Tesla: Why Innovate When You Can Imitate?
To innovate or imitate?
Innovation, or its antithesis, imitation, are both strategies that companies employ, for better and for worse; it seems clear from the divergence of views in strategic management theory that neither innovation or imitation are ultimately superior to one another.
Innovation and imitation are individually advantageous at certain points in time, contingent on environment, resources and capabilities. I propose the idea of strategic forks in the road, where managers must contend with the trade-offs between innovation and imitation with every strategic decision they make.
At each fork or strategic decision, imitation should be preferred when your organisation doesn’t have the dynamic capabilities to compete with more innovative firms, or when there is little value in innovating because the impact on achieving organisational goals are limited.
Innovation should be preferred when your organisation has a set of resources or dynamic capabilities that could position you to outperform your competitors in that particular arena and when there are large potential benefits in achieving organisational goals in doing so.
Notably, if an organisation frequently decides to imitate and rarely to innovate, they can reduce their dynamic capabilities, which I define as higher order resources or unique resource-creating capability, with the ultimate stagnation of the firm as a competitive force.
On the other hand, whilst innovation is the key to dominating submarkets, there can be huge financial and legitimacy risks incurred by non-conformity, so innovation should only be encouraged when there is a competitive path to tangible benefits.
What is innovation?
Before we can discuss when innovation or imitation are preferable, we must first discuss what we mean by innovation. Teece (1986) explains innovators as firms which are first to commercialise a new product or process in the market.
Despite innovators being the first to market, however, Teece points out that it is common for competitors to profit off the innovation, rather than the innovator. So, despite being first to market, it seems that innovation doesn’t always create a competitive advantage, and a corollary is that those who are later to market must sometimes gain by imitating the first mover.
Teece argues that if an innovator has tight appropriability, for example a strong patent, it is likely for the innovator to gain a competitive advantage, but otherwise business strategy is needed to ensure that the innovator doesn’t become imitated. Teece reveals to the reader, then, that innovation as a strategy for competitive advantage is contingent on specific factors, and one of these is whether a design is at the preparadigmatic phase or the paradigmatic phase.
This spectrum refers to whether designs are still being evaluated by the market (preparadigmatic phase) or whether there is one proliferated design with economies of scale and specialisation (paradigmatic phase). The strategy preferred by Teece in the preparadigmatic phase was one of floating your idea on the market to see if it is accepted.
The ‘Secret Tesla Motors Master Plan’
Tesla Motors used a similar ‘floating’ strategy to find their way in the electric vehicles market; we can view this mediation from the preparagimatic to the paradigmatic EV market in Elon Musk’s ‘Secret Tesla Motors Master Plan’ (2006). Musk explained that his plan was to start by developing an expensive Tesla Roadster (starting at around $100,000) which would help pay down the R&D costs of future cheaper Tesla vehicles and allow the firm to learn more about creating vehicles cost-efficiently.
By the paradigmatic phase in the later 2010s, the EV market had swollen from 100,000 cars sold in 2011 to 1.3 million in 2017 and economies of scale were emerging, allowing Tesla to release more affordable cars like the $39,000 Tesla Model 3.
Notably, then, Tesla succeeded because it realised the importance of learning and developing a dynamic competency in production processes over time and used their business model of releasing ever cheaper models of cars over time to achieve this; as Zollo and Winter point out (2002), practices that improve learning (e.g. experience accumulation) are critical to the formation of dynamic capabilities.
But, how can we frame Tesla’s success and dynamic capabilities within the framework of innovation? I would argue that, following Teece (2010), it is Tesla’s business model that is its greatest innovation: a combination of internal systems (e.g. the way the management team operates relatively flat), processes (e.g. using direct to consumer sales) and assets (e.g. battery technologies) that have made Tesla difficult to imitate and competitive in the EV market.
Was Tesla a First Mover?
What about framing the success of innovative firms through the lens of a first mover advantage? Difficulties arise when we think about exactly what touted ‘first movers’ like Tesla were first to achieve — it brought its EV range to market over a decade later than GM did, wasn’t the first to use touch screens or apps, didn’t have the first charging point and wasn’t the first car to celebrate minimal interiors.
