Innovation and Technology
Case Study of Tesla Motors
Unit:
Managing Technology and Innovation Strategy (BUSM4528)
Lecturer:
Mark Boyes
Program:
MBA (Executive)
Semester:
1 2017
Due Date:
4th June 2017
Student:
Catherine Robertson
Number:
SN 9503312
Executive Summary
This study examines the innovation of electronic vehicles (EV) with a particular focus on
Tesla Motors. The motor vehicle sector contributes significantly to C02 emissions
throughout the world, with companies relying heavily on fossil fuel. With the growing
reduction in oil reserves and environmental sanctions enforced by governments across the
globe, car manufacturers are challenged to develop new environmental friendly products.
The current challenge for EV is battery charging, not only related to the limited number of
charging stations, but also the time it takes to recharge the battery, which can be as much
as 6 hours. Tesla is leading an innovation beyond the car market as it plans to configure
cities energy systems to reduce the environmental impact. The challenge for Tesla to
increase the scale of production and reduce costs in order to enter the market for the
average consumer in order to become profitable. New plans for Tesla involve extending
beyond simply EVs and merging the next step which is to ensure that the battery recharge
is not from fossil fuels, but from clean energy by converting households to solar power.
(Gans 2016)
In the short term to remain a market leader in the pursuit of innovation sustainable
operations, Tesla must address the following recommendations:
1. Streamline production to reduce costs in line with integrative Innovation or “High
End” Technology Disruption
2. Global market expansion
3. Continued global infrastructure development of charging stations including adding
battery swap stations
4. Bring together the two business offerings of electric vehicle and domestic solar
power and energy storage
2
Contents
Introduction ....................................................................................................................................... 4
Aim ..................................................................................................................................................... 4
Findings ............................................................................................................................................. 4
Battery Electric Vehicles ............................................................................................................. 5
Alternate propulsion cars ............................................................................................................ 6
US Automotive Industry .............................................................................................................. 6
Biofuels and Natural Gas ............................................................................................................ 6
Internal and External factors affecting Tesla ............................................................................... 7
PESTLE ......................................................................................................................................... 7
SWOT ............................................................................................................................................ 8
Five Forces applied to Tesla ...................................................................................................... 9
Innovation strategies used by Tesla ........................................................................................... 10
Design Thinking/Futures thinking ............................................................................................ 10
Innovation .................................................................................................................................... 11
Disruptive Market ....................................................................................................................... 11
Integrative Innovation or “High End” Technology Disruption .............................................. 13
The Double Diamond ................................................................................................................ 15
Corporate Strategy .................................................................................................................... 16
Short term objectives for Tesla- Sustaining Innovation ........................................................... 18
How will Tesla remain competitive? ............................................................................................ 18
Conclusion ...................................................................................................................................... 21
References ...................................................................................................................................... 22
3
Introduction
The American company, Tesla Motors was founded in 2003, as an automotive company
dedicated to developing EVs. (Rothamerel & Zimmer 2015) As well as producing EVs, Tesla
produces advanced electric powertrain components to other manufacturers such as Toyota
and Daimier. Tesla’s mission is to “accelerate the advent of sustainable transport by
bringing compelling mass market EVs to market as soon as possible” Tesla’s CEO Elan
Musk, states on his website that “we’re catalyzing change in the industry. Tesla’s vehicles
are fun to drive and environmentally responsible” (Musk 2013). Tesla’s aim is to develop
more changing stations across the world. In the United States (US) the number of changing
stations has grown from 18 in 2013, to 236 in 2015. (Rothaermelt & Zimmer 2015)
Aim
The aim of this case review is to understand the forces which are affecting the alternate
energy vehicles and identify the internal and external factors affecting Tesla. It will also
determine if Tesla has a sustainable competitive advantage, how it should maintain this
advantage and what should be their short-term objective to ensure survival.
Findings
The oil embargoes of the 1970’s first highlighted the need for more fuel-efficient cars, by
1990, the California Air Resource board passed a mandate that 2% of all car produced in
California had to have zero emissions by 1998, then 5% in 2001 and 10% in 2003. The
mandate was considered to being a catalyst for the increase research and production of
EVs. (Rothaermelt and Zimmer 2015)
