Journal of Case Research Volume X Issue 01

Tesla: Disruptor or Sustaining Innovator

Dr. Salma Ahmad

Department of Business Administration, Aligarh Muslim University,
Email: salmaahmed6[at]rediffmail[dot]com

Mohd. Azmi Khan

Department of Business Administration, Aligarh Muslim University,
Email: azmikhan201[at]gmail[dot]com

Abstract

Tesla Inc (formerly Tesla Motors) is a pioneer of the first highway legal serial production all-
electric car to use lithium-ion battery cells. Tesla launched Roadster, the first luxury electric
car in the world in 2008 which received a humongous response. Initially, the customers were
the affluent few. Tesla later launched less costlier versions such as the Model S, the Model-
X and the Model-3 to target the mass market. With the introduction of Roadster, Tesla did
not compete within the confines of the existing industry or attempt to steal customers from
the existing automobile rivals; but, developed an uncontested market space that made the
competition irrelevant. It created a Blue Ocean, a previously unknown market space. The
objective of the case is to develop conceptual clarity of what a Blue Ocean is, how it is
different from a Red Ocean, analyze whether Tesla created a Blue Ocean. The case would
also help discuss the future strategy for the company.

Key words: Blue Ocean, electric car, innovation, transformation, competition

Background of the Case and of the fact that transportation is a

major contributor to it. Transportation is
Across the world, people are
the second largest source of carbon
becoming increasingly concerned about
emission in the world. Electric vehicles1
the environment. Sustainability has
(EVs) have zero emission potential as EVs
become a buzz word in the corporate
produce zero direct emissions and plug-in
sector as well as in academic literature.
hybrid electric vehicles (PHEV) produce
People are becoming conscious of the
zero tail pipe emissions when they are in
impact pollution has on the environment
all-electric mode, but they can produce

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evaporative emissions. Powering EVs With environmental consciousness

through solar charging stations could gaining ground all over the world, interest
considerable reduce greenhouse gases in EVs has grown. Government
emission of vehicle. In 2008, Tesla Motors regulations were also introduced in this
launched Roadster, the first luxury electric regard giving a further thrust to acceptance
car. By the introduction of the first electric of EVs. Automobile manufacturers started
vehicle, it created a Blue Ocean, a launching EVs. Chrysler, Ford, GM,
previously unknown market space. Honda, Toyota all launched EVs for the
automobile market. Nissan Leaf was the
History of Electric Vehicles (EV) first all-electric, zero emission vehicle
The very first EV in a very crude produced for the mass market.
form was appeared on the road in 1902.
The credit for this can be attributed to Since the introduction of electric
Walter C Baker. It was called the “Road vehicle Tesla has come a long way. It
Torpedo”. This became quite popular and started with the launch of the Model S
many different versions appeared on road which was very expensive but later it
until Henry Ford launched Model-T in launched low-cost versions for the mass
1908. Model-T was manufactured on the market. It has better acceptance than the
assembly line, thus drastically lowering EVs which were launched earlier because
the price of an automobile. Model-T made Tesla provides a larger driving range
automobiles affordable hich were earlier ,infrastructure for charging, facility for
only the prerogative of the rich and free charging between cities, and also on
affluent. Interest in EVs resurfaced in the building back-up battery supply. It also
early 1970‟s due to increasing fuel prices provides infotainment which is not an
and launching of NASA‟s Lunar Roving essential feature of a vehicle but it is what
Vehicle which was an EV. It was round customers‟ desire. Additionally, it has
this time that Sebring -Vanguard launched adopted a unique distribution model of
an electric vehicle and became the 6th both direct and online sales
largest automaker in the world in 1975.
However, due to the limitation of range as Hybrid Electric Vehicles Vs. Plug-in
compared to fuel-based cars, it gradually Hybrid Electric Vehicles
lost its prominence by 1990s. Hybrid Electric Vehicle (HEV) is a
vehicle that no longer depends solely on

