Why Elon Musk’s New Strategy Makes Sense4 August, 2016 / Articles
Last week Elon Musk released the second installment of Tesla’s Master Plan. The first installment had been written in 2006. It outlined Tesla’s automotive strategy and it has been pretty much followed to the letter. The second installment moves Tesla beyond the traditional car market, with a plan to reconfigure our cities, energy systems, and our impact on the environment. As if becoming the first American car entrant in almost a century weren’t enough.
Let’s quickly review the company’s history. Tesla’s initial strategy began like a start-up: to build a minimum viable product to test the market. They built the Tesla Roadster, which was essentially an electric Lotus, and it sold well. They then moved into the luxury market where they applied plenty of competitive pressure with the Model S. And recently they announced the final part of their plan: a mass-market vehicle costing around $30,000 that quickly racked up years worth of pre-orders.
Along the way there has been lots of discussion as to whether Tesla was a disruptor. Its strategy of coming into the market from the high end did not fit the typical demand-side disruption playbook. Instead, it looked as though Tesla’s innovation was to redesign the car in a way that fundamentally meshed software and hardware.
While traditional carmakers had for decades tacked on software to their existing product lines, Tesla’s cars were designed from a clean slate. Their architecture – that is, how the car was put together – was fundamentally new. As of now, it is far from clear that traditional carmakers can replicate that new architecture without dismantling their organizations – something most established firms find extremely difficult.
But even before we have had a chance to find out, Tesla’s new plan involves a substantial pivot. Tesla is doubling down on clean energy and plans to use its cars as a means to convert households to solar power. And it is doubling down on autonomous vehicles, which is something that threatens to change the entire business model of the auto industry.
One of the uncomfortable facts about electric cars is that while they are “clean” in the sense of emitting no exhaust pollution, they still have a carbon footprint since the electricity has to come from somewhere. Because most electricity isn’t generated from renewable sources, in practice most electric vehicles still technically run on fossil fuels.
Musk’s plan to make Teslas truly clean involves marrying the selling of vehicles with the installation of solar panels on houses. Musk and his family already own the main entrant in the latter category – SolarCity – and so Musk wants to merge the companies. He clearly believes there is more innovation to be had with the two businesses combined.
What will the integrated electric car and solar future look like? There may be complementarities between the two but the overlap is uncertain. (Solar can do more than charge cars; and not all car charging will happen at home via solar.) Having an integrated company leaves Musk free to tweak the approach of each without having to ask for permission from two boards. In other words, his approach to clean energy requires cleaning up the organizational lines.
Musk’s interest in tweaking both approaches makes sense given his view that the business model of the car industry is doomed. He sees cars going autonomous, threatening the need for car ownership. Tesla has to date operated on the business model of the car industry, selling people vehicles that they own and control. But Musk sees the future as one where cars are accessed, not owned. It’s hard to know who will end up owning the cars, but it may not be the individuals who end up riding in them.
Add to that the likelihood of similar transformation in mass transit (Tesla is planning an autonomous bus) and goods transportation (there is a planned autonomous semi), and you can see that Tesla needs to keep its options open.
The usual reason not to pursue an integrated approach and combine two loosely related businesses is that you want each to focus on what they are good at without distraction. But when the architecture of an entire industry is in flux, that focus becomes a problem as it blinds companies to the issues that affect both of them.
As I outline in my book, The Disruption Dilemma, the companies that have thrived in the face of architectural disruption of this kind are those that have kept all the parts close and in control rather than spread them out. Tesla’s new Master Plan takes a page straight out of that playbook. As a bet, Musk has business history on his side.