position within the electric vehicle market.
Central this strategy has been Tesla’s “top down” approach—starting with a high priced, small volume
Starting with a premium priced, low volume model also provided Tesla with a cash flow while it invested
in manufacturing, distribution, and building its network of charging stations.
The future growth in the market for all-electric vehicles is an additional source of uncertainty. Falling oil
prices make the low operating costs of PEVs less of an attraction. A critical issue, therefore, is whether
Tesla’s decision to make available its patents to other companies
Tesla’s announcement that it would make “not initiate lawsuits against anyone who, in good faith, want to
use our technology” took the industry by surprise and initiated much discussion of Tesla’s motives.
The evidence in the case suggest that Tesla’s innovations in electric cars are based more upon system
design and hardware-software optimization than on specific inventions. For example:
In terms of patents relating to electric vehicles, Tesla has far fewer than GM, Toyota, or Ford.
The outstanding performance of Tesla’s cars depend, to a great extent, o the fact that were
Hence, it would appear that, by not initiating lawsuits against patent infringement, Tesla was not giving
away a great deal. In addition, given that most of Tesla’s superior technology was not based upon
patented technology, it was still keeping to itself most of its technological advantage.
So, what advantages might accrue to Tesla as a result of others utilizing its patents? There are several
possible benefits:
Enhanced reputation for altruism.
Tesla’s ability to influence standards in the industry. Typically, decisions to give away
proprietary technology to competitors are motivated by the desire to exploit network externalities.
Thus, when Google wished to overturn Apple’s leadership in smartphones, its introduced Android
Would you buy or short Tesla’s shares?
To assess Tesla’s prospects for profitably over the long-term we need to assess the following:
1. Will Tesla survive its development phase? Tesla is burning cash: in 2014 it had to finance a net
2. Will growth in the market for electric cars be sufficient to meet the optimistic sales projections
that Tesla has made? In 2014, PEVs accounted for less than 1% of world automobile sales and the
3. Will PEVs be displaced by cars powered by fuel cells? A possibility but the probability looks
4. Will Tesla be able to establish competitive advantage in the market for electric cars? Tesla is
threatened by two groups of rivals. The biggest threat comes from the major car makers—GM,