On January 13, Tesla's stock surpassed the $500 mark, and some analysts predict it will continue to climb even higher. The company has been labeled an "existential threat" to traditional automakers who are struggling to remain relevant.
I recently bought my first Tesla. The first time you climb into the cockpit of the Model 3, you feel more like you are in a spaceship than a car. It's exhilarating to drive, costs roughly $30 a month to operate, and is zero emission. But I'm told that Tesla owners carrying on about their cars has become blasé, so I'll get to the point.
Tesla's struggle to achieve scale is a subject of daily discourse in the business press, and Elon Musk certainly has his haters. Perhaps his reputation as a maniacal CEO with a propensity for throwing temper tantrums is well-earned. Yet one could argue that at this point in time, Tesla is exactly where it should be as a company: on the precipice of turning an industry on its head.
One could not imagine a more difficult market to transform. The American automobile market is dominated by behemoth, entrenched manufacturers and an iron-clad, two-party distribution system. The auto business is capital-intense, requires engineering capabilities, and has a long cycle for return on investment.
Disruption has become an overused term, often uttered any time something is new. When Harvard Business School professor Clayton Christensen first introduced the concept of disruption in the 1990s, he offered a view that the way to alter the universe was to create transformative products that could be scaled to the masses. In other words, disruption is not just about change, but creating industry-leading products.
We've learned several lessons from Tesla's struggle. Here are eight keys to scaling successfully:
1. Completely re-imagine the product.
While all innovators reverse-engineer products based on deep consumer insight, Tesla's designs are simply awe inspiring. For example, the Model 3's battery is in a compartment below the car which creates equal weight distribution and handling, and increases safety and space (the car has both a trunk and a "frunk", as there is no engine). The car has no mechanical switches or buttons. Tesla rethought every facet of the automobile.
2. Finance your expansion.
By accepting deposits months before production, Tesla's customers are financing production and improvement of its cars. While most companies have a negative cash operating cycle, Tesla has access to cash to procure raw materials after its cars are sold. As a company scales, its operating cash position deteriorates. This is one of the reasons why software as a service (SaaS) companies are so valuable--they are able to manage their cash cycles.
3. Rethink distribution.
One of Tesla's more interesting innovations is rethinking the car dealership. While Tesla operates retail stores, their salespeople act as advisors. Customers actually order the cars online in about five minutes.
Unlike other car makers, Tesla makes improvements within model years. The company even pushes software updates with new features. While we think of innovation in terms of new products, some of the Model 3's most useful features were added after the rollout. New buyers are paying for "enhanced auto-pilot" without even knowing exactly what it is.
5. Expand your capacity methodically.
Tesla has been catching heat for cars taking one to two months to deliver, but the reason is that the company has only one U.S. plant. We have seen clients make the monumental mistake of adding capacity at times when demand was slowed down. It may be better to make your customers wait than to have poor utilization.
6. Get the quality right.
Tesla has been under a considerable amount of scrutiny about its quality, which at times has been suspect. Whenever releasing products, marketers should ensure enough time for testing and improvement. Every time you release a new product, there is an opportunity cost--improving upon the ones you already have.
7. Create multiple profit centers.
Once the quality and capacity are right, marketers can add ancillary products and services. Tesla is building a franchise in lithium-ion battery products for the car and the home. While we tend to feel guilt when up-selling our customers, power units are an example of a product that enhances the original product. The right products can scale in parallel with one another.
8. Stay focused on the mission.
Tesla set out to change the world with battery-powered, zero-emission automobiles. Against all odds they are fulfilling their mission. Profit will come later. I'm of the opinion that Tesla will be acquired by a global automaker that is four or five years behind on autonomous technologies. That would truly bring Teslas to the masses.