Lessons from Tesla’s Approach to Innovation (2022)

Tesla has shifted the auto industry toward electric vehicles, achieved consistently growing revenues, and at the start of 2020 was the highest performing automaker, in terms of total return, sales growth and long-term shareholder value. As a technology and innovation scholar, the author has studied how innovators commercialize new technologies and found that Tesla’s strategy offers enduring lessons for any innovator, especially in terms of how to win support for an idea and how to bring new technologies to market. To understand Tesla’s strategy, one must separate its two primary pillars: headline-grabbing moves like launching the Cybertruck or the Roadster 2.0 and the big bets it is making on its core vehicles, the models S, X, 3, and Y.

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(Video) Lessons from Tesla’s Approach to Innovation (HBR Executive Summary)

Few companies have attracted as much scorn and adoration as Tesla. When Tesla launches a product like the Cybertruck, the reception tends to be divisive: critics see it as further evidence that founder Elon Musk is out of touch and doomed to fail, while supporters buy in— within a month Tesla received 200,000 preorders for the new vehicle. Compare that to the Ford-150, the world’s best-selling car in 2018, which sold just over 1million vehicles that year.

Disagreements aside, there is no question that the company has shifted the auto industry toward electric vehicles and achieved consistently growing revenues (passing $20 billion in 2019). At the start of 2020, Tesla was the highest performing automaker in terms of total return, sales growth and long-term shareholder value. Surely, there is a method to what seems like madness to so many.

As technology and innovation scholars, we’ve studied how innovators commercialize new technologies and we’ve interviewed Elon Musk, his co-founder J.B. Straubel, and other important members of the team. What we’ve found is that beneath the turbulent surface, Tesla’s innovation strategy— which focuses on transforming the auto industry as a whole— offers enduring lessons for any innovator, especially in terms of how to win support for an idea and how to bring new technologies to market.

To understand Tesla’s strategy, one must first separate its two primary pillars: headline-grabbing moves like launching the Cybertruck or the Roadster 2.0 (which the company claims will accelerate faster than any production car ever made) and the big bets it is making on its core vehicles, the models S, X, 3, and Y. These efforts aim to achieve different things — winning the resources to commercialize vs. actually commercializing the idea — but they come together to achieve a central goal: bring a new innovation to market.

Let’s start with the first part of the strategy. In our view, efforts like the Cybertruck aren’t really about making money; they are about getting attention and proving that Tesla is one of the world’s most innovative companies, specifically for the purpose of building Tesla’s ability to win support from stakeholders— what we call innovation capital.

In our work reviewing academic research, interviewing over 100 innovators, and conducting both quantitative and qualitative analysis of innovative companies, we’ve explored how innovators build up their innovation capital. Innovation capital consists of four factors:

  1. Who you are (innovation-specific human capital) — your capacity for forward thinking, creative problem-solving, and persuasion
  2. Who you know (innovation-specific social capital) — your social connections with people who have valuable resources for innovation
  3. What you’ve done (innovation-specific reputation capital) — your track record and reputation for innovation
  4. The things you do to generate attention and credibility for yourself and your ideas (what we call impression amplifiers). Politicians with political capital can get others to join them in pursuing their objectives; in a similar fashion, business leaders with innovation capital can attract the resources needed for innovation to flourish.

Based on our case study of Tesla, we’ve observed that Elon Musk is a master of building and using innovation capital to win support for his ideas. Not only does he leverage his past success at Paypal and Space X to win support for future projects, he also uses what we call “impression amplifiers” to get stakeholders on board. For example, when Musk stands on stage and reveals the Cybertruck, he doesn’t just talk about the new idea, he materializes it, putting it into physical form to convince skeptics (he also did this when he parked a Space X rocket in front of the National Air and Space Museum). He also broadcasts the idea through big media launches like the demo for the Cybertruck, which gets third parties talking about the company and generating buzz.

