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Strategic Control and the Long Game: Tesla’s EV Strategy

Tesla’s EV strategy is turning into a textbook example of how to transition from one point of strategic control to another to leverage strategic control in the long run, and how to use the other aspects of their broader strategy to support dynamic competitive advantage.

A Strategic Control Point is a part of the industry value chain that is in limited or short supply so that any company with unique access to or a unique competency in that area of the value chain could earn supra normal margins throughout that value chain (and potentially into other adjacent markets).

There are numerous examples, discussed in detail in The Carrot and the Stick, but the best way to understand strategic control is by example. Two examples in particular stand out:

  1. Softsoap®. In 1980, the Minnetonka Corporation started offering “Crème Soap on Tap” through boutique distributors. The company decided to follow up with a similar product for mass distribution, changing the name to Softsoap®, as we now know it. The problem, for a small producer of consumer goods, is that retailing is intensely competitive. The best they could hope for was a successful product which would quickly encourage giants such as P&G, J&J and Unilever to enter and push them off the shelves. Minnetonka believed that if it had a year lead on potential competitors, it could build up enough of a brand presence and shelf space allocation to do well even after the “big players” entered. So, how does a small regional player keep the “big players” out, that is, how can they forestall entry? In this instance, Minnetonka decided to buy up the world’s supply of pumps. By doing this, anyone who wanted to enter the liquid soap market would have to build their own factories to make pumps. In this instance, pump manufacturing was a classic Strategic Control Point – a part of the supply chain that, if controlled, enabled Softsoap® to gain a differential competitive advantage. Note that this advantage would eventually be dissipated – a key to strategic control is to not view it as an end point, rather good companies use the cash and margin generated from strategic control to move on to the next market opportunity. In this case, the owners did an exit and sold the brand to Colgate-Palmolive.

  2. Alphabet. After a presentation at the Yale Latin American CEO Summit a few years ago, the CEO of one of the largest insurance companies in Latin America approached me, saying, “I hate Google.” He went on, “They are extorting money out of me.” A curious accusation of a major U.S. company, I thought, and so I asked him to say more. He claimed that they wanted to sell him driving habit data on drivers in Lima, Peru and if he didn’t “pay up” (hence his “extortion” claim), they threatened to sell the data to his major rivals, putting him at a significant market disadvantage. With over 90% of the phones in his home country (according to him) using Android phones and/or Google Maps, hey were the only ones who could supply that individual-level data, which can be important to accurately determining the risk/pricing of individual drivers. The data coming of the phones in his home market was a classic Strategic Control Point.

Tesla’s Strategic Control in EV Sales: Its Charging Network.

The source of strategic Control is often not in your core market, but rather somewhere else in the value chain. For example, Softsoap® wasn’t in the pump business, it was in the soap business, but the source the strategic control came from the pumps. Alphabet isn’t in the insurance business, but it leverages strategic control in information for revenue in the multiple industries.

Similarly, although Tesla clearly IS in the energy business, its source of strategic control in the EV market in the United States at the present time is derived from its charging network. Specifically, its charging network provides a vehicle (pun intended) for a sustainable competitive advantage in EV manufacturing and sales – with Tesla charging networks proprietary and exclusive to Tesla vehicles, it serves as an almost prohibitive barrier for other EV brands. To effectively compete, as long as Tesla’s charging network remains proprietary, other EV brands would need to establish a separate charging network, something, unfortunately, is still years away at best.

Indeed, unless you have an additional ICE vehicle at home or charge at home and only drive short distances, a non-Tesla EV is impractical in the United States today. To wit, there are many attractive EVs on the market today, but none of them would even be in my consideration set due to the patchwork network of unreliable and geographically sporadic non-Tesla EV chargers. This is a classic strategic control point, and it gives Tesla an enormous advantage in EV sales. We need to look no further than its current dominant position and EV market share as evidence.

Disintermediation and Disruption.

For any point of strategic control, those on the outside looking in attempt to find ways to disintermediate the Strategic Control Point. Think no further than Warby Parker or the Dollar Shave Club as examples. In the domestic EV market, one could argue that Tesla’s advantage could quite easily last another 5 to 10 years, as long as Tesla’s charging networks remains proprietary and exclusive to Tesla vehicles.