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the internal combustion engine (ICE) to 2008, Tesla launched the first ever electric
propel the engine, but rather uses an car-the Roadster and gained popularity the
electric motor to propel the vehicle using world over. Tesla, the company also
electricity. While Plug-in Hybrid Electric specializes in the manufacture of lithium-
Vehicles (PHEVs), are also called range- ion battery energy storage, and residential
extended electric vehicles because the photovoltaic panels (through the
vehicles always have gasoline as a subsidiary company Solar City) energy
potential back-up that can extend the storage and solar panels. It also sells Tesla
driving range. PHEV‟s are equipped with Power wall and Power pack batteries, solar
a larger and more powerful battery panels, and solar roof tiles.
compared to HEVs which can be Tesla Motors started small with a
recharged at the electricity grid. Both little over 80 employees, which included
HEVs and PHEVs are energy-efficient and teams in California, the United Kingdom,
environment-friendly hybrid electric and also Taiwan. The employees are
vehicles that do not depend solely on an drawn from diverse industry and expertise
internal combustion engine as their only such as electronics, automotive, and
propulsion mechanism, instead they use software.
bidirectional power flow. However, they
have their fair share of differences in terms The Product
of efficiency, operating cost, maintenance Tesla offered different models such
cost, range, emissions, etc as shown in as Roadster, and currently sells the Model
Exhibit 1. S, Model X, Model 3. The company is also
accepting bookings now for the upcoming
Tesla Motors-The Company Model Y. The power of the car is derived
Tesla Inc is an American from its Lithium-ion Energy Storage
multinational corporation which is System, or a battery pack, which can be
popularly known for the manufacture of charged in minimum time. These vehicles
electric vehicles (EVs).Tesla Inc (formerly conform to US safety standards,
Tesla Motors) was established in the year environment, and durability standards. The
2003. Based in Palo Alto, California, it cars have in-built safety features like the
was founded by Martin Eberhard and Marc essential airbags, front crumple zones, side
Tarpenning who wanted to build cars for impact protection, and 2 and ½ mph
people who had a passion for driving. In bumpers.

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Green Car-Green Initiative who were conscious of eco-friendliness.

Tesla is deep in the green car This included businessmen, politicians and
industry. This is the untapped market celebrities. Later, it launched other lower
segment it is focusing on. It has devoted priced brands. The Model-S was priced at
all its research and development (R&D) $69,900. This is the company‟s flagship
efforts for this purpose. Further, Tesla is a Model. The Model-X, and the Model-3,
pioneer and a market leader of EVs and priced at $35,000, followed. Model-3 is
has about a five-year head start over other aimed at a higher-volume segment. This
companies. While other companies are still received huge acceptance. It delivered
evolving and developing their green car around 1,03,000 vehicles in the fiscal year
designs, Tesla has already made a name 2017 and 40,740 vehicles in the second
and a brand for itself. It is believed that quarter of 2018, and during the third
the future is of electric cars which would quarter of 2018, Tesla delivered around
be dependent on renewable sources of 83,500 units, of which some 55,840 were
energy and Tesla is all in to derive benefits deliveries of Tesla's Model 3, about 14,470
from this trend. were Model S, and some 13,190 were
deliveries of Model X (see Exhibit-3).
Transformation of the Auto-Industry
Tesla has had a significant impact Product Strategy
on the auto industry and has been able to Tesla followed a strategy which is
transform the auto industry. In time, all typically adopted by the technological
automobile manufacturers would be industry where initially an expensive
delivering EVs. Tesla has also introduced product is launched targeting the affluent
the concept of self-driving. It would be buyers and then launching products for the
remembered as an innovator who mass market. It followed a typical
transformed the automobile industry, and technological-product life cycle. In the
other automobile manufacturers followed words of its CEO Elon Musk, “New
suit (see Exhibit-2). The first product technology in any field takes a few
launched by Tesla was Roadster, which versions to optimize before reaching the
was priced at $1,09,000. This was mass market, and in this case, it is
prohibitively expensive for the common competing with 150 years and trillions of
man. As such, its target audience dollars spent on gasoline cars.”
(consumers) was only the affluent few,

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Vertical Integration Rather Tesla does not resort to the

The automobile industry is largely conventional norm of selling through an
dependent upon its component suppliers, extensive dealer network. It has adopted a
and only engine manufacturing and final unique strategy and sells its vehicles
assembly are undertaken by the through company-owned showrooms as
manufacturer. Companies typically well as online.
outsource component production to the
extent of over 90 percent. Vertical Technology Strategy
integration is, in fact, rare in the The focus of Tesla‟s technology
automobile sector. In general, the auto strategy is on pure-electric propulsion. It
industry does not have a single source; an picks up approaches from the technology
OEM would have a range of suppliers. industry and transfers them to the
transportation industry such as online
Tesla‟s production strategy software updates.
includes a high degree of vertical
integration. This includes component Acquisition Strategy
production and proprietary charging Tesla acquired Solar City in the
infrastructure. The company has large year 2016. Through this it ventured into
factories to bring economies of scale. It the manufacturing of solar panels, solar
builds electric power train components for roof tiles, and battery storage. These
vehicles from other automakers, like batteries complement the generation
Daimler AG, and Toyota. Tesla has a profile of solar panels that charge only
limited number of suppliers and in most during the day when the sun is shining. It
cases, a single supplier for certain stores electricity for use on cloudy days
components. Consequently, the company and at night, which is needed to provide
has much more supply-chain volatility as the on-demand electricity consumers are
compared to most automakers. used to.