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How Tesla Sets Itself Apart

(Video) Lessons from Tesla’s Approach to Innovation — Commentary

Similarly, when Musk tweets to his 29 million followers that a “Roadster will include ~10 small rocket thrusters,” he probably isn’t serious when he says that “Maybe they will even allow a Tesla to fly.” But he is creating a positive impression for Tesla by leveraging another impression amplifier: comparing, or drawing a connection between his innovation and some other successful one. This comparison creates an impression between the technical superiority of a Tesla and … rocket science, literally. These techniques aim to build Musk and Tesla’s innovation capital so they can continue to win support from investors, customers, and employees to keep Tesla operating.

What about the other part of Tesla’s strategy: the existing vehicles— the model S, 3, X and Y— which form the core products and require the most investment? These big bets aim to transform an industry, and they require paying attention not just to the product, but to the entire product ecosystem.

What makes this part of the strategy truly unique is not just that Tesla produces electric vehicles, but that it introduced a new hardware and software architecture (the way you put the car together). For example, a Tesla has more software than the average vehicle and it is integrated around a single central software architecture. Although most gas-powered cars have software too, they typically have less software and operate on a different architecture making it more challenging to imitate Tesla’s ability to update software and optimize vehicle performance.

Tesla’s hardware architecture — a flat pack of batteries at the base, two electric engines (front and rear), no transmission, etc. —also gives it an advantage over competing electric vehicles built on traditional vehicle architectures, such as a lower center of gravity, greater energy density, and more efficient battery management. This means that pound-for-pound, Tesla tends to beat out competitors who try to leverage parts of the old internal combustion vehicle architecture, for example, by putting batteries in the trunk rather than in a flat pack at the bottom.

On the surface, building a new architecture may seem an easy strategy to imitate, but prior research shows it can be very difficult: it can take time and effort for incumbents since it often requires abandoning old ways of doing things and developing new capabilities. In the words of a senior auto executive I interviewed, “It’s just hard for us because historically we have been great mechanical engineers, not great software engineers. But we need to become software engineers.”

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Tesla’s ecosystem strategy also considers the level of individual components for its products. Why? We know from past research that the profits in an industry tend to flow to the bottlenecks — the components that limit the performance of the system. In the case of electric cars, even though batteries are made of commodity materials, because their power capacity limits the performance of most applications, especially cars, they are a bottleneck to the performance of the whole system. By investing in batteries —producing them at scale and in better ways — Tesla is betting that they will control the bottleneck, and thus the profit center, for the future of the industry.

Tesla’s strategy also accounts for the system level: the entire set of complements needed for a consumer to use its product. This is why Tesla has built out a charging network for its cars across the country. Acting early enabled Tesla to be the only electric car that could drive long distances because there was an infrastructure in place for charging. In the future, this advantage may erode if other auto makers build charging networks and piggyback off their existing dealership networks to potentially offer more convenient service. But for now, Tesla has the advantage and looks to be extending it by creating inter-operability with new networks like EVgo.

Regardless of your views of Tesla’s future success, the company has developed a fascinating multi-pronged strategy for fundamentally changing an industry. The core strategy has unique elements at each level of the ecosystem: overturning the core product architecture, positioning themselves in key bottleneck components, and resolving system-level limitations that slow the adoption of the technology. At the same time, they have applied an effective approach to build their innovation capital so they can win the resources and support to execute on their vision. Investors are seeing the potential of Tesla’s future as the company’s market value now exceeds the combined market value of GM, Ford and FiatChrysler. Innovators should take note.

Editor’s note: This article has been updated to clarify the definition of innovation capital. (2/18/22)

FAQs

What is Tesla's innovation strategy? ›

For Tesla, strategic innovations doesn't mean developing new and unheard of technologies, but re-imagining how existing technologies can be deployed in new and meaningful ways. Tesla is engineering the future by looking to the past.

What makes the culture of Tesla so innovative? ›

Tesla's organizational culture empowers its workforce to search for ideal solutions that make the business stand out in the automotive industry and the energy generation and storage industry. The company encourages employees to innovate to support continuous improvement of the business.

What are the key elements of Tesla strategy? ›

Tesla business strategy aims to accomplish this mission via the following three key principles:
  • Focus on electric cars. ...
  • Ownership of distribution. ...
  • Low cost of ownership. ...
  • Unconventional way of doing business.
22 Apr 2021

Why is Tesla's strategy successful? ›

Tesla's success in reducing costs was to minimize risk by keeping very little inventory. Such inventory cost reduction was achieved by batch production after prepaid orders were obtained. Its order-production strategy offers a few advantages.

