Protecting Broken Business Models

While Apple has been a disruptive force in multiple industries for the past decade, Tesla is poised to be the disruptive force for the next decade.  I have written on some of the reasons I believe that Tesla is disruptive in the past including the fact that it has innovative technology, their approach to the media and a pioneering leader who isn't afraid to invest everything he has into his ideas and convictions.

So when I read this recent article in Fast Company it re-affirmed my belief that Tesla isn't just a pioneering company but they are a disruptive force.  It might seem odd that this article would be the impetus for these impressions given that the headline has a general negative tone.  The phrase 'Tesla hits another speedbump" doesn't exactly scream 'disruptive force'.  However, when you dig a little deeper you begin to see how disruptive they are.

The nexus of the article is that as many as five states now have or are in the process of limiting Tesla's direct sales model.  No franchised middle men means they control the entire experience and the entire cost structure of the car.  The problem is that there are many people getting rich being the middle men in the car buying process and in 2013 new car dealers (excludes used cars) generated sales of $592 billion and employed nearly 1 million people.

 This despite evidence from the Department of Justice's antitrust research group, which found in 2009 that state bans on manufacturer direct sales of vehicles are unequivocally bad for fueling economic engines such as competition and innovation.

When you see governments stepping in to protect broken business models you know something powerful is happening.  And I think we can all agree that the current car dealer model is broken.  The constant haggling, salespeople who are seemingly un-empowered and need to check with their manager hiding in a backroom, large markups, hidden fees and limited options are all hallmarks of the current car buying process.

This isn't the first time that a company has entered a market dominated by middlemen with a direct sales model and bested everyone in market share.  You need to look no further than Geico in the insurance market to see how this game plays out.  In the mid-90's they went all-in on a direct model that included a massive advertising blitz and they tripled their market share during that period to become the third largest car insurance company, taking a significant chunk of the market share from leaders State Farm and Allstate.

A Classic Media Response

One of the eight factors of a fear culture is the media.  While I provide a lot more information related to each of the eight factors in my upcoming book I couldn't let this great example pass by without highlighting it.

You may have heard about the recent fire in a Tesla Model S.  While a car fire should not be a market moving occurrence, this one had a little more meaning.


The backstory;

Tesla has been on a roll lately both in the stock market and in the court of public opinion with the very successful launch of its Model S exceeding sales expectations and the future looking bright for the company as it tries to introduce new lower priced models that can be produced on a more massive scale.  However, the lingering question about the Tesla engineering has been the battery pack and what safety issues may be caused by a battery pack exploding.

This past week we finally found out and within minutes of the story hitting the wire (the embedded video has 3 million views and there are others with a simple Youtube search with similar view numbers) the stock plummeted losing over 10% of its value within a matter of a couple days.  The cry starting to build quickly towards a media statement on the accident but nothing came from Elon swift enough for those in the market and the stock continued to sink.

Then on Friday Elon broke the silence with a master stroke of genius regarding the incident.  He released a blog post detailing the accident along with the emergency response.  You can read the full response at this link but a few key aspects of the response:

1. Elon highlighted the safety features - onboard alert system directing the driver and occupants to exit the car and the firewalls between battery packs preventing the fire from reaching the cabin of the car.
2. Quarter inch armor plating around the battery pack compared to a thin metal sheet protecting the gas tank in a conventional automobile.
3. He contrasted the stats so far with that of a typical combustion engine with a conclusion that is 5 times safer in a Tesla than a typical gasoline powered engine.
4. Provided a copy of the email exchange with the customer where they reinforced that they were very pleased with how everything performed and that they were even more sold on the product

While there was a pressure to rush out a response (even highlighted by the Forbes article linked) to attempt to stem the tide of fear that was building around the company and its engineering they were methodical in gathering all the facts even if it took extra time.  They created a clear, detailed description which added credibility to the message, and then turned a potential negative into a massive selling opportunity by contrasting it with the competition - the traditional automobile.

