Tesla – Re-Imagining the Driving and Ownership Experience, and Building a New Industry to Power it

July 31, 2014

“I don’t think people quite appreciate the gravity of what is going on (regarding climate change) or just how much inertia the climate has. We really need to do something.”

– Elon Musk, Founder & CEO of Tesla Motors, interviewed by San Francisco Chronicle, 06/13/14

“By any measure, the Tesla Model S is a truly remarkable automobile, perhaps the most accomplished all-new luxury car since the original Lexus LS 400. That’s why it’s our 2013 Car of the Year.”

– Angus McKenzie, Motor Trend, January 2013

“My Model S is the single best product I have ever owned – and I’m a productphile… It’s so engaging, you forget it’s a car. It’s quiet, smooth, and powerful. I’ve never before experienced all three in a high-end sports sedan.”

– John Hamm, owner since November 2013

“The Model S is like a computer on wheels. Besides the unbelievable driving and service experience Tesla co-owns the vehicle with you, they make you feel like they’re your partner. They even offer a (high) buyback guarantee after five years because they believe the car will hold its value.”

– Andrew Salzman, owner since April 2014

I make no bones about it: we are only hallway through the 2010s, but if Elon Musk isn’t soon acknowledged as the entrepreneur of this decade – and maybe the next one – I’ll be your Dutch uncle. Not only is Musk the founder of Tesla Motors, but he’s also in the process of revolutionizing the space exploration industry with his company SpaceX. Leaving SpaceX aside for the moment, the combination of imagination and entrepreneurial relentlessness that Musk is applying to revolutionize the auto industry is something to behold. In this post I want to point out some elements of the impressive Tesla Model S, and identify what lessons the rest of us can learn and apply to our own innovation efforts.

First, let’s agree that all prior attempts by established automakers to produce successful hybrids or EVs have fallen short of most motorists’ expectations. Only the most frugal and/or eco-conscious motorists can possibly be attracted to the unprepossessing Prius, Leaf, or Bolt. Like many entrenched companies, the last thing Toyota, Nissan, or GM are willing to do is cannibalize their traditional gas-powered auto business, so they are condemned to wait for other companies to do it for them. So along came Elon Musk to actually build an attractive Green car – and a new industry infrastructure around it.

I would go much further than the accolades given to Tesla for its Model S by Motor Trend magazine (quoted above) and other publications including Consumer Reports. Comparing the Model S to the Lexus LS400 fails to give Tesla its due. The Lexus was indeed a landmark innovation mainly because it set a new bar for customer service, but it was still just one more gas-powered car. To my mind, Tesla and its Model S provide the most accomplished high-end driving and owning experience and new industry since the post-war years (WWII, that is) when automobiles entered the era of mass-production on a global basis, along with dealer-provided sales and service, and a proliferation of gas stations and after-market parts vendors sprouted up to support them. It’s no exaggeration to say that Musk and his team haven’t just re-imagined the car itself, but have designed an entire new industry infrastructure for assembly, distribution, recharging, service and maintenance.

How have they achieved this breakthrough, that many of us had given up on seeing in our lifetime? First, as others have recognized, Tesla is primarily a technology company rather than an auto manufacturer. As a result, the Model S has a single, elegant and unchanging exterior. There are no “model” years, no changes to the body’s external design from this year to next. All enhancements and updates to systems, capabilities, and performance are downloaded via wireless software while the car is parked in your garage overnight. As Simon Sproule, Tesla’s VP of Communications & Marketing, said recently, “The product (Model S) acts more like a mobile device than a conventional car.” Just to wax lyrical for a moment, this amazing sports sedan has acceleration that leaves you breathless, and because of its regenerative braking system, you can slow and stop from a high speed much quicker and more safely than you would expect. It also has longer battery life than any other all-electric car, reaching a pretty decent range of 260 miles when using the most powerful battery option. Tesla continually invests in enhancements to the battery technology because they understand how important a long range on one “tank” matters to drivers. Beyond the driving experience, two recent owners whom I interviewed describe a unique ownership experience, which I’ll detail more below.

The Model S blows everything else off the road in more ways than one. It is better in so many ways than any luxury sedan or sports car I have driven or ridden in. This is even before taking key ancillary factors into consideration, such as no fuel bills, little requirement for maintenance, and the overall ownership experience. Within the next five years I predict that high-end ICE (internal combustion engine) cars are going experience a decline in sales which will only be slower due to the time it will take Tesla to ramp up production of the Model S.

Realizing that no one else was going to develop the infrastructure needed to support the sale, recharging, and servicing for Tesla’s EVs, quite apart from developing and assembling the car, Musk is building a new verticalized industry – recharging stations, battery factories, and direct sales showrooms. His long-term cause is to persuade large numbers of consumers to substitute internal combustion engine cars for electric cars in order to minimize the use of non-renewable fossil fuels and slow down the approach of unwelcome changes in the world’s climate.

