Part II: Tesla and World Class Innovation

Tesla Motors is the first American car company to go public since Ford Motor Company in 1956. It is an organization built on the world class innovation strategy, great execution in product development, internal operations, commercialization, and positioning for future growth. Large companies in industries over one hundred years old and startups creating technologies that will mold the future can both learn from Tesla, because Tesla is both.

Complex Coordination

Tesla engages in a type of innovation called “Complex Coordination.” The term was popularized by Peter Thiel, co-founder of PayPal and the $2 billion venture capital firm Founders Fund. The Founders Fund has identified this as an innovation strategy that involves “larger-scale complex coordination, getting a lot of different pieces together to work.”1

Peter Thiel has given other examples of successful complex coordination strategies. Regarding Apple’s iPhone, Peter states that its success was due to “getting all these different pieces coordinated in just the right way. That included the incredible complexity of the manufacturing process set-up, the distribution, [and] marketing coordinated in just the right way. For some reason, that’s quite hard to do.”2

The foundational piece of Tesla’s innovation is manufacturing a quality electric car. Tesla’s Model S P85D rated a 103 out of 100 in Consumer Reports’ 2015 rating. “It kind of broke the system,” says Jake Fisher, director of the magazine’s auto test division”.3

Tesla’s technology is so good it can pursue other revenue sources outside of its core line by licensing its technology to other car companies. “Daimler uses Tesla’s battery packs; Mercedes-Benz uses a Tesla powertrain; Toyota uses a Tesla motor. General Motors has even created a task force to track Tesla’s next moves.”4

Tesla’s use of information also gives them an advantage. The company collects each second the car is driven and all charging data from each of their vehicles and transmit this back to their corporate headquarters.5Centralizing the data has created a quality feedback loop to improve all aspects of the product.

This is not all. Tesla has made improvements to the manufacturing process, such as robots installing the battery packs in the cars. 6 The company has cultivated a culture and mentality unique to the automobile industry by establishing its headquarters in Silicon Valley and not in Detroit.7 Tesla is governed by a part-time CEO, who took the job at the age of 37, with no previous automobile experience. For distribution Tesla has created and promoted a unique brand, their own direct sales network, and bypassed the industry standard dealerships and their business model of servicing cars as a profit center.8

Executing well in one or two areas is “hard to do” and that alone is usually enough to establish lasting differentiation. But combining so many pieces as Tesla has done compounds the effects. Brian Singerman, a Partner at Founders Fund and creator of iGoogle discussed the merits of complex coordination. “It is extremely difficult, if not impossible to clone these types of businesses with two guys in a garage. This is not something that you can hack up in a couple months.” 9

Product Development

All the commercially viable American automobile companies have been manufacturing cars for between 60–110 years. These established companies have the benefit of using existing operations and products as a platform to make iterative changes and over time learn about new technologies and what their customers want. Startups, like Tesla, have an advantage over incumbents since they can respond quicker to customer wants and changing technologies. But, startup teams need to generate feedback that what they are building is useful and wanted by the market. Quickly ramping up a platform to make iterative changes, based on market feedback, is critical to generating revenue to sustain the organization. Eric Ries is an author who popularized the lean startup movement and the term minimum viable product (MVP) to describe a product with the minimum features that is viable in the market that the startup can begin learning as quickly as possible.

A popular illustration in the startup community (below) shows how to build an automobile MVP. What the illustration intends to show is that an MVP needs to be useful by the customer at any step in the iteration process, i.e. an automobile MVP is not one or two wheels, nor the body of a car without wheels.

But, this message is dead wrong in so many other critical ways and teaches damaging principles about what an MVP should accomplish. The first step in building an automobile business is not to build a skateboard. Skateboards, scooters, bicycles, and motorcycles are useful- but they are not minimum viable products of cars. This difference is important for innovators in either a startup or an established business. Each step of the iterating process should support the overall strategy and help the team learn foundational lessons for each subsequent phase.

Fortunately, Tesla’s MVP approach can serve as a model for other organizations. A simplified description of Tesla’s MVP was to take a car produced by a completely different company, the Lotus Elise, and replace and integrate its engine with a battery pack. Of course that is a gross simplification. It wasn’t as easy as pulling out the combustion engine and dropping in a battery pack. Darryl Siry, Vice President of Sales, Marketing, and Service of Tesla said at the time regarding the integration “As with most things, however, the devil is in the details.”

Tesla’s first focus as a company was on the essence of their product, batteries. Once they were ready with the batteries, Darryl Siry said the “time came to think about how to approach building a fully integrated EV car. As a startup, there were potential advantages to identifying an existing platform that had already been tested for US safety regulations and which could donate most non-EV parts.”10

Lotus and Tesla entered in to an agreement where Lotus provided advice on designing and developing a vehicle as well as producing partly assembled vehicles.11 Using the Elise as a platform allowed Tesla to slowly build up its technical expertise and get to market quicker by leveraging Lotus’ compliance to government safety standards.

Tesla had to redesign the chassis because of the 1,000 pound battery and redesign the suspension and the back-end. The entire electrical systems needed to be redesigned, materials sourced, and integrated into the design of the car. The body panel designs are similar to the Lotus, but were modified and the material changed to carbon fiber to reduce the weight.

Tesla’s MVP, the Roadster, was released in 2008. It generated feedback from innovators and early adopters and sold around 2,500 vehicles, an important step in learning and developing the direct sales network. The Roadster generated approximately $275 million in revenue and got the product out on the roads, to be seen by millions of consumers.

The Future

As Tesla looks to the future, its goals are not to just produce and sell more cars, capturing market share from other car companies. Tesla calls itself “not just an automotive company, [we are] an energy innovation company.”12 In the future it is more likely Tesla becomes an energy company that makes cars than remain a car company that uses batteries.