Sales Strategy The company has also set up a

Automobile manufacturers have a large factory to produce battery at Nevada
large network of dealers for distribution to in partnership with Panasonic. The plant
their customers. They are dependent upon would undertake all aspects of battery
their dealers for sales of their products. production, from raw material to battery

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pack. Further, the company also intends to content for the driver. The only familiar
sell its OEM batteries for non-automotive driver components are the steering wheel,
applications to increase production volume pedals, and transmission shifter. The
and reduce per unit cost of production. system is a class of its own, and Tesla has
created a benchmark for the automobile
Technical Differences industry.

Tesla‟s Model S, its first electric Manufacturing Model

vehicle, is unique. It has a 17-inch touch
screen infotainment system which has Tesla has a unique manufacturing
become an industry benchmark for model. It adopted the electronic
automotive display integration. It also has manufacturing services (EMS) model of
an optoelectronics display, which is the production that is a norm not in the
same technology which is used in automobile industry but the consumer
smartphones and tablets. The system runs electronics industry. Therefore, it is often
on a Linux-based operating system which seen as being a technology company than
offers navigation and also computes at a a traditional automobile company. It
speed which is at par with most other entered into a contract with leading EMS
systems. The system also includes an provider to build its central infotainment
embedded 3G modem that runs on system, instrument cluster, and several
broadband data. This can receive software other systems. This meant that Tesla
updates over the air and controls all the needed to internalize much of the
functions of infotainment, audio, hardware and software development, and
navigation, Bluetooth phone, and even the systems integration. The company had
vehicle settings like windows, door locks, an advantage in this regard as it had
sunroof, trunk release, traction control, recruited its engineers from all over
headlights, steering and also suspension Silicon Valley. Since it adopts a design
settings. and builds model, it has direct control over
the finished product, more control over the
Further, a 12.3 inch fully digital user experience and over quality and
instrument cluster is placed in front of the performance. This can be said to be its
driver with a processor which is used to competitive advantage.
handle a diverse range of graphics, and

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Design Innovation Tesla and Artificial Intelligence (AI)

Tesla expedited the pace of
hardware, software, services, and Tesla‟s Autopilot uses artificial
application development and re-think intelligence3 to drive a Tesla vehicle with
design innovation. Tesla has a competitive minimal assistance. This is also another
advantage over design innovation. It innovation that other automobile
recruited many design engineers from manufacturers are trying to emulate and
various leading technology companies to trying to keep pace with the innovation of
design and build the car. Tesla‟s software Tesla.
design is state-of-the-art. It can update
vehicle software over-the-air (OTA) with Tesla has used machine learning4
ease. And as consumers and government in its Autopilot program. It used to it
pursue eco-friendly and low-emission handle a large amount of data created by
transport options, Tesla stands to have an its fleet of vehicles and the Autopilot
upper hand. sensor suite on those vehicles.

Design thinking2 focuses on Customer Experience

customer needs and designs a product
accordingly. It can be said to be a Though the products offered, Tesla
customer-focused innovation. Tesla has is providing a different customer
embraced the concept of design thinking. experience that other automobile
Tesla believes in re-designing a vehicle manufacturers would find difficult to copy
about its energy source (electric) and its and compete with. It is often said that
driver (based on artificial intelligence). It people are not buying „vehicles‟ when they
did not think about Tesla as a vehicle in buy Tesla, but they are buying „futuristic
isolation but how the vehicle could impact experience‟. And the key elements of the
the planet. The EV is much more than Tesla experience include the buying
transportation. It is about creating a process, the lack of refueling cost, the lack
sustainable planet. It thought about EV as of mandatory service checkups, the air
not something that functions within an improvements, lower depreciation, and the
ecosystem but something that can driving experience.
transform that ecosystem.

