Tesla's Leverage Dynamic Capabilities to Succeed

Professor David J. Teece explains that ‘dynamic capability’ is “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”. The basic assumption of this framework is that core competencies should be used to modify short-term competitive positions that can be used to build long-term competitive advantage (David J. Teece). Ambidextrous organisations, such as Tesla Motors, are categorised by their capability to simultaneously explore and exploit existing knowledge. By using the dynamic capabilities of stakeholders, Tesla was able to leverage on opportunities for further knowledge in order to innovate and thrive until this present day. Indeed, disaggregating dynamic capabilities into three distinct capacities (1) to sense new opportunity, 2) to seize the identified opportunity, 3) the ability to realign available assets to capitalise on opportunity), we can understand how Tesla Motors has managed their knowledge to revolutionise the future dynamics of the global automobile sector. Through the three components of dynamic capabilities we will discuss; how Tesla’s CEO spotted and executed new opportunity that was neglected by other mainstream vehicle manufacturers, their ability to recombine and reconfigure assets as markets and technologies change, and explain the absence of cognitive inertia in Tesla’s top management team.

To identify an opportunity an ‘enterprise must constantly scan, search, and explore across technologies and markets, both ‘local’ and ‘distant’ (David J. Teece). Indeed, successfully sensing and seizing new product innovation opportunities, companies will be able to protect its intangible assets and sustain superior performance. Tesla’s CEO, Elon Musk, understood that for the ambitious project of developing electric vehicles, he must reinvent the existing automobile sector and create a new ecosystem, while competitors such as IBM, General Motors, Nissan and Digital Equipment Corporation were hindered by the perils of their cognitive boundaries.

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With the rise of environmental awareness, Elon Musk identified a vacant niche in the market of companies manufacturing electric vehicles. He believed could radically change the automotive landscape by responding to consumer needs of sporty performance and socially responsibly vehicles. Undertaken with the aim to use infinitely scalable clean energy generation to stop relying on fossil fuels and move towards a zero-emission future.

Henderson (1994) notes that “Tesla’s competitors were not able to identify these opportunities as they became prisoners of the deeply ingrained assumptions, information filters, and problem-solving strategies that made up their world views”. Tesla’s competitors went to unsuccessful efforts to innovate and quickly abandoned the idea of electric vehicles. This is because they perceived that battery-operated vehicles would face limitations – one of which being the idea that low battery capacity would cause the electric vehicles to have extremely limited mileage.

However, it was not necessary to be innovative in this field – “Tesla has shown that you can take existing technology and make a successful product” (Financial Times, 2014). Here, Tesla identified and capitalised the ‘local’ opportunity, which is the idea of creating electric vehicles upon existing battery technology, and the ‘distant’ opportunity of implementing such technology into automobiles. Musk broke the innovation mould by proving that dominant conventions dictated by the automotive establishment could be both challenged and successfully overturned (Gibson R.).

Organisations need both exploration and exploitation of new and existing knowledge of technologies for superior performance in the long term. In Tesla’s case, this has been achieved through sensing ‘local’ and ‘distant’ opportunities, as well as changing the ‘rules of the game’ by starting the creation of a new car manufacturer ecosystem. Thus, we can argue that ambidextrous organisations who exploit existing knowledge and explore new knowledge will attain a short-term market share leading to long term competitive advantage, whereas those organisations who cannot exploit what they know efficiently will wither and atrophy.

Simply sensing new opportunities is not enough, without proper execution of this opportunity one cannot guarantee their company’s innovative and sustainable future. ‘Once a new opportunity is sensed, it must be addressed through new products, processes, or services’ (David J. Teece). Furthermore, in order to capture the concept of ‘seizing the opportunity’, it is imperative to intensely invest in specific technologies and devote considerable time to creating feasible ecosystems.

However, Elon Musk not only seized the technological aspects of these opportunities, but also undertook a second step in reshaping existing ‘rules of the game’. James Bessen (HBR, 2014) stated that “in order for Tesla to succeed, a lot of complementary knowledge and infrastructure needs to be developed”. A crucial obstacle for Tesla was creating the charging stations for his electronic vehicles as there was no infrastructure developed and no one was willing to develop it, apart from Tesla. Strategic thinking prompted Musk to disclose some of his company’s patents so anybody in the industry could use them in order to create a technological platform whose members would contribute by developing existed infrastructure. Sharing knowledge of technologies and innovations has explicit benefits for Tesla Motors, as the more car manufacturers will be involved in electric vehicle production, the larger the scale of specific car parts production will be, and in turn, electric cars will become more affordable.