What can we learn from Tesla? ›

Most Important Life Lessons That We Can Learn From Nikola Tesla.
  • Genius Requires Solitude. Nikola Tesla was a loner. ...
  • It's Perfectly OK To Be Ahead of Others. Don't be afraid to do something new, something different. ...
  • Money Isn't Everything. ...
  • Don't Care About What Others Are Doing: ...
  • Be patient And Push-On.

What kind of innovator is Tesla? ›

Business Model. Tesla produces unquestionably innovative products, including a range of electric cars that defy consumer expectations, like the Model S, “the safest and quickest car on the road”. Tesla is also committed to world-changing technology, like its line of fast-charging sustainable batteries.

What are Tesla's core values? ›

Tesla's core values comprise “doing the best, taking risks, respect, constant learning, and environmental consciousness.” Tesla applies these values as the principles that govern the overall attitudes and practices of all stakeholders and its workforce.

What is the importance of innovation? ›

Innovation plays a key role in introducing novelty to existing product lines or processes, leading to increased market share, revenue, and customer satisfaction. Sometimes innovation is used to upgrade the operating systems of the business or to introduce modern technologies for automation.

Is Tesla a disruptive innovation? ›

Tesla clearly doesn't qualify under the traditional definition of a disruptive innovation. In the model described by Clayton Christensen, a new entrant offers substitute products using technology that is cheaper but initially inferior to products offered by mature incumbents.

What makes Tesla different from its competitors? ›

Tesla's battery-powered vehicles are significantly simpler than their internal combustion competitors. By some estimates they have significantly fewer parts per vehicle — around 20 — versus the 2,000 in internal combustion engines. This simplicity dramatically reduces the consumers total cost of ownership.

What is Tesla's main objective? ›

We're building a world powered by solar energy, running on batteries and transported by electric vehicles. Explore the most recent impact of our products, people and supply chain. We design sustainable systems that are massively scalable—resulting in the greatest environmental benefit possible.

What is Tesla's operations strategy? ›

Tesla uses operations management (OM) best practices to maximize productivity while minimizing costs, based on the 10 strategic decision areas. This optimal operational condition contributes to Tesla's ability to sell its products at reasonable prices, given current market forces and cost of materials.

What are the 4 components on which Tesla focused? ›

Making Model S Safe through Design Choices

In terms of the powertrain, Tesla focused on the core intellectual property of four components – the advanced battery pack, the power electronics module, the high efficiency motor and the electronic control software (Tesla Motors, 2011).

Which of the five generic strategies is Tesla pursuing with its marketing strategy explain? ›

Tesla's Generic Strategy (Porter's Model)

Tesla's generic competitive strategy is broad differentiation. This generic strategy builds competitive advantage based on the development of products that differentiate the company from other firms in the industry.

How does Tesla satisfy customer needs? ›

Tesla's strategy is to own the entire customer relationship, from start to finish. The company sells the cars directly to its customers, without any third parties being involved, meaning they have complete control over the messaging and relationship to offer a consistent experience.

What value does Tesla deliver to customers? ›

Tesla's value proposition is divided into three aspects: innovation in vehicles, innovation in batteries, and innovation in infrastructure.

What is Nikola Tesla's most famous quote? ›

Be alone, that is the secret of invention; be alone, that is when ideas are born.

Why is Tesla a sustaining innovation? ›

Classic Christensen theory says Tesla is not disruptive; it's a 'sustaining innovation' because an incumbent could do what Tesla is doing but better, cheaper and quicker and easily overtake the start-up.

What leadership style does Tesla use? ›

Elon Musk's leadership style, transformational leadership, focuses on creating real positive change in the world. This type of leader is action-oriented. Instead of sitting around and philosophizing about how to change the world, they outline and execute a strategy that makes their vision a reality.

What are the types of innovation? ›

Essentially, there are three types of innovation: radical, incremental, and disruptive. They may vary depending on the niche, market, brand essence, services, and products offered.