However, as I often write, strategic control is not an endpoint; rather, it should be a vehicle and bridge for the next strategic control point. Every enduring application of strategic control has taken the supra normal margins and cash from one point of strategic control and used it to leverage it to another point of strategic control. In The Carrot and the Stick, I talk about how, quite often, if done properly, this can be developed into a sustainable ecosystem that can lead to decades long competitive advantage.

The key to strategic control is not the original source, but rather building on that to transition to the next one. Examples include Procter & Gamble’s use of inventory control with Walmart many years ago to leverage that to other retailers; Apple’s use of its App Store to leverage it into a broader ecosystem; Alphabet’s use of Google maps and the Android operating system to leverage it for revenue and margin in multiple other industries. There are countless examples.

Herein lies the beauty of what appears to be unfolding with Tesla’s EV strategy. Tesla has recently struck multiple deals to, in classic fashion, develop its criticality position in the EV charging market – it’s next Strategic Control Point. Tesla has not only established its NACS connector as the de facto standard in the United States, but Nissan, Volvo, Ford, General Motors, among many others, have agreed to adopt this standard and, with this, access to Tesla’s charging network. Tesla has now struck multiple deals to sell its chargers to others such as EG Group, allowing them to brand the chargers under the EG brand label. This will immediately dissipate Tesla’s strategic advantage – vis-à-vis an exclusive Tesla charging network – in EV sales, essentially disintermediating itself. It’s what good companies do.

In short, Tesla has been transitioning from a) using its charging network as a Strategic Control Point that provides enduring strategic competitive advantage in EV sales to b) developing one in the charging infrastructure. The former will dissipate over time no matter what; the latter will last considerably longer. Tesla is playing the “Long Game.”

While they technically can do both, concentrating on one as you transition to the next is key. As we know, trying to be everything means you will be nothing.

Scale, Timing, and Pricing are a Key – The importance of all Facets of Strategy Working Together.

Mark Fields, the ex-Ford CEO, recently discussed how and why Ford needs to continue to be committed to ICE vehicles. In short, his contention is, in classic BCG/Portfolio matrix rationale, continuing to push and sell ICE vehicles gives the major automobile manufacturers the scale and cash to develop new lines and technologies. Similarly, many discussions on Tesla’s pricing misses the broader strategic reasons for recent pricing moves. Building scale on the low end of the 3 and Y vehicle lines has given them the cash to build out the charging network, in addition to various other initiatives. Tesla needs the cash from the scale in the 3 and Y lines. As such, the pricing of the low end of its product line has been instrumental to its broader strategy. Analysts have, in typical fashion, over-emphasized shrinking margins where, for Tesla, it’s cash flow that drives the business. Like every part of a firm’s marketing mix, you cannot look at any one in isolation; they all need to work together, and, in this sense, Tesla’s strategy has been nothing short of a textbook example of how to use pricing, scale, a cash cow and strategic control to transition from the short run to the long game.

Conclusion. Playing The Long Game.

Tesla is playing the long game.

While it may be five or ten years down the road, a robust charging network will be built out in the US. By virtue of its NACS connector becoming the de facto connection standard, building out its Tesla branded charging network, and, now, opening it up to Volvo, Nissan, Ford, General Motors, and others, Tesla is positioning itself as the one necessary piece in the EV market in the US in the future, a classic definition of strategic control, something often referred to as criticality.

As a result, any discussion of Tesla’s pricing strategy must to be viewed in the broader strategic frame. Viewed in this light, pricing to gain scale, which helps build out Tesla’s future strategic control in the EV charging market, has been nothing short of brilliant. They are doing this in two stages:

Stage 1. By concentrating on a) gaining scale in EV manufacturing and sales vis-à-vis its charging-network-generated Strategic Control Point, b) using this scale to generate the cash to help build out a future dominant position in the EV charging infrastructure, they have been playing the “Long Game.” Price and scale have been critical.

Stage 2. By opening its charging network, Tesla is moving, in classic fashion, from one point of strategic control in EV sales to another as the critical component in the EV charging network. Good companies disrupt themselves.

Good companies play the “Long Game,” finding ways to leverage one Strategic Control Point to another. They also use tactics such as pricing and product line decisions to support that strategy. Tesla is evolving into a textbook example of how to do this over time and how all the strategic pieces can fit together to support each other.

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