Tesla Motors Inc: Is It Really A Disruptive Company?

The media regularly describes Tesla Motors, the electric car manufacturer headed by billionaire entrepreneur Elon Musk, as a disruptive innovation. Is Tesla really a disruptive company in the auto industry?

Tesla Motors Inc: Is It Really A Disruptive Company?

An article from the Harvard Business Review (HBR) indicated that Tesla is not as disruptive as people think.

Last year, Clayton Christensen, a professor at Harvard Business School (HBS) accepted a friendly challenge from a Tesla investor to examine his perception that Musk is creating a new model of disruption. Professor Christensen is considered as one of the most influential business thinkers and well-known for his theory of disruptive innovation.

Professor Christensen assigned his research associate Tom Bartman and colleagues at HBS Forum for Growth and Innovation to perform a deep examination of Tesla’s business to determine if it is pioneering a top-down disruption, and to assess any other company that may disrupt the global automobile market.

Tesla aims to produce affordable electric cars to replace gasoline-powered vehicles

Tesla produced 59,500 electric cars during its 10-year history, and it is offering its vehicles to high-end consumers. Most of its vehicles costs $100,000 plus. The electric car manufacturer is expected to introduce a new model with a price tag of $70,000 later this year and $35,000 model for the mass market in 2017.

Musk repeatedly expressed Tesla’s goal of producing affordable mass-market electric cars that will replace gasoline-powered vehicles.

Last year, Professor Christensen told Bloomberg that disruptive became a trendy buzzword. He said, “The word is [now] used to justify whatever anybody—an entrepreneur or a college student wants to do.”

Disruptive innovation

Professor Christensen defines disruptive innovation as a “phenomenon by which an innovation transforms existing market or sector by introducing simplicity, convenience, accessibility, and affordability where complication and high costs are status quo.”

He explained that disruptive innovation is” initially formed in a niche market that may appear unattractive or inconsequential to industry incumbents, but eventually the new product completely redefines the industry.”

Bartman’s team asked five questions to determine whether Tesla is a disruptive innovation. The questions include:

  • Does Tesla’s product targets over-served customers of create a new market?
  • Does the company create asymmetric motivation?
  • Can it improve performance fast enough to keep pace with customer’s expectations while retaining its low-cost structure?
  • Does it create value networks including sales channels?
  • Does it disrupt all incumbents or can existing players exploit the opportunity

Bartman concluded that Tesla is not a disrupter but a classic sustaining innovation after evaluating the electric car manufacturer based on the above questions. A classic sustaining innovation means a company’s product offers incrementally better performance at a higher price.

If Tesla is following a disruptive innovation strategy, theory predicts that it will continue to see no strong competitive response. However, because it’s a sustaining innovation, theory predicts that competitors will emerge. Our analysis concludes that a competitive response won’t happen until Tesla expands outside its current niche of people who prefer electric vehicles to gas-powered cars—but if it expands by creating more variety (such as SUVs) and more affordable vehicles, competition will be fierce,” said Bartman.

Take note all electric vehicles accounted only 119,710 units (seven-tenths of 1%) out of the16.5 million vehicles sold in the United States last year. The established players in the auto industry are not paying much attention to electric vehicles because only a few people are interested to own one.

The automakers are not completely ignoring the electric vehicle market. General Motors Company and Nissan are offering electric vehicles—the Chevy Volt and Nissan Leaf, respectively. Both electric cars outsold Tesla’s product in 2014.

Tesla chose a difficult path towards achieving its goal

Bartman believes that GM, Toyota and other players in the industry could easily shift to electric vehicles using their existing manufacturing capabilities, supplier networks, and dealerships to prevent the threat. He commented that Tesla has an “amazing car,” but lowering its cost structure could be challenging.

He added that Tesla chose a difficult strategic path to achieving its goal of dominating or thwarting the existing global automakers.