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April 15, 2013

Turning a Business Model On Its Head

Posted by Ravi Kumar S. (View Profile | View All Posts) at 12:08 PM


Edward Rybicki, Process Integration Officer, Volkswagen Group of America, on Infosys' long-term approach to IT. 

Remember when the Saturn brand took the car world by storm 20 years ago? They shook up the industry by offering no-hassle pricing, friendly sales associates, and plastic, dent-resistant panels that could hold up to the meanest, run-away shopping cart in a parking lot. But the brand's initial appeal wore off after a while. For starters, the company failed to anticipate that loyal Saturn owners would be looking to upgrade to a larger, fancier model. They didn't have such a model ready for showrooms until five or so years after the brand's launch.


General Motors, of course, didn't have the power of social media at its disposal 20 years ago. Yet even without a virtually connected community, old-fashioned word of mouth spread to the extent that Saturn was considered to be a bit different than the average car. Saturn's still around today, but I'd say the brand has lost some of its original luster. I never hear from friends that they're excited about owning one in the same way they did two decades ago. It takes a lot of work to maintain an innovative brand and its products. 

That's why I'm closely watching another car brand. The Tesla is a high-end sports car that's been getting rave reviews during the past few years, mostly because it's powered exclusively by electricity. Just as Saturn boasted bright, airy dealerships with no-hassle salesmen who didn't work on commission, Tesla has its own twist on the traditional car sales model. It has stores in shopping malls, for instance. And its no-commission salesmen help you design the car yourself and order it directly from their plant. So no car lots with unsold inventory just sitting around.

Now here's the rub: If this sounds too good to be true, it might very well be. Some 15 years ago, General Motors produced the EV-1, a futuristic looking electric-powered coupe. It spent something in the range of $150 million on the project and sold 150 of them, which translates into a cost of $1 million a car for the company. It's a project most GM executives would like to forget.

So why is Tesla any different? For starters, its founder Elon Musk isn't what's known in the auto industry as a car guy - and by writing that, I mean it as a compliment. He created PayPal and wasn't encumbered by century-old "rules" and conventions as to how a car company should exist or how the actual model should be built. (Watch the movie Tucker: The Man and his Dreams for another great story about an innovative industrialist who threw out the rulebook when it came to creating a car company.)

Second, Tesla's battery is more advanced than what any company could make 15 years ago. Still, its friendly, no-hassle sales proposition has been tried before and there aren't showrooms in each and every mall in the country. So its distribution network is extremely limited.

Yet Tesla sales is picking up steam. It's a niche product that's not for everyone, and they've positioned it as such. So the fact that it's sold some 6,000 models last year is definitely a sign of an innovative car sales model that competitors might someday be imitating. 

I suspect the success of