Tesla as David vs Goliath

Every large company should be deathly afraid of the small upstart.

History is replete with the little company developing a product that ends the lifecycle of an existing product, and which sometimes destroys an existing company.

It is a phenomenon that has launched management theories.

Why did the backroom, “skunk works” succeed, while the large, highly profitable company, with virtually unlimited resources, fail?

Today it’s popular to view Tesla as the innovative David, and GM as the Goliath.

Remember the steam shovel using cables to lift the buckets? It built the Panama Canal, and was ubiquitous until the advent of diesel engines. Converting to diesels wasn’t truly revolutionary; it merely used a different power source. It was the next innovation that put an end to many shovel companies.

The revolution started in the UK, but seemed to sprout in many places at once.

It was the use of hydraulics: Initially as hydraulically controlled backhoe attachments for tractors, and eventually as large self-contained hydraulic excavators.

The new entrants developed new markets where small, hydraulic excavators served new needs, while traditional manufacturers continued to focus on their existing customers. Before existing manufacturers realized what was happening, the new entrants were cannibalizing traditional markets, starting with smaller buckets, and then moving up the technology curve to larger hydraulic systems, and larger buckets.

By the early 2000s, only Bucyrus remained with a line of cable actuated shovels … and then Bucyrus was bought by Caterpillar. Hydraulics had changed an industry.

A similar story almost happened to IBM. A little upstart, Apple, introduced a small desktop computer that IBM scoffed at, until it realized the Apple computer, and a dozen others like it, were beginning to encroach on its territory.

IBM entered the desktop market, but could never displace Apple as the innovative leader. IBM focused on protecting its market share for large computers, from which it derived most of its revenues. IBM could, however, by using its influence, elbow its way into the desktop market.

We all know the end of this story. IBM sold its desktop business and shifted its focus to consulting and, now to Watson, which they hope will revolutionize the use of big data.

But it was the little upstart, Apple, which trounced IBM.

In the case of Japanese automobiles, they too started by introducing small, low-priced models, and then moved up the value chain.

A similar scenario occurred with disc drives, which was chronicled in The Innovator’s Dilemmma1.

So we see that a disruptive technology is often introduced by the small upstart that begins small, targeting a market not addressed by the larger manufacturers.

The disruptive technologies also had large advantages over the technologies they replaced, either in performance or cost … or both.

Is this the case with Tesla?

Tesla Plant. Photo by Jurvetson
Tesla Plant. Photo by Jurvetson

 

It is small, and has adopted at least two innovative strategies: Selling direct, and using off the shelf lithium-ion batteries.

It has also used a third strategy: Taking advantage of Carbon Credits, worth over $150 million so far this year, to finance its business.

By selling direct, Tesla avoids having to establish a dealer network, but at the same time may be violating state franchise laws. Time will tell whether that is a problem.

It’s also starting at the high end of the value chain, hoping to move down the chain with later models … the opposite of how other disruptive technologies have captured their markets.

While other disruptive technologies have sneaked up on existing manufacturers, Tesla is confronting GM and the other large manufacturers head on.

Are the existing manufacturers so bedeviled by bureaucracies and tradition that they can’t compete?

Does Tesla command a competitive advantage, other than sizzle, over gasoline powered vehicles, or EVs manufactured by others? Sizzle sells initially, but eventually dissipates … or goes up in smoke.

And, most importantly, is there really a large market for the EV technology in the first place?

 

 

Notes:

  1. The Innovator’s Dilemma, When New Technologies Cause Great Firms to Fail, by Clayton M. Christensen. The book provides details on the emergence of the hydraulic excavator as well as disc drives.

 

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