Development of Sustainable Business for Tesla

Introduction

Since the turn of this decade, Tesla has positioned itself as a leader in the electric vehicle sector by producing the roadstar and Model S which set some standards in the EV market (Reed, 2019). At the time of entry into the market, few car manufacturers such as Mitsubishi, Nissan and General Motors were exploring electric vehicles as an alternative to traditional automobiles especially with increasing concerns about climate change but not without difficulty (Friend, 2009). Tesla quickly built a reputation as the standard for electric vehicles especially with the introduction of the Roadster in 2008 and Model S in 2012 (McBride, 2019).

Despite this vision, Tesla has experienced challenges over the years which have been primarily visible in its inability to deliver on promises made to the market and the lack of profit between 2013 and 2019 (Reed, 2019). Like any other player in the manufacturing sector, Tesla forecasted that scaling production volumes could reduce cost of production per car unit and subsequently lead to a profitable business. Following simple rules of economies of scale, this should have been the case once Tesla began producing the Model 3 however with the scale up came operational and organisational challenges that exposed deeper concerns with Tesla.

With the introduction of the model 3 came the increase in production volume targets, Tesla had to invest in more equipment, research & development and gigafactories (Tesla production plants). Indirectly, this implied that Tesla would require additional human resources to manage these assets. The consequence of this was, Tesla had to raise funds to support this scale, leading to its request for additional investment in 2017 increasing its debt and equity financing to approximately 7.85 billion dollars (Tesla 10 K 2018, cited in, Collins, 2018). Tesla having done all this, has worked consistently to optimize its processes and address concerns raised by customers in the last 12 months about delivery and quality. Tesla’s financial statements in Q3 2019 show that these actions have yielded profitability however in the short term.

To understand and solve some of Tesla’s pressing issues, Study Group 19, Section B, Said Business School MBA class of 2019 evaluated Tesla’s current activities and recommended the following actions:

1. Scale into Asian market through China as it is the largest market for EVs today
2. Collect data on organisational behaviour to properly define existing challenges and design solutions to plug current and future organisational behaviour gaps
3. Manage stakeholders more effectively through structured communication and a well-developed social media strategy (Galindo et al, 2019).

For the rest of this essay, we assume that Tesla has implemented these recommendations and hired me as the leader for its new transformation team with the objective of deploying additional solutions for its sustainable growth.

Building a Sustainable Business for Tesla through change initiatives

To build a sustainable business, there are three changes that Tesla could make following the implementation of the initial recommendations:

1. Redesign culture of the organisation to accommodate scale and increased diversity
2. Optimize operations process to maintain quality of output across different locations
3. Develop motivation initiatives to increase employee drive towards innovation

Redesign organisation culture

Healthy culture is a key driver of growth when leveraged for leadership (Chatman & Cha, 2003). According to Goffee & Jones 1996 the right balance of sociability (a measure of employees’ ability to engage in a friendly manner) and solidarity (a measure of productivity and efficiency) allow for better output. This view on the value of sociability is supported by Fowler’s view that people are motivated when they can care and feel cared for. Chatman & Cha state that “the less formal direction you give employees about how to execute strategy, the more ownership they take over their actions and the better they perform”emphasising the value of sociability in culture.

Rethinking and potentially redesigning the Tesla culture is important with the scale up of production. It is also essential for the transference of skills which is important for an optimized production process across Tesla’s existing and new locations. Tesla could use positive role modelling, supportive problem solving and emphasizing transfer of positive traits to develop healthier culture (Kim & Toh 2019, cited in Moos, 2019)

Optimise operations process

The Toyota production system has become one of the strongest examples of successful manufacturing with specific features that allow for staff learning, technology innovation and just in time (JIT) production even with its move across geographies (Toyota, 2019). There is no record of any challenges experienced by Tesla as a result of operating different sites however as it expands into the Asian market and it plans to begin production of Model Y, it is important it explore the most effective models for managing production outcomes between customer orders and products delivered.

This is important as operational issues can occur anywhere in the process of production and these issues can manifest further in the process from where it is created. To address rising challenges, Tesla needs to review steps in its processes, identify bottlenecks and then eliminate MUDA - unnecessary processes in the line. (Campbell, Slate & New, 2013). These will enable Tesla deliver process and product quality. These operations processes could stretch from how production is done to how sales, marketing and accounts are done. Historically, Tesla has had delivery challenges and therefore will need to continue to watch out for these and address them accordingly. Iovan (2017), highlights that understanding relevant variables in delivery like demand, routes etc., could significantly guide solutions. As Tesla enters new markets and increases volumes, this will be more important because scale emphasizes dysfunctional systems.