The US government then in 2003 supported 1.3 billion in research into hydrogen-powered
cars. Controversially this was also when congress passed a depreciation tax breaks of up
to $100,000 for buyers of SUVs renown for being gas guzzlers as compared with $4,000
for EVs. (Rothaermelt & Zimmer 2015)
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Tesla motors is a public company who trades on the NASDAQ stock exchange under the
symbol, TSLA. In 2007 Tesla identified that it was losing $50,000 on each car sold. The
CEO at the time had led the company to believe that it cost $65,000 per car to manufacture
the Roadster, which seem to justify the sale price of $92,000, however in reality the car cost
$140,000. In 2008 a completely redesigned roadster was launched for $109,000, by
December 2009, 937 Roadster models in 18 countries had been sold, with an additional
1,200 putting down deposits giving the company 70 million in interest free loans.
(Rothaermel, Zimmer 2015)
Tesla completed its initial public offering in June 2010, in the first day of trading shares
closed at $23.89, generating $226.1 million for Tesla. Despite this that year’s annual report
showed an operating loss of $146.8 million and in 2013, this grew to $396 million. The turn
around came in the first quarter of 2013, when Tesla turned a profit of $11 million, causing
a run on investment that pushed up shares to over $150. (Rothaermel and Zimmer 2015)
Battery Electric Vehicles
The current options available to consumers is a pure EV or the hybrid propulsions vehicle.
The pure electric vehicle uses batteries to supply the energy required for propulsion. The
electric motors can also act as generators, using the energy created during breaking to then
use for acceleration.
The major disadvantage of the battery operated cars is that this is the most expensive part
of the car which deteriorates over time. Newer lithium-iron batteries provide a larger range
offering a driver 250-300 miles on one charge. Currently there a number of large companies
heavily investing in research and development into reducing costs of making batteries and
the time it takes to recharge them. (Rothaermel and Zimmer 2015)
There is an increasing variety available to consumers in both options and price points for
EVs. Vehicles range from being able to travel from 62-265 miles, with price ranges from
$16,395 to $95,000. (Rothaermel and Zimmer 2015)
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Alternate propulsion cars
Another type of EV is the hybrid propulsion, which uses both an electric motor with internal
combustion engine, thus not restricting the the travel range of these vehicles. These
vehicles reduce air pollution, dependence on petrol and reduce green-house gas
emissions. Elon Musk would argue that these cars have the disadvantage of both vehicles,
as they have to carry the extra wait of another engine and have increased costs for ongoing
repairs and maintenance. (Rothaermel and Zimmer 2015)
Despite some of the challenges faced by hybrid cars their sales continue to rise, with Toyota
likely to top 1 million cars in 2015.
US Automotive Industry
The US automotive industry has been dominated by GM, Ford and Chrysler for decades.
In the 1990s they shifted production to SUV’s believing that gas prices would remain low.
However, in 2004 sales started to decline, the 2008 global financial crisis saw car sales
drop from 18 million in 2000 to 11 million in 2008.
Biofuels and Natural Gas
Researchers are also exploring the use of alternative fuel such as ethanol and natural gas
for automobile propulsion. Produced from natural sugars Ethanol can be manufactured
from sugar cane or corn. While not producing any carbon dioxide emissions, its
production would require huge expanses of land, with a suggestion that this would push
up the costs of food production. (Rothaermel and Zimmer 2015)
Produced from oilseed, biodiesel is more expensive than fossil diesel, however is
environmentally friendly as it does not omit carbon dioxide. While natural gas, which
comes from methane produces a small amount of carbon dioxide. (Rothaermel and
Zimmer 2015)
6
Internal and External factors affecting Tesla
The internal and external factors affecting the success of Tesla are reflected in the pestle
analysis below.
PESTLE
Figure 1: Pestle analysis of EV Market
7
SWOT
Figure 2: Tesla Motors SWOT analysis and competitors
The above SWOT analysis suggests that Tesla has a sustainable competitive advantage
over both other electric vehicles and the combustion engine.
8
Five Forces applied to Tesla
Tesla is one of the largest companies in the EV market, to ensure that they maintain this
lead, it is essential it must understand the external factors which will affect their future
success. Applying the five forces developed by Michael Porter to analyze the impacts of
external environment will help identify opportunities.
Figure 3: Five forces Tesla analysis (Kissinger 2017).
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Innovation strategies used by Tesla
Design Thinking/Futures thinking
There are four stages in design thinking illustrated in figure 4.
Figure 4: design thinking
Design thinking has historically occurred much further down the development process,
focusing more on making a product more aesthetic. Design thinking is a methodology that
provides a solution based approach to problem solving. (Siang 2017). Design thinking is
useful when dealing with complex problems. It focusses on understanding the human
needs, by re-framing the problem in a human centric way and defining the problem,
brainstorming the ideas and prototype and testing. Tesla are reimagining the car, they have
embraced the principles of design thinking. In 2009, it participated at the Stanford Graduate
School of Business’ Customer-Focused Innovation Program. Tesla understand that by
designing products quickly, mistakes will occur, however you learn from these as you learn
from and integrate your learnings into the next iteration of the product. (Digital Surgeons
2017)
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Innovation
Innovation can be described as new products or services that create value in the market
which then drives economic growth. Innovators tend to be the leading companies in their
market segment, such as Apple and Google. (Rothaermel 2010)
Miller and Olleros (2007) suggest companies should have a clear vision of the innovation
strategies they will follow. According to Francis and Bessant (2005) there are four “P’s” for
innovation or change:

Product Innovation

Process Innovation

Position Innovation

Paradigm Innovation
The initial strategy for Tesla was similar to many startup companies, building the Tesla
roadster a minimally viable product to test the market. Its innovation strategy was to come
from high end of the market and with each sequential iteration improving the product,
reducing production costs and improving product design. According to Forbes magazine,
Tesla is the leader in innovation premium. This is determined by identifying the difference
between their market capitalization and a net present value of cash flow from existing
business. (Dyer and Gregerson 2016)
Disruptive Market
Clayton Christensen, popularized the disruptive innovation theory. His suggestion was that
for a new innovation to be disruptive, the focus would be on developing a good innovative
product and starting at the bottom of the market and working your way up. For disruptive
innovations to be successful it is also supported by new technologies or business models
that enable their growth. See figure 5 below, which diagrammatically shows disruptive
market theory. (Nielson 2016). In contrast, the innovation strategy for Tesla’s was to come
from high end of the market and with each sequential iteration improving the product.
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Figure 5: Disruptive Market (Nielson 2016)
Although not completely disruptive in its approach, there are a number of areas where Tesla
have disrupting the market:

Tesla allows customers to buy the car off the web, reducing cost incurred at the sale
yards

It offers simple application updates as better algorithms are identified

Personalised customer experience with driver settings, climate control and other
features

High standard of quality assurance and research and development. If an error is
found, Tesla will pick the car up and return the next day fixed.

Open Sourced technology in the hope of universally lifting the auto technology

Price, although current initial costs are high the running costs are extremely low.
(Katzar 2014)
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Integrative Innovation or “High End” Technology Disruption
Tesla’s plan was opposite to the traditional disruptive innovation theory. Rather than
focusing on one job, it brings together multiple jobs to create a superior solution. (Neilson
2016). Because the integration is so important for success, the initial costs are often high.
Over time the goal is to move down the market as quickly as possible. (Neilson 2016)
High end technology disruption produces highly advanced technology that makes it difficult
for competitors to copy, over time these companies use technology to lower costs. Tesla
manufactures offer highly integrated plants with extensive use of robots, that can perform
up to four tasks, as compared to most robots in the automotive industry that perform only
one task. Tesla has also been successful in gaining a significant market share, which is
important as it endeavors to move down market having the necessary volume to mitigate
new competitors. (Furr and Dyer 2015)
See figure 6 which represents a diagrammatic example of how Tesla has use integrative
innovation.
Figure 6: Integrative Innovation (Nielson 2016)
Disruptive innovations create new systems or “value networks” which will displace the old
ones. This will often ask for the innovators to think beyond the product itself. (Suskewicz
2015) Tesla has disrupted the status quo with its commitment to rapid iteration, and think
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more like software developers than commodity manufactures. (Knight 2016) This is truly
evident with the statement on Tesla’s website “Tesla is not just an automobile company it’s
an energy innovation company” (Suskewics 2015)
According to Musk, the traditional model of the car industry is doomed, with expectations
of the car industry being autonomous, which will in future threatened the need for car
ownership. (Knight 2016) Tesla will have a have a clear impact on gas stations, services
and insurance as it creates its own ecosystem.
If EVs were to hit tipping point then demand for traditional fuels reduces as does tax revenue
excise which will have an effect on deceased government revenue, so a challenge for Tesla
will be the government’s response to this.
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The Double Diamond
Divided into four phases, Discover, Define, Develop and Deliver, the double diamond is a
visual mapping of the design process. (Design council 2015)
At the commencement of a creative process there are often a number of creative ideas
(divergent thinking) which are then narrowed down to the best idea (convergent thinking).
This process demonstrates the double diamond as illustrated in figure 7.
Figure 7: Double Diamond
The double diamond shows that this process however occurs twice, once to confirm the
problem and then to create a solution. The four phases of the double diamond are:

Discover- this is the start of the project where users are reviewing the world through
a fresh lens.

Define- In this phase the users identify what should be acted on first ensuring that it
is feasible.