In short, Elon Musk has displayed a unique world-changing vision untrammeled by whatever today’s limitations and impossibilities are; a crystal clear, highly disciplined strategy for developing the product and the experience of using and owning it; and a relentless focus on learning, innovating, learning more, innovating again, in order to execute on every possible detail. Perhaps more than any other factor, though, it’s clear to me that Musk and his team designed the car from the stand-point of being a customer asking the question: How would I want the environmentally friendly automobile of my dreams to look, feel, drive, and own? Beginning with this end in mind, Musk has re-imagined the automobile driving and ownership experience – the app if you like – and designed a new platform and infrastructure to manufacture and support it.

Based on this vision he and his team have converged a bunch of technologies from robot-enabled manufacturing and assembly, to battery design and manufacture, to recharging infrastructure to mobile computing – all in service to a knock-your-socks-off user experience. They’ve basically redesigned the automobile as a software-enabled mobile device. Instead of being a portable computer like your iPhone or Galaxy, it ports – i.e., transports – cargo in the form of people and their things.

What does this teach us? If joining an existing category doesn’t make sense because for one reason or another it won’t get you very far, re-invent it. If a genuinely revolutionary concept is not feasible, at the very least you should decide how to re-frame the existing category. And do so from the customer perspective rather than the conventional build-it-and-they-will-come perspective that most entrepreneurs still adopt. Indeed, my guess is that the failure of the Tesla Roadster 5-6 years ago may have been due to Musk not yet fully understanding what customers would be receptive to, maybe wanting instead to produce an impressive performance product before some of the key technologies – such as batteries with sufficient reliability and range, recharging stations, and even mobile computing with touch-screen technology – were ready for prime-time.

Tesla could have retrenched and developed another fairly typical EV or hybrid, but these sub-categories, as defined by incumbents like Nissan and GM, seem to be in a permanent chasm. At best they have found only relatively small and unprofitable niche markets, their appeal being limited by their pedestrian design and driving experience. After going back to the drawing board, Musk decided to enter the high-end sports sedan category for Tesla’s next car. The company is now planning to enter the Crossover category in 2015, in which Tesla will offer the Model X, and later it will debut a mid-range sedan, the Gen 3, designed to compete in the $35,000 class of vehicle.

What do we learn from this? Musk and his team applied everything they had learned from the Roadster fiasco to identify another category where the stakes were higher but the rewards in terms market size and growth potential. This was a double-down bet that also carried with the potential for serious embarrassment and huge losses if it didn’t work out. Most entrepreneurs, after getting a bloodied nose, go on the defensive and opt for a “safe” choice. Not Musk. Another vital lesson is to invest in one sub-category to begin with, and stick to just one offer in that category until you succeed with it.

Competitive separation

Besides the imaginativeness and uniqueness of the company’s vision to create the best possible car for 21st century drivers, Tesla’s other crown jewels include its fast-developing, verticalized value chain, designed to deliver the highest quality driving and ownership experience possible. Hence the company’s commitment to continue perfecting the battery technology for increased reliability and driving range, to build as many battery factories as necessary to enable production of more and more cars; to develop a nationwide, and then global, infrastructure of recharging stations; and, much like Apple did with its retail stores, to completely redefine the buying and the service experience, going even further than Toyota did when it introduced the Lexus in the late eighties. In the latter activity, Tesla has encountered predictable resistance from auto dealer networks in some states because, as with the railroad owners in the early 20th century when they were faced with the advent of civil aviation, they believe that they are in the conventional gas-powered auto business rather than in the broader automotive transportation industry, and they want to do everything possible to prevent its success. How history repeats itself.

Tesla wants nothing to do with the sado-masochistic experience that customers undergo when buying a car from most auto dealers today. Quite simply, the company doesn’t believe that existing dealers can migrate from their “what do I gotta do to get you into this car?” approach to providing a more amenable and rewarding buying experience for customers. Tesla has a no-haggle policy because, unlike your average car dealer, it knows the value of what it’s selling and doesn’t believe that it should play mind-games with its customers.

Along with this distinct business model is the clarity of purpose and willingness to not do a whole host of things that would distract the company from its main goal, which is to put electric vehicles on the map as a preferred form of auto transport and a major contributor to energy conservation. As one of my interviewees, John Hamm, put it: “The Model S is a fabulous automobile and nobody hates you for it, because they think you’re a great environmentalist. You genuinely feel good owning this vehicle.”

