Gennaro is the founder of FourWeekMBA, a leading source on business model innovation.
In 2006 Tesla was struggling to pull off the first viable version of its car, which would prove at least the first feasibility of the project. And that time, Musk laid out a master plan.
The 2006 Tesla Master Plan wasn't a hundred pages grandiose document. Instead, it represented a few lines, yet it would take more than a decade to roll out.
Sketched on the fly by Elon Musk as Tesla was still in the process of figuring out a viable Roadster model as a market entry strategy; this is how it looked like:
When companies like Tesla start to roll out their business models, they go through a phase of what I like to call the "transitional business model."
That is a model that works in the short-term to validate the market, enable the technology and its ecosystem to mature while still having a reality check.
Therefore, launching products will allow the company to test larger and larger segments of that same market. Even when you might want to keep an ambitious, long-term vision, the transitional business model will help you have built-in reality checks in the short term.
This is how business scaling picks up!
Business scaling is the transformation process of a business as the product gets validated by broader and broader market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated, it becomes critical to build a viable business model.
"Great companies are built on great products.”― Elon Musk
If you ask any entrepreneur who has survived long enough in the marketplace, they might all answer the same thing. While they will first focus on survival, they will also balance that with building a great product. There isn’t a better market entry strategy than having an incredible product.
As we’ve seen so far, it all starts by identifying what’s the segment of the market that we want to tackle first to prove the viability of the product. And scale from there. For instance, when Tesla had to develop its first electric car prototype. Rather than starting by wanting to produce the cheapest electric car for everyone. It did the opposite. It started with a premium sports car, what would be called the Roadster, which targeted sports cars’ aficionados who looked forward to something very unique.
From there, Tesla built upon to develop cheaper models for larger market segments. In this specific case, it wasn’t easy at all to execute this plan. Yet it eventually worked out (after many near-death experiences) as Tesla slowly validated the market.
If Tesla had gone all-in with the grandiose plan of developing an electric car for everyone (which is instead a plan that became feasible only by 2020) this would have led to sure failure, with billions of dollars burned on the way.
Once the product has been validated, it might happen that the company still hasn’t managed to balance the various pieces of the puzzle to create a sustainable business model. The more innovative (meaning you’re operating in a new, developing market) is your company, the more time it might take before your business model becomes viable. In fact, as Steve Blank highlighted in his Customer Development Manifesto, “Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model.”
Therefore, the first steps are toward scaling up the business by tweaking the business model as the product reaches its initial target market. Once the business model and product are aligned (this isn’t a linear process, and it might require years of trial and error), then the organizational design (or more precisely, how you decide to structure your company to keep scaling) becomes extremely important.
As Colin Bryar highlighted in his book, Working Backwards: Insights, Stories, and Secrets from Inside Amazon, "as Amazon grew, we realized that despite our best efforts, we were spending too much time coordinating and not enough time building. That’s because, while the growth in employees was linear, the number of their possible lines of communication grew exponentially.”
Therefore the long-term process looks something like this:
This means that for various stages of growth of the organization, you will need to focus on more and more aspects. The product will always be at the center. Yet, one thing is to have a product that works for a small segment of a market. Another is to have it work for larger and larger segments.
That won’t only change the product itself as it scales, but it will also need a rebalance of how business models and organizations are structured. For instance, going back to the Tesla case, as a customer, it might sound trivial that the company would finally offer a cheaper version of the electric car. Yet, this is a revolution that requires the company to reinvent everything from product development, design, manufacturing, supply chain, distribution, cost and profit centers, and therefore organizational structure!
Let's go back to Tesla's case study now to see how the company scaled its business model in the last fifteen years.
While we all know Tesla today, its strategy was shaped already a few years back. Usually, effective strategies get rolled out in years, and only after they become successful do those become obvious.
Yet, when they are getting rolled out, they are not obvious at all. So much so, that those rolling out the unconventional strategy, are getting criticized, ostracized, and only at the end idolized.
Based on the market context, companies, especially startups have to find ways to enter markets, often dominated by other players, and roll out a temporary business model, which is only viable in the short-term, as it helps the company to transition to a more mature business model, to achieve scale.
When Tesla entered the market, it did it via the launch of the Roadster, a sport’s electric car, so it could start validating the market gradually by a sub-segment of the automotive industry.
This enabled Tesla to enter with a product priced competitively (Tesla wasn’t able at the time to offer an electric vehicle at a competitive price). As sports cars are higher-priced, that segment of the market was in fit with Tesla’s temporary business model.
At the same time, the sports car segment also had customers open to more innovative products, as long as they would be highly differentiated.
Yet before transitioning to a new business model, the company will need to validate smaller segments of the market by attracting the psychographic which is ready to take on the new technology.
Yet often, new technologies require the development of a whole ecosystem. For instance, in the case, of Tesla, it’s not about convincing people that electric cars are “cool” (not only that).
But also, initially, about providing the infrastructure to make the electric vehicle competitive in terms of everything else (availability of charging stations, charging vs. refilling, cost of batteries, time to recharge, and so on).
Only a few years after, in 2012, Tesla would finally start to roll out a business model based on potential mass adoption of its electric cars:
Only in 2012, Tesla would finally launch its Model S, the electrical sedan intended to be adopted at a mass level. This strategy is still getting rolled out, and it might still take years to get to the level of mass production.
Successful strategies take years to become viable, as in some cases, they require the fit between the technology and the ecosystem it encompasses and the market.
When this happens, the company rolling out the business model will reach its full potential in terms of scale.
Back in 2012, Elon Musk explained that well:
“In 2006 our plan was to build an electric sports car followed by an affordable electric sedan, and reduce our dependence on oil…delivering Model S is a key part of that plan and represents Tesla’s transition to a mass-production automaker and the most compelling car company of the 21st century.”
Back in 2018, Elon Musk highlighted the long-term vision for Tesla:
Our goal is to become the best manufacturer in the automotive industry, and having cutting edge robotic expertise in-house is at the core of that goal. Our recent acquisitions of advanced automation companies have added to our talent base and are helping us increase Model 3 production rates more effectively. We don’t want to simply replicate what we have built previously while designing additional capacity. We want to continuously push the boundaries of mass manufacturing.
Tesla’s mission can be summarized as:
to accelerate the world’s transition to sustainable energy.
As the company highlighted:
Tesla builds not only all-electric vehicles but also infinitely scalable clean energy generation and storage products. Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better.
To conclude a transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model
It was 2006, when Tesla, with his co-founder Martin Eberhard, launched a sport’s car, which broke down the trade-off between high performance and fuel efficiency.
Tesla, which for a few years had been building up an electric sport’s car ready to be marketed, finally pulled it off.
As Elon Musk would explain Back in 2012:
“In 2006 our plan was to build an electric sports car followed by an affordable electric sedan, and reduce our dependence on oil…delivering Model S is a key part of that plan and represents Tesla's transition to a mass-production automaker and the most compelling car company of the 21st century.”