Yet Tesla is heralded by many as succeeding because of a ‘first mover advantage’ — how do we deal with this inconsistency? I would argue that the first mover advantage principle is flawed because it struggles to define what markets are, for example Golder and Tellis (1993) define Gillete as a follower in the shavers market, whilst Suarez and Lanzolla (2005) define it as a first entrant.
Buisson and Silberzahn’s four breakthrough model (2010) can help us reconcile the issues with first-mover advantage by exploring the ways in which firms can either create submarkets or dominate existing submarkets, rather than argue about whether or not the firm is a first entrant or not.
For our example, we can use the four breakthrough model to more specifically identify what it is about Tesla that made it so rule-breaking.
Firstly, a technological breakthrough: Tesla’s battery innovations have given it the efficiency in terms of range and cost that has allowed it to defy many of the issues that have plagued many other electric vehicles (EV).
Tesla also has built a breakthrough business model, controlling the complete customer experience including purchase and servicing which is controlled through and app and its charging network, which is dominant in the US and Europe.
Tesla’s design breakthroughs can be found in their minimalist but functional interiors, with a touch screen to control much of the cars features, and not much else; appealing to those who were attracted to the shift to minimalism and aesthetics of products like the iPhone.
Finally, process breakthroughs were created not just in terms of manufacturing (e.g. the world’s largest casting machine ever made) but also in Tesla’s relationship, or lack of relationship with car dealerships, instead favouring a direct distribution model which has reduced costs and complexity (e.g. the cars are built to order and immediately dispatched to buyers, reducing inventory costs).
In combination, these huge breakthroughs explain why Tesla has created submarkets (e.g. in EV charging network primacy) or dominated existing ones (the EV market).
The benefits of imitation
It seems so far, then, that innovation due to breakthroughs are what have made pioneering firms like Tesla so successful, but I will argue in this paragraph about how important conforming to the market and imitating as a firm can be for survival.
DiMaggio and Powell (1983) in The Iron Cage Revisited explain how organisations often homogenise within specific fields because of coercive, mimetic and normative isomorphism. Coercive isomorphism occurs because of political influence and legitimacy problem, which is true of Tesla.
In the case of Tesla, in order to raise capital, the firm has resorted to debt financing which has meant that management has had to focus on profitability to cover debt interest payments, which has financialised the firm but also benefited it because it has become more durable.
Furthermore, whilst Tesla has eschewed many of the norms of other auto makers, it has also institutionalised itself with government through its early dependence on state funding, EV subsidies and its EV carbon credit sales (now itself a billion dollar sub-business within Tesla).
This points to the failures of a pure first-mover or innovation analysis of successful firms because often these touted ‘first movers’ or ‘innovators’ act in ways that are congruent to the market or institutions, and innovate only in certain arenas.
Tesla is both an innovator and an imitator
One of the ways that Tesla innovated in the automotive industry was by exploiting the gap left by institutionalised traditional car makers who relied on homogenised methods of production, supply chains and sales methods.
Tesla had few true competitors in the electric vehicle or internal combustion engine market because traditional car manufacturers were too set in their ways to adapt to the changing environment; Tesla’s nonconformity was a dynamic capability that allowed it to rapidly pivot around different technologies and environmental opportunities.
By capitalising on the slow-moving competition, Tesla used its own dynamic capabilities to radically create a new submarket of EVs that it still dominates in terms of market share. Significantly, however, Tesla imitated and conformed at certain strategic points; we can draw the conclusion from this that innovating is not always the answer, and imitation can play a large role in strategic decision making.
Lessons for practitioners
I propose that imitating is often the best strategic decision if you do not have a dynamic capability that would allow you to dominate in that feature or arena of competition and if innovating wouldn’t further organisational aims.
However, too much conformity or imitation, whilst useful for survival, increases your static capabilities over your dynamic ones: all the organisation would end up good at is following and copying rather than creating.
The optimal strategic path, then, is one that uses your current dynamic capabilities to innovate when you can, whilst imitating at the times when your don’t have the ability to dominate to reduce resource demands.