Musk recently announced the release of hundreds of patents to speed up the formation of the new electric-powered auto industry. “Tesla Motors was created to accelerate the advent of sustainable transport. If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property land mines behind us to inhibit others, we are acting in a manner contrary to that goal…. What we are doing is a modest thing. You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.” This “strategic act of generosity” demonstrates a form of enlightened self-interest that serves as an example to every entrepreneur, and also sets Musk apart from other entrepreneurs, even eminent ones like Steve Jobs. Is it better to have 30% of a big market or 100% of a small one? Since Musk sees that Tesla’s mission is to benefit as many countries and populations as possible, he understands the need to encourage others to join Tesla to form a vibrant, growing EV movement and market.

What do we learn from these examples? In order to differentiate your company from both established and new competitors, it’s imperative to determine the two or three areas in which you will be clearly superior to all known alternatives, sufficient to not only establish a slight advantage but leave them in your wake. Musk has done this by delivering a peerless driving and ownership experience, having the courage to build a verticalized design, production, recharging and distribution infrastructure that ensures quality at every stage, being very clear about what not to do – not to launch a number of models at once, not to enter every market and thus overstretch the infrastructure – and being willing to open up much of Tesla’s technology to allow other auto makers to leverage Tesla’s innovations free of any license fees and thus form a vibrant global market for EVs. These differentiating factors are extremely difficult if not impossible for other EV makers to neutralize. This is the job of all CEOs and entrepreneurs, to be very extremely clear about what it will take to achieve competitive separation, and then actually remain committed. Underpinning all these factors is a unique and compelling vision.

Target market focus

Tesla’s initial target market has been environmentally-aware business executives and entrepreneurs who love cool tech products and are accustomed to a luxury driving experience, but are pressed for time and thus value high-end service. These people are typically in such fields as high-tech, investment banking, venture capital, brokerage, hedge fund investing, professions such as medicine, law, and consulting, entertainment, and others. Tesla started by marketing its cars on the West and East Coasts and today is permitted to sell its cars in roughly half of the states in the U.S., though it has supercharging stations for its customers in most states to provide unlimited coverage. The company is steadily and aggressively expending the markets where it sells the Model S, though taking care not to outstrip the growth of its manufacturing and recharging infrastructure and thus disappoint customers.

Among Tesla’s target customers, key reasons for choosing a Tesla Model S over other high-end luxury cars include (a) current conventional gas-powered car is aging and requiring more frequent repairs, (b) eagerness to “go green” provided that perceived risks are mitigated, (c) superior buying, driving and ownership experience for a lower total cost of ownership when compared with conventional alternatives.

According to reports in Wikipedia, a total of 2,650 cars were delivered in North America between May and December of 2012, the first year when cars were available. During the first six months of 2013, 10,050 were delivered. The Model S was released in Europe in early August 2013, and the first deliveries took place in Norway, Switzerland and the Netherlands. As of early November 2013, the Model S was sold in 20 countries. Sales totaled 6,892 units during the fourth quarter of 2013, for a year’s total of about 22,477 units sold in North America and Europe, surpassing Tesla’s annual sales target of 21,500 units. Global cumulative sales passed the 25,000 unit milestone in December 2013.

Against target sales of 35,000 units during all of 2014, a total of 6,457 units were sold in North America and Europe during the first quarter of 2014. As of March 2014, the United States is the leading market with over 23,800 units sold, followed by Norway with 4,042 units, and the Netherlands with 1,399 units. Retail deliveries in China began in April 2014. The right-hand-drive version was released in the UK in June 2014, and it will be followed by Hong Kong and Japan. Deliveries in Australia were slated for the second quarter of 2014. Perhaps not surprisingly, sales to date have not been significant in Germany or other continental European countries, but this is likely to change during 2015-2016. The company has recently stated that it is on track to meet its aggressive sales target by the end of the year.

What do we learn from this? By focusing on one set of target customers as their sweetspot, Tesla has been able to tailor the driving and owning experience to the requirements and preferences of this more or less homogeneous group in terms of its driving preferences, in a small selection of major capitals and countries where the market, highway and power infrastructure allows them to sell and service the Model S without major glitches.

Offer completeness

In order to be able to achieve a level of excellence with a still-limited production of cars, Tesla has chosen to focus on producing one model and getting it widely adopted, providing opportunities for continuous refinements, before introducing a new chassis for a different sub-category. With no need to introduce a new design every year, the company is able to focus on refinements that matter to motorists based on the feedback that it receives from customers.

Apart from the excellent performance attributes already mentioned, other aspects are no less impressive. The battery is a mattress-sized combination of fuel-cells nestled low between the rear wells, providing road-holding stability. Fuel bills are virtually zero, because you just recharge. In the U.S. at least, the local power utility reduces your overall domestic electricity rate by 10% just because you have a Tesla in the garage. Furthermore, the lack of a normal gasoline engine leaves you with two trunks, totaling as much baggage space as a Chevy Equinox.