The future of Tesla may be in Powerwall, a new product announced in April 2015. Powerwall is a home battery that charges using electricity generated from solar panels, or when utility rates are low, and powers the home in the evening, or when rates are high. Combine solar panels and one or more Powerwall home batteries and Powerwall offers independence from the utility grid.

Tesla’s Powerwall has the potential to be classic Clayton Christensen disruption. A disruptive product is worse than the current available products when judged by the traditional criteria, but better in different ways. Current energy storage occurs on a large scale within the electric power grid. Energy generated at a power plant is distributed for commercial and residential uses. When production exceeds use, utility companies need to store the energy. The energy storage products used by utility companies are better than Tesla’s Powerwall at storing large quantities of energy. But Tesla’s Powerwall is not an industrial product; it is for individual households.

Clayton Christensen identified three questions that identify a disruptive innovation. The answers to these three questions suggest that the Powerwall is a potentially disruptive innovation.

1) Is there a population of clients that has historically been under-funded, under-staffed, and have as a result gone without?

  • Answer: While there are residential uses and demands for energy, storage is prohibitively expensive and only available to utilities, corporations, and super-wealthy.

2) Is this group likely to appreciate lower cost “good enough” solutions?

  • Answer: Residential energy storage does not have the same requirements as grid energy storage. These two markets do not have the same problems and do not need the same solution. San Diego Gas & Electric, for example, is a regulated public utility that provides energy service to 3.5 million people through 1.4 million electric meters in the San Diego area. Their requirements are much different from a household of 5 people storing enough energy to power their home during the evening.

3) Is it possible to be profitable while providing these clients lower cost good enough solutions?

  • Answer: This is perhaps the most difficult question to answer from the outside. An ancient Chinese military approach to military strategy and tactics is addressed in the book “The Art of War”, attributed to Sun Tzu.
All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved. I.e., everybody can see superficially how a battle is won; what they cannot see is the long series of plans and combinations which has preceded the battle. 13

Each quarter Tesla’s form 10-Q is available for public review, but not their strategy. Tesla is currently running at a loss, but the unit economics are good and are the foundation for the coming years.

  1. Center, Mecatus. “A Conversation with Peter Thiel.” Conversations with Tyler. Medium, 06 Apr. 2015. Web. 13 Mar. 2016.https://medium.com/conversations-with-tyler/peter-thiel-on-the-future-of-innovation-77628a43c0dd. ↩︎
  2. Benston, Britt. “Peter Thiel on Startups, Buzzwords, and Complex Coordination.” Anderson School of Management Blog. UCLA, 26 Jan. 2015. Web. 13 Mar. 2016.http://blogs.anderson.ucla.edu/anderson/2015/01/peter-thiel-on-startups-buzzwords-and-complex-coordination.html. ↩︎
  3. Chappell, Bill. “New Tesla Breaks Consumer Reports’ Ratings Scale, Bolsters Company’s Stock.” The Two-Way. NPR, 27 Aug. 2015. Web. 13 Mar. 2016. http://www.npr.org/sections/thetwo-way/2015/08/27/435325951/new-tesla-breaks-consumer-reports-ratings-scale-bolsters-companys-stock. ↩︎
  4. Thiel, Peter A., and Blake Masters. Zero to One: Notes on Startups, or How to Build the Future. N.p.: n.p., n.d. Print. ↩︎
  5. Madrigal, Alexis. “What Data Tesla Collects on Your Driving.” The Atlantic. Atlantic Media Company, 5 Nov. 2010. Web. 13 Mar. 2016.http://www.theatlantic.com/technology/archive/2010/11/what-data-tesla-collects-on-your-driving/66173/. ↩︎
  6. ”Factory Upgrade.” Factory Upgrade. Tesla Motors, 17 Nov. 2014. Web. 13 Mar. 2016. https://www.teslamotors.com/blog/factory-upgrade. ↩︎
  7. ”Job Hub: Tesla Motors Jobs and Culture.” Management Consulted. N.p., 23 Aug. 2015. Web. 15 Mar. 2016.https://managementconsulted.com/consulting-jobs/job-hub-tesla-motors-jobs-and-culture. ↩︎
  8. Musk, Elon. “To the People of New Jersey.” Blog. Tesla Motors, 14 Mar. 2014. Web. 15 Mar. 2016. https://www.teslamotors.com/blog/people-new-jersey. ↩︎
  9. Cutler, Kim-Mai. “Q&A: Why The Most Famously Libertarian VC Firm Is Diving Deep Into Education And Health.” TechCrunch. AOL, 22 June 2015. Web. 13 Mar. 2016. http://techcrunch.com/2015/06/22/singerman-health-education-founders-fund. ↩︎
  10. Siry, Darryl. “Mythbusters Part 2: The Tesla Roadster Is Not a Converted Lotus Elise.” Blog. Tesla Motors, 03 Mar. 2008. Web. 15 Mar. 2016.https://www.teslamotors.com/blog/mythbusters-part-2-tesla-roadster-not-converted-lotus-elise. ↩︎
  11. “Supply Agreement for Products and Services — Lotus Cars Ltd. and Tesla Motors Inc.” Onecle. N.p., 11 July 2005. Web. 15 Mar. 2016.http://contracts.onecle.com/tesla-motors/lotus-supply-2005-07-11.shtml.↩︎
  12. “Tesla Energy.” Press Kit. Tesla Motors, n.d. Web. 14 Mar. 2016.https://www.teslamotors.com/presskit/teslaenergy. ↩︎
  13. Sunzi. The Art of War: A New Translation. Boston: Shambhala, 2001. Print.↩︎