Optimising operations could also enable Tesla save on cost. According to Tesla, its days of sale inventory is on average lower than the industry average which ranged between 60 – 75 days of sale in Q3 2019 (Vellequette, 2019). This implies Tesla is getting better at transforming inventory to income. With increase in its product line and production volumes, it will become important for Tesla to introduce accounting control mechanisms within its new processes to ensure that contribution margins are improved and maintained for different product lines while issues arising are quickly detected. For this Tesla should double down on its accounting to enable it trace cost and revenue by product and allocate overhead costs appropriately.

Develop motivation initiative

Empirical evidence shows that the most effective and sustainable motivation tactics are designed to accommodate employee’s needs to “bond, comprehend and defend” along with their needs for rewards (Allan, 2008). While money can be a good motivator, it is often a distraction and is only a useful tool where technical skills are involved. The efficiency of money as a motivator declines with the increase of intellectual capacity required for delivering on a task (Ariely, 2009). This therefore means a combination of different motivation tactics which account for diversity of the company’s workforce and skill set will be essential for building the kind of culture that supports learning, growth and productivity at Tesla going forward.

The right type of motivation is important for influencing productivity and subsequently increasing revenue.

Understanding and developing urgency and credibility in the change process

Urgency of transformational change is impacted by different factors including organisation culture, historical context and level of understanding across different stakeholder groups (Kotter, 1995). To understand the level of urgency of the situation and the credibility of the transformation team lead as a change agent, an analysis of the existing organisational culture and stakeholders’ perception of already implemented changes as well as suggested next steps for building a sustainable business is necessary. Stakeholders’ motivations identified from this will then be matched against the findings of this assessment to understand best approach for building credibility and emphasizing urgency in the implementation phase.

Organisational historical context

As a company with less than 2 decades under its belt, it can be hypothesized that Tesla has executed all change activities so far using mostly in-house resources and the introduction of a new party to execute recommended solutions could be an indicator of the urgency of the situation. This is because it shows Tesla is willing to acquire the resources necessary for growth.

Organisational cultural context

Tesla can be categorized as an organisation with fragmented culture based on Goffee and Jones’ 1996 breakdown of culture types. This culture type is characterised by Tesla’s high solidarity and low sociability. Over the years, Tesla has pushed its staff for excellence both directly and indirectly by deploying motivation tactics which implied that Tesla would only accommodate the exceptional in its business. This can be deduced from the layoff of Tesla staff in 2018 and early 2019 (Villasanta, 2019). A combination of this culture and new transformation efforts could escalate the perception of urgency across the organisation with many stakeholders viewing the transformational effort as key to stabilizing the business.

Stakeholder motivators in context of transformation

Tesla’s key stakeholders are either internal or external and have varying degrees of engagement and therefor varying degrees of understanding of the situation however, the implications of the success or failure of transformation outcomes cut across all stakeholders. It is therefore important to assess motivators for all key stakeholders in the context of this transformation as even though they are not directly influenced by the process their motivators could be a key influence in driving a sense of urgency. Furthermore, assessing each stakeholder group could provide additional clarity on the credibility of the transformation lead.

Investors:

If the purpose of a business is to maximize investors’ returns as stated by Friedman (1970), the temperament of investors influences the temperament of the organisation. With the specific case of Tesla investors, it is urgent they begin to see consistent positive returns on their investment and improve the internal rate of return in relation to the cost of capital. Improving profitability could impact this as profitability shows viability of a business and is especially important as seen with the spike in Tesla share prices the day after it announced profits for Q3 2019 (McGee, 2019).

Customers

Over the years, Tesla as an organisation has lost its credibility before many customers as a result of its failure to deliver on multiple promises (Trainer, 2019). The transformation effort is urgent as it could impact behaviour of current and potential customers. Customers would only continue to patronize a brand when there is a perceived sense of satisfaction. This sense of satisfaction is measured by money and referred to as customer lifetime value (Barbu & Tiganoaia, 2018). Therefore, building a sustainable business for Tesla is not urgent to the customer however it is urgent for customer attraction and retention. 

Board of Directors:

Many today like Friedman (1970) believe the primary, if not sole responsibility of a company is  working to maximize return on investments for its investors Given the current situation where additional investment has been made to scale production and Tesla was not profitable more than 10 quarters before Q3 2019 (Tesla, 2019), it can be surmised that the board is keen to begin seeing sustained profitability. This therefore makes building a sustainable business for Tesla an urgent situation for the board of directors.