The enormous touch-screen dashboard system can initially be a distraction but soon becomes addictive. It is essentially like having two iPads delivering touch-screen applications, including air-conditioning controls, navigation, sound system controls, steering, suspension, and brake regeneration settings, internet browsing, and contact lists and buttons for making phone calls or sending text messages. Salzman told me “The Model S provides an Apple-esque experience, with a thousand little differentiating features such as not needing a key – or a button to press – to start the car, having a tiny delay between engaging Drive and the car moving (requested by drivers accustomed to how automatic gearshifts work), the sound volume automatically lowering when you get out of the car, the constant wireless software updates applied unobtrusively overnight, and so on.”

In the absence of a drive train, mechanical engine or gears, maintenance is very low. Services are basically to make sure the electronics and battery are working, and the tires are inflated and in good condition. Salzman went on to cite examples of the service experience: “When you dial the 1-877 number to set up your routine service, you get through directly to a person; when you arrive at the service department at the appointed time, the agent greets you by name and knows why you’re there without you saying anything; apart from receiving a Model S loaner, by the time I get home from leaving the car I’ve received an email with a pdf file detailing the ten items that will be checked, some of which are tagged “good will” (i.e., no charge).”

In the absence of alternative funding to manufacture the lithium-ion batteries to Tesla’s rigorous specs, or to invest in super-charging stations, Tesla has decided to avoid depending on third parties that may not be able or willing to fulfill the commitments that it depends on in order to survive and grow. Over time, the company will surely sign partnerships and alliances with governments and private corporations to build out the world-wide infrastructure battery and recharging infrastructure – a task that unfortunately defeated Better Place, a highly-funded startup that toiled for years during the period after 2005 to develop a recharging infrastructure for electric-powered vehicles in specific countries. Musk has talked recently with BMW about sharing the cost of building recharging stations and creating a common, standard infrastructure. At this point BMW is responding with a new performance hybrid of its own to compete against the Model S – this is the i8, just released in Germany and due in the U.S. next year. Sounds like good progress, though the i8 is still not a pure electric-powered vehicle.

What do we learn from this? Tesla has meticulously developed a whole product designed – as should always be the case – from the customer’s expectations in, rather than from its design-team out. By focusing on one model only to begin with, it has been able to deliver an end-to-end selecting-buying-receiving-driving-servicing-owning experience that is superior to that provided by any other auto manufacturer today. So what I think we learn is that it’s not just about brilliance in conception, but relentlessness in attention to detail and commitment to operate the business in service to its customers rather than having customers subjected to the company’s concept of the product experience.

Execution strategy

I see one over-riding execution discipline that we can all learn from. Throughout the period of putting Tesla on the map for the right reasons, Musk has retained a crystal-clear vision of the type of energy-conserving automobile that he believes customers have been waiting for, connected to a disciplined strategy of how to get there, connected in turn to an extraordinary attention to detail in the execution of a brand-new infrastructure and value chain. In less than five years the Model S (released as recently as mid-2102) and the infrastructure that assures its survival has gone from being a custom project to a repeatable playbook that Tesla will be able to replicate in new classes of automobile (SUV, crossover, mid-range sedan) and in new geographies around the world where energy, security, road and traffic conditions differ from the U.S., Canada and Nordic or western European countries. This is a most extraordinary feat. It would only be possible with a leader who understands intuitively the thick line that connects vision-to-strategy-to-execution. Thus entrepreneurial leadership at its highest-performing level is in fact an end-to-end discipline, as it was to a large degree with Jobs during his second, extraordinarily successful tenure at Apple. Although Musk seems to me to be a remarkable innovator in this end-to-end sense, my hope is that others among us can understand this crucial lesson and leverage it in our own businesses.

One measure of Tesla’s success thus far is that it spends virtually nothing on advertising, relying almost entirely on word-of-mouth, that most potent of marketing “programs”. Musk is also savvy enough to engage some of the groups who resist disruption by Tesla in a public though responsible manner, sufficient to garner sympathy rather than come across as a cocky tech bully. His no-drama style is refreshing in the face of other tech leaders whose personalities and leadership style are more iconoclastic. What every leader can learn from Musk’s patient and structured approach to execution is that execution itself requires a specific strategy. Don’t try to transform a one-off project into a global mass-market product without developing an adaptable playbook in-between. The electricity, IT, sales/service, and highway/road infrastructure to support the Model S in Brazil or China vs the U.S. undoubtedly differs in one aspect or another. A single monolithic approach won’t cut it.

THANKS: I am thankful to two friends and colleagues, John Hamm and Andrew Salzman, who each own and drive a Model S, and who were gracious enough to spend time being interviewed for this article.

Read more about the Motor Trend review and award at motortrend.com.