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Tesla-An Innovator and Market Leader Brian Loh, a partner at McKinsey

and Company, said, “Innovation is at an
Tesla, Inc‟s focus was on climate “all-time high‟ in the auto industry right
change. Tesla is the key driver of now, which is significant because
innovation, and these innovations have historically, the auto industry is very slow
been around sustainable mobility and to evolve.” “There‟s so much change
automotive technology. Consumers are happening that the automakers are trying
increasingly becoming conscious of using to make sure they‟re as successful in the
environment friendly product, and Tesla next era as they were in the past.” “The
tapped on this sentiment and has become electronics innovation trend with the
one of the most recognizable brands in the industry has been going on for a while, but
world. It has been rated as the best car I think it‟s accelerating. The mega trends
brand in terms of technology and we read about in the papers every day of
innovation (see Exhibit-4). automotive driving, electrification,
connectivity, shared mobility. These are
Investor confidence has also grown huge industry-shaping trends, and they are
and has resulted in an increase in its stock having a big impact in the industry at the
prices by tenfold. It has become a leader, OEM level and the supplier level, and it‟s
and many companies are following its leading to a lot of big investment”. And
lead. Due to its incredible market value, Tesla has taken the lead, proved to be a
people have included Tesla among the Big disruptive innovator and making the
Three. People have started calling Tesla, industry to follow suit.
GM, and Ford as the "New Big Three". As
of 2017, Tesla was amongst the top 10 Tesla is today acknowledged being
most valuable car brands worldwide, one of the most technologically innovative
valued at 4.4 billion U.S. dollars. The companies dealing with climate change.
reason why the automaker made it into the The company‟s focus on environmental
ranking was large because of its top- sustainability, safety, and innovation made
selling model, which is Model-S. The its electric cars immensely popular and got
model beat out decades of brand building an overwhelming response. It is an
and production capacity of other giant innovator, and this innovation is its
automakers. greatest strength. It has challenged the

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norms and influenced and transformed should drive. Tesla has been an inspiration
what kinds of cars other automobile in the industry and demonstrated that year-
manufacturers should make. It has also old convention could be defied.
transformed what kind of cars consumers

1
An electric vehicle (EV) is a vehicle which uses one or more electric motors for propulsion. EVs store
electricity in an energy storage device, such as a battery. Electricity can be used as a transportation fuel to power
battery electric vehicles (EVs).
2
Design thinking is process of creative problem solving. It has a human-centered core and encourages
organizations to focus the people needs..
3
Artificial intelligence (AI) is the ability of a digital computer or computer-controlled robot to perform tasks
commonly associated with intelligent beings.
4
Machine learning is an application of artificial intelligence (AI) that provides systems the ability to
automatically learn and improve from experience without being explicitly programmed.

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Exhibit 1: Difference between HEV’s and PHEV’s

Hybrid Vehicles Plug-in Hybrid Vehicles

HEV is a vehicle whose propulsion energy is PHEVs are vehicles equipped with a large
acquired from more than two types of energy battery which can be plugged into the
sources, one of which is electric. national grid or home outlets.
The battery can only be charged via The battery can be charged via regenerative
regenerative braking and can call on gasoline braking as well as by plugging it in any
to extend its range. household 120-volt power outlet.
It reduces the toxic emissions by shutting Centralized electricity generation is much
down the ICE at idle and restarting it when more efficient and products.
needed.

Exhibit 2: Other automobile manufacturer’s growing interest in electric vehicles

In 2014, Mercedes approved an investment of over US 4 2 billion for purpose-built electric
vehicles (Source: fool.com)
In 2014, General Motors announced an investment of US $ 449 million for the next generation
of electric vehicles and advanced battery technologies. (Source:gm.com)
In 2015, Ford announced a US $ 4.5 billion investment in EV technology and 13 new electric
models will be added by 2020. (Source: Ford Annual Report-2015)
In 2020, Volkswagen would be launching over twenty electric and plug-in hybrid electric
vehicles, ranging from small-sized cars to large SUVs in China, its largest market. (Source:
forbes.com)

Exhibit 3: Sales of Tesla depicting number of vehicles delivered worldwide

Source: www.statistica.com/statistics/502208/tesla-quarterly-vehicle-deliveries

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Exhibit 4: Perception of best car brands (index score)

Vehicle Index Score %

Tesla 33.90
Mercedes Benz 19.70
Toyota 19.50
Ford 19.50
BMW 18.20
Cadillac 18.10
Audi 16.50
Lexus 16.50
Chevrolet 11.30
Acura 11.30
Source: www.statistica.com/statistics/303737/US-car-owner-perception-of-best-car-brands-
for-innovation/; Opinion Research Corporation, Consumer Union.

Exhibit 5: Tesla models specification with price

Models Acceleration Range Price

Model Y 3.5-5.9 seconds 280-300 miles $39,000-47,000
Model 3 5.1-5.6 seconds 220-310 miles $35,000-44,000
Model S 4.1-4.3 seconds 259-335 miles $69,500-97,500
Model X 2.7-6 seconds 200-325 miles $80,000-1,44,000
Roadster 4.2-8.8 seconds 620 miles $2,50,000-2,00,000
Source: www.tesla.com

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