How Tesla changed the car industry. An innovation analysis

Academic Paper , 2021 , 8 Pages , Grade: 1,7

Economics - Innovation economics

This Analysis will focus on how Tesla managed to enter the car industry (Porter´s Five Forces), how they use the mentioned technologies to differentiate from other participants to disrupt the industry (Christensen Module I), and now enter the mass market (Crossing the Chasm). At the end future recommendations for Tesla are given.

The automotive industry is changing fast and adopting new technologies which will play central roles in the future of the industry. First the megatrend within the industry is to shift from the classical petrol engine towards electric vehicles. Second, new technologies for the cars include artificial intelligence (AI), big data & analytics, internet of things (IOT) or autonomous driving.

How Tesla changed the car industry

Introduction

The automotive industry is changing fast and adopting new technologies which will play central roles in the future of the industry. First the megatrend within the industry is to shift from the classical petrol engine towards electric vehicles. Second, new technologies for the cars include artificial intelligence (AI), big data & analytics, internet of things (IOT) or autonomous driving. This Analysis will focus on how Tesla managed to enter the car industry (Porter's Five Forces), how they use the mentioned technologies to differentiate from other participants to disrupt the industry (Christensen Module I), and now enter the mass market (Crossing the Chasm). At the end future recommendations for Tesla are given.

Car industry analysis using Porter's Five Forces and Tesla changing the industry

Among thebiggest players in the car industry are Volkswagen, Toyota or Ford Motors. They operate for decades in this industry,whileTesla delivered its first vehicle not even ten years ago. Although Tesla is relatively new to the industry, they managed to be awell-knownplayer, gainmore and more market share and already overtook all other major players in terms of market cap. The Porter's Five Forces framework is an environmental analysis tool, which examines how the environment is in direct contact with the business and how it affects the way, the business operates.

illustration not visible in this excerpt

Figure 1: Developing and Using an Innovation Specification in the exploration space

Source: Schilling, 2013

Thus Porter's Five Forces help to analyse the industry and help to understand how Tesla managed to enter the industry and at the same time being able to grow as fast as they do. Also it explains how they managed to acceleratethedevelopment of electric vehicles in the whole industry (StartUs Insights, 2021).

In the following the five forces are applied to the automotive industry:

1. The degree of existing rivalry: In the car industry intense competition among manufacturers result in in a high rivalry among car manufacturers. This is further intensified by the establishment of new market segments such as electric cars or new business models such as car sharing.
2. Threat of potential entrants: The car industry has high entry barriers, as there are high fixed cost for factories and also high expenses for R&D.
3. Bargaining power of suppliers: In the car industry the power of suppliers has been weak for years. Due to a fragmented market, suppliers are mostly dependent on one or two large car manufacturers and have geared their entire product portfolio to these.
4. Bargaining power of buyers: In the car industry, the bargaining power of buyers is relatively high asthe concentration of car companies on the market is high and the products are not very differentiated and easily interchangeable. Also the switching cost for consumers are low, as there is no major factor which ties a consumer to a certain brand, except maybe an emotional relationship to the brand.
5. Threat of substitutes: In the car industry, the treat of substitutes is highas the price and availability of oil and gas influences the willingness of a customer to use alternative ways of transportation such as bus, train or plane. Furthermore there are new business models such as mobility on demand (Uber), or ride sharing.

(Schilling, 2013)

Although the entry barriers were described as high,Tesla managed to enter the industry very well. This is because their car was fundamentally different than the cars from other manufacturers. This allowed them to start in a smaller niche market and later grow to the mass market. This will further be described in the next chapters. Also Tesla had access to enormous funds, as Elon Musk entered the company at a very early stage and had a net worth of several hundred million dollars at that time. Furthermore the bargaining power of buyers was described as high. This is not the case for Tesla, as they started with a very low production capacity and the demand for their cars was higher than the number of cars they were able to produce. In addition, Tesla differentiates from other car manufacturers in their distribution model. While most car manufacturers have intermediary sellers, Tesla has a direct distribution model, which allows them to cut out the margin for the intermediary (see figure below). The bargaining power of suppliers is low anyway, which plays into Tesla's hands as well.

Figure 2: Developing and Using an Innovation Specification in the exploration space

Editor's note: this figure was removed due to copyright issues.

Source: Cuofano, G (n.d.)

Because of the advantage in the three mentioned forces of the Porter's Five Forces, Tesla managed to enter the car industry, bring innovation to it and managed to accelerate the overall development of electric vehicles.

Analysing Tesla's product using Christensen Module I

The fundamental difference between Tesla and other car manufacturers is the understanding of what a car is.This becomes more clear when looking at the attribute “technical features” of cars. While most more established manufacturers see the car as an object which transports the customer from A to B, older manufacturers see the technical features or possibilities of the car as nice infotainment systems or improved assistant systems for the driver. Tesla however sees the whole product not as an object with technical features on board but they see the whole car as a technical platform or a “computer on wheels”. When looking at the figure below, the established manufacturers move along the red lines. Mercedes would serve customers on the high-end markets, while Volkswagen would serve customers at a lower trajectory of customer needs. Both however move along the red lines, meaning they focus on their main customers and ignore important new technologies in emerging markets. Thus they only perform sustaining innovation by improving their products to a small degree from year to year, instead ofusing disruptive technologies.

Figure 3: Developing and Using an Innovation Specification in the exploration space

illustration not visible in this excerpt

Source: Christensen, 2003

Tesla on the other hand sees technical features not only in the infotainment system or assistant systems. Tesla's focus in terms of technical features lies on artificial intelligence (AI), big data & analytics, internet of things (IOT) or autonomous driving. All of these technologies are in a very early stage of development, but improve at a fast pace. This is described by the blue trajectory in the figure above.Tesla's approach to use these technologies and collect data from the cars to improve the autopilot of the cars and the connectivity of the cars among each other can be described as the concept of a “computer on wheels” and thus represents the disruptive characteristic and black arrow in the chart (Tesla Motors, 2021).

Also Christensen describes that products which have attributes with disruptive character, perform worse at other attributes. So does Tesla, as Tesla's focus is on the new technologies and attributes like the quality of the material or comfort/luxury for the driver underperform compared to other market participants (Christensen, 2003).

Crossing the chasm:

As described before, Tesla started in a small niche market. Still today there is a huge demand in the mass market for their cars. How they achieved this demand in the mass market can be perfectly explained by the concept of crossing the chasm, which is illustrated in the following picture.

Figure 4: The Chasm by Moore

illustration not visible in this excerpt

Source: Moore and McKenna, 1999

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• Grade: 1,7
• Author: Philipp Rothe (Author)
• Publication Year: 2021
• Pages: 8
• Catalog Number: V1357325
• ISBN (PDF): 9783346876867
• Language: English
• Tags: tesla