From a learning perspective, leveraging resources through collaborative relations can help companies arrange existing skills and assets into new combinations that will create radical growth and new opportunities for long term stability. Chesbrough (2003) states that a successful company should work with people inside and outside of the company in order to make the best use of internal and external ideas.

According to Chiaroni et al. (2010), open innovation can be categorized into three processes; the inbound process, the outbound process and the coupled process, which is the combination of the other two. Tesla applies coupled innovation process by establishing three main strategic alliance types to facilitate sustainable growth: supplier alliances, R&D alliances and OEM alliances with other automobile manufacturers.

Supplier alliances showed Tesla that collaborative relations are a critical key to business longevity. The ecosystem designed around the release of the Tesla Roadster in 2008 was created with their strategic alliance, Lotus Cars. The collaboration of Tesla Motors and Lotus Cars enabled Tesla to reduce manufacturing plant costs and avoid costs of storing unsold vehicles, as Lotus was able to accommodate Tesla’s production rate at their manufacturing plants in England while maintaining their own operations. To support this, Tesla states in their 2012 annual report that the cost of producing their vehicles are beginning to decline due to a shift of focus towards cost reduction as a result of a more stabilised and improved operations process by producing their cars at a steady rate of production. However, Lotus is not the best car factory in the world according to Eberhand (2006), in terms of cost and exchange rate to the Pound Sterling, as it is more costly to manufacture when the dollar is extremely low.

Lecocq and Looy (2009) state that technological collaborative networks and R&D alliances are more effective strategies than mergers and acquisitions. Panasonic invested $30 million in Tesla Motors in order to collaborate in R&D to produce the next-generation battery cells which will optimise the efficiency of current electric vehicle batteries, and advance vehicle performance and value by promoting sustainable mobility. This new technology would be combined with Tesla Motors’ current electric vehicle battery expertise in order to create one of the most efficient electric vehicles, the Tesla Model S (Tesla Motors, 2011). The new battery cells achieved unrivaled range, increased energy density and longer battery life, which will in turn increase the range and performance of Teslas electric vehicles. The longer battery life will further ease concern on the fact that there are limited public charging stations. The efficiency of this collaboration resulted in Tesla’s R&D expenses to decline by 15% from $69 million in Q4 2012. From Q3 to Q4 2012, total gross margin rose from (17)% to almost 8%, as a result of a higher Model S production rate and efficiency of battery cells (Tesla Motors, 2012 annual report).

Tesla has also set up OEM alliances with Daimler who announced it took a 10% stake in Tesla estimated to be worth about $50 million. Through this investment, the two partners are enabled to cooperate on a greater scale in the developing of electric drive and battery systems as well as in individual projects. Through this partnership, Tesla Motors obtained a new production plan as well as financing and future revenue streams. “Beyond simply supplying battery systems, this partnership allowed Tesla to focus on its value proposition of bringing high performance electric vehicles to mainstream consumers” (Fraser et al., 2009:11). However, Tesla Motors must be careful with present partner, Daimler, who has recently become a rival on Tesla Motors. Therefore, inter-organisational collaborations can pose several risks to organisations as some company’s may be inclined to sabotage in order to gain market share.

According to Teece (2007:1335), A key to sustainable profitable growth is the ability to recombine and to reconfigure assets and organisational structures as the enterprise grows, and as markets and technologies change. The challenge that companies face today is to be able to manage the constant changes that take place in technology and in the industries and to be able to stimulate innovatively and creativity. It is critical that companies realign and re-evaluate their business model more frequently than before to adapt to radical industrial shifts.

Why didn’t other automobile companies such as General Motors pursue the same distant opportunity that was available to them? The term ‘cognitive inertia’ describes the phenomenon that managers might fail to re-evaluate a situation even in the face of change (Huff et al., 1992; Reger and Palmer, 1996; Hodgkinson, 1997; Tripsas and Gavetti, 2000). Technological change has proven particularly deadly for established firms, with numerous examples of established firm failure in the face of radical change (Tripsas et al, 2000).

Companies that do not invest in their value chain to enhance it can see themselves stagnate, while technological development continues to innovate the current market. Factors that may cause inertia for Teslas competitors may include that moving towards electric vehicles will destroy the value of its complementary assets, or the vast investments in current petrol-powered cars and current operation processes. This is called ‘sunk cost fallacy’ – “paying attention to historical costs that is not recoverable when considering future course of action” (Lovallo & Sibony, 2010).