Is Tesla an incremental innovation? ›

That Tesla successfully married these things together isn't considered true innovation. It's considered incremental innovation. Taking already existing pieces and putting them together to make a successful 'new' product is common in many industries.

Is Tesla a disruptive innovation? ›

Tesla clearly doesn't qualify under the traditional definition of a disruptive innovation. In the model described by Clayton Christensen, a new entrant offers substitute products using technology that is cheaper but initially inferior to products offered by mature incumbents.

What strategy did Tesla adopt to fit in the changed market conditions? ›

Tesla uses direct sales, unlike other automakers who sell through franchised dealerships. A global network of company-owned showrooms and galleries has been established, most of which are located in well-known urban areas.

What did Elon Musk innovate? ›

Essentially, Tesla is a car company that pioneered the production of fully-electric vehicles. This chapter of Elon Musk's greatest inventions began In 2004 when he invested a significant amount in Tesla, which introduced its first electric car, the Roadster, in 2006.

What are Tesla new innovations? ›

Solar Roofs

One of Tesla's most exciting recent innovations has been its Solar Roof, a roofing system that can harness solar energy to power homes. Tesla's Solar Roof tiles are designed to look like regular roof tiles, but they are actually made of solar panels.

Why is Tesla a sustaining innovation? ›

Classic Christensen theory says Tesla is not disruptive; it's a 'sustaining innovation' because an incumbent could do what Tesla is doing but better, cheaper and quicker and easily overtake the start-up.

How is Tesla different from its competitors? ›

Tesla's battery-powered vehicles are significantly simpler than their internal combustion competitors. By some estimates they have significantly fewer parts per vehicle — around 20 — versus the 2,000 in internal combustion engines.

What makes Tesla a disruptor? ›

Tesla has the potential to disrupt the automotive and power generation industries with its technology for electric and autonomous vehicles, batteries, and solar generation systems. Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years.

What makes Tesla a disruptive brand? ›

Tesla took a unique approach to establish itself in the market. Instead of trying to build a relatively affordable car that it could mass-produce and market, it took the opposite approach, focusing instead on creating a compelling car that would create a demand for electric vehicles.

What are the types of innovation? ›

Essentially, there are three types of innovation: radical, incremental, and disruptive. They may vary depending on the niche, market, brand essence, services, and products offered.

What is the main growth strategy adopted by Tesla? ›

Market Penetration: Currently Tesla intensive growth strategy is based in their aggressive market penetration. They achieve business development that is demonstrated by an increase of sales. Due to the increase of sales Tesla is growing a emergencing market.

What competitive strategy does Tesla use? ›

Tesla's generic competitive strategy is broad differentiation. This generic strategy builds competitive advantage based on the development of products that differentiate the company from other firms in the industry.

What is Tesla's approach to the market? ›

Tesla's marketing strategy, then, goes against the trend of developing TV advertisements and pushing its products onto consumers. Instead, Tesla focuses on word of mouth advertising, and referrals. Essentially, Tesla markets to its customers by not directly marketing to them.

Why is Elon Musk an innovative leader? ›

He builds rockets, disrupts the automotive industry, and has his sights set on colonizing Mars. To say Musk is innovative would be an understatement. He's known for being bold with an eye to the future. And, he expects each and every one of his team members to innovate alongside him.

What is Elon Musk's IQ? ›

IQ 155. Elon Musk IQ, which is reported to be 155 IQ, is one of the most intriguing aspects because there is no official evidence proving the precise amount.

Videos

1. 6 Life Changing Lessons From Tesla
(Catson Media)
2. “Innovation Capital” – Like Tesla and Elon Musk | ONE IDEA
(Founders & Innovators Morning Show)
3. What Can You Learn From Tesla Marketing?
(Prof. Seema Gupta)
4. 5 Steps of Innovation | Part 1 | Hindi | By Dr Vivek Bindra | Leadership Trainer
(Dr. Vivek Bindra: Motivational Speaker)
5. 15 Business Lessons from Elon Musk
(Alux.com)
6. How Toyota Changed The Way We Make Things
(Bloomberg Quicktake: Originals)

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