Develop- Solutions or concepts are created in this phase, then prototyped, tested
and iterated.

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Delivery- The final product is produced and launched.
Futures thinking extends the double diamond beyond the product has been launched where
in the future there is a divergent extension of design thinking. Tesla’s success is built on
exploring new technology trends, leading the trail with computerization, connectivity, design
and manufacturing together with automation. (Knight 2016)
The next phase for Tesla is the integration of domestic solar power and energy storage to
support the EV.
Tesla will also create architectural disruption to the future of the transport market, in
particular mass transport, with autonomous buses, and semi-trailers already being planned
by Tesla.
Corporate Strategy
According to Musk “the overarching purpose of Tesla Motors is to help expedite the move
from a mine and burn hydrocarbon economy towards a solar electric company, which I
believe to be the primary, but not exclusive sustainable solution”. The strategy for Tesla
was to enter at the high end where customers will pay for this new technology and then to
drive down the market as soon as possible. This is in opposition to normal disruptive
markets.
In the case of Tesla, Elon musk set a target of combining both high performance in a vehicle
with environmental stewardship, and then over the consecutive years lowering production
costs, by improving manufacturing capability and battery technology (Neilson 2016)
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Innovation Strategy
Tesla Electric Vehicles
Description
Energy Innovation Company
Objective
- To increase market share
- Educate consumers about Tesla's goal to improve the future
- Increase the waiting list
Innovation Type
Radical- new technology and new technical competencies
Drivers
Known Challenges
Knowledge Sources
- Sustainablity commitment
- Declining supplies of gasoline
-Emerging technology accessibility
- Competitive market
- Current cost of product is high
- Battery life
- Tesla employees
- Panasonic
- Toyota
- Daimler
Innovation Tools
Prototyping
Risk Profile
High
Key Success Factors
Developing and EV affordable to the average consumer
Corporate Strategy Alignment
To accelerate the advent of sustainable transport by bringing compelling mass market
electric cars to market as soon as possible.
Figure 8: Tesla Innovation Strategy
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Short term objectives for Tesla- Sustaining Innovation

Streamline production to reduce costs- in line with Integrative Innovation or “High
End” Technology Disruption

Global market expansion

Continued infrastructure development of charging stations including adding battery
swap stations

Bring together the two business offerings of electric vehicle and domestic solar
power and energy storage

Invest in flushable liquid electrolyte for electric batteries for cars, which would allow
charging in the same time as filling a petrol tank
How will Tesla remain competitive?
To survive Tesla needs to become price competitive. As demonstrated in table 1, a scale
curve analysis on costs from 2012 to 2014 shows Tesla’s cost for producing the Model S
was $50,000 per vehicle.
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Table 1: Scale curve for Tesla’s Model S 2012-2014 (Dyer and Gregson 2016)
Scale curve slop = 80%. Costs drop 20% with each doubling of unit
Tesla’s significant investment in research and development and building the battery
Gigafactory for the model S, Xr3 and the factors have contributed to these losses. This
curve however also identifies that the cost to build each unit has dropped by 20% with each
doubling of the unit volume. If it was assumed that the model 3 was to follow the scale
curve, then according to Dyer and Gregerson (2016) Tesla will break even at approximately
275,000 units
By continuing to build Tesla battery supply chain this will also continue to provide a
competitive edge. Scaling up production as identified in table 2 results in more efficient
manufacturing, manufacturing improvements and cost reduction. (Zac 2015)
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Table 2: Planned 2020 Gigiafactory production exceeds 2013 global production. (Zac 2015)
To remain competitive Tesla, needs to extend its supercharger network. No other
manufacturer has been able to replicate this to date, which gives Tesla is discrete
advantage. (Trefis 2016)
Tesla continues to disrupt the entire model of the automotive and fuel industry. The second
stage of Tesla’s master plan moves beyond the car market, to configure cities energy
systems so that they reduce their impact on the environment.
For every 100,000 Tesla cars on the road this would equate to a reduction in the use of 40
million gallons of petroleum or about 100 million not spent annually at the gas station.
(Cross 2016)
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Conclusion
With motor vehicles contributing significantly to CO2 emissions and a growing reduction in
oil reserves, Tesla is leading the innovation of EV and battery storage. Throughout this
innovation, Tesla has used design thinking methodology to achieve its goal and disrupted
the entire model of the automotive and fuel industry. To maintain this advantage Tesla must
move toward the reducing production cost, expanding to a wider global market and continue
to expand it charging stations. It also has the opportunity to incorporate its other business
offering of domestic solar panels and battery storage to further reduce the environmental
impact
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