Management Team:

Filings by Tesla in the past 2 years have shown that despite the growth of the business and continuous financial investment, Tesla’s automobile business has been operating at a loss (Tesla, 2019). As many industry analysts expect that Tesla should have hit break even after 10 years of operation, it is becoming even more critical for the management team at Tesla to reinstate faith in the business by regaining credibility and delivering on its promises. The management team clearly understand the urgency and has demonstrated this by implementing the changes suggested by the consultants of Study group 19.

Employees:

According to Kotter (1995), a lack of urgency and vision across the employee group can significantly hinder the outcome of a transformation process as employees are key to the execution of transformational changes. The implementation of previous recommendations and the hiring of a new transformation team by the management is a statement of urgency from management to employees especially given the historical and cultural context of Tesla. Not only is the situation urgent to employees, the transformation of organisational culture and deployment of motivation initiatives is urgent for improving employee engagement and productivity.

Despite the high level of urgency, the credibility of the transformation team leader as a change agent can only be assessed in view of Tesla’s historical context and current organisational culture which imply that the organisation would only introduce an external party at this critical transformation juncture if they are known to be an effective change agent. However, as there are no facts of the outcomes of the change agent so far, the agent’s credibility can be considered neutral until proven otherwise by future actions. 

Implementing change initiatives with credibility in an urgent environment

Change implementation ought to be designed in such a way that the activities requiring the least effort and yielding the highest impact are implemented first. As causality applies in operations management by “using time as a reference for sequence”(Cazacu, 2015), change implementation can follow the same logic or can be carried out using parallel processes. It is however essential that the flow is designed to accommodate dependencies. This means that actions that could impact the effectiveness of another initiative should be completed independently and the outcome used to implement the initiatives that depend on it.

Therefore, to deploy the recommendations stated above, the first step would be to identify the order in which they will be executed whether this would be in parallel or sequentially.

With Tesla’s recent improvement in delivering cars up to 90% of production monthly (Tesla, 2019) it can be hypothesized that optimizing operations processes is not the most urgent recommendation to deploy however as Tesla is still a growing company, it is important to shape its culture in such a way that it is adaptable with scale as this could influence operations process.

All three steps will start at different points but run in parallel. It is important that an organization consider the stage of its growth as it applies different change initiatives, and this influences the approach and order in which the change initiatives are launched. As Tesla is in its growth phase, it is important that it develop an organisation that works in the best way possible for each geography it operates in. For this reason, restructuring organisational culture has been prioritized as it will set the pace for how processes are integrated into different locations and will define how motivation is established to drive ownership, care and effectiveness. Furthermore, early learnings in this process could allow the organisation identify issues with proposed changes as they relate to other aspects of the business and quickly mitigate them. Finally, improved culture could motivate and empower employees to drive more innovation across operations processes (Fowler, 2014).

According to Kotter (1995), there are 8 steps that leaders seeking to implement effective change must follow and in the right order. While there are no hard and fast rules for implementing change, there are key factors that influence which of the 8 steps are executed at each point of the change process. Key factors include but are not limited to financial resources and credibility of the executor. These steps are:

“Establishing a Sense of Urgency

  Forming a Powerful Guiding Coalition

  Creating a Vision

  Communicating the Vision

  Empowering others to act on the vision

  Planning for and creating short term wins

  Consolidating improvements and producing still more change and

  Institutionalizing new approaches”

As there is already an existing level of urgency, the team lead can focus on steps 2 – 8 for the implementation stage. As the transformation team lead is new to the organisation and has neither high nor low credibility as a change agent, the first best step is to form a coalition with other members of the organisation to help drive change. This will help build the consensus required to persuade others to take up the change (Cialdini, 2008, cited in Influence at Work, 2012).

Leveraging the support of this guiding coalition, a vision for the transformation agenda, reflecting all three solutions should then be created and communicated through formal and informal channels. This will help drive sociability and subsequently reinforce the culture being built. It is also essential that the coalition have a representative from different stakeholder groups within Tesla as information follows the flow of power and influence which can travel both horizontally and vertically (Yukl & Fable, 1990, cited in Murray, 2019).

While the vision is being shared, the team should plan for short term wins which both the transformation team and the rest of the organisation can work towards. Employees are more likely to engage if they believe their opinion will be considered (Kipnis et al, 1990, cited in Murray, 2019). Involving others in creating quick wins could be a way to motivate employees to engage in consolidating improvements. Finally, the transformation team should institutionalize new approaches that come out of all the short-term wins and improvements.

As the transformation lead takes up these responsibilities, it is important to deploy the right leadership tactic at each stage. According to Goleman (2000) there are 6 styles of leadership and “leaders who have mastered authoritative, democratic, affiliative and coaching styles of leadership are more likely to succeed”. It is therefore important for the transformation team to set reinforcement mechanisms through the entire transformation process.

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