In full disclosure I just purchased less than 100 shares of Tesla on Monday, but this has been a perfect example of a brave and courageous media response in a situation where fear could have dictated a rushed and inadequate response that would have only created more questions.  It came at a cost as the shares (as of this writing) have not recovered their pre-accident price but they have a long-term perspective not driven by the very fickle short-term whims of the market.

Tesla's Elon Musk

This week's profile in corporate bravery is Elon Musk of Tesla motors.  If you haven't heard of him by now you must be living under a rock.  He is an eccentric innovator - most recently making headlines for his hyperloop idea and also known for his space company and his intergalactic aspirations.  I know, it sounds a bit like Sheldon from the Big Bang Theory but instead he is a billionaire with a really good business strategy in the automotive space.

Tesla has been on a roll recently and the stock price and media coverage have followed.  Including the basis for this post - the recent BusinessWeek article on Tesla entitled "Why Everybody Loves Tesla".
I am not going to focus on why everybody loves them though and instead focus on all the 'brave' things they are doing as a business - led by Elon who dares to do things differently.  To underscore this philosophy the article includes this quote from Consumer Reports after giving their Model S a 99 out of 100 rating:

"It’s what Marty McFly might have brought back in place of his DeLorean in Back to the Future”

Tesla's business strategy has focused on all the things that prevent people from buying not only a new car but also an electric car including:

• Range of an electric charge and re-charging - by pushing the envelope on innovation of batteries and creating an entire network of refueling stations.

"Higher-end versions of the Model S can go up to 300 miles on a charge, which has helped separate Tesla from rival vehicles such as the Nissan Leaf, which run about 75 miles before needing more juice. Musk has hinted that Tesla has a 500-mile battery pack in the works. At the company’s solar-powered Supercharger stations, Tesla owners can replenish about 200 miles of range in 20 minutes for free. (Most electric cars take hours to recharge.) Or customers can opt for the battery swap, which will cost about what they’d pay for a tank of gas, and be back on the road in 90 seconds." 

• Integrating software and hardware for a seamless driver experience.

"Even the flaws of the Model S seem to resonate with geeks. Early versions of the outside handles malfunctioned—they sometimes wouldn’t extend out of the door—and the windshield wipers seemed to have a mind of their own. Tesla fixed those and other problems with a software upgrade delivered via the car’s high-speed wireless connection. An engineering leader at Ford says he’s envious of what Tesla has achieved by starting from scratch and interweaving software on the touchscreen with the vehicle’s internal systems. “The level of integration that the software has into the rest of the Model S is really impressive,” he says."

• Creating a direct to consumer strategy for car sales

"Unlike every other major car company, Tesla has also kept its retail business in-house. It’s trying the Apple model of placing its own stores in high-end malls and shopping centers instead of relying on dealer franchises. Salespeople, who don’t receive commissions, help buyers configure their cars on giant touch screens." 

• An innovative insurance program that guarantees the value of the vehicle over the long-term
• Maintenance program that includes pickup service and only minimal necessary maintenance

These are all ways that Tesla didn't listen to conventional wisdom; they weren't afraid of perceived advantages that the large, legacy car makers had and they weren't afraid of challenges they would encounter from various stakeholders that would have their very business models disrupted.  As the BusinessWeek article points out they will continue to see challenges but it isn't likely to stop them from continuing to push a business model that they believe is likely to be successful in the long-term.

There’s also the possibility that Tesla is overdoing it with the high-tech whiz-bang. The 17-inch touchscreen, for example, is equipped with a Web browser. Distracted driving laws vary by state, but obviously no one behind the wheel should type out Internet searches in a moving vehicle. There’s no stopping determined drivers from trying. Tesla’s in-car technology “is almost too good,” says Munley. “Detroit is leery about it, and would never go that way for fear of safety and lawsuits. We’re all waiting to see if there are accidents.” Meanwhile, car dealers around the country see Tesla’s direct-to-consumer sales as a violation of laws that separate car manufacturing from selling, and are engaged in a statehouse-by-statehouse lobbying effort to block the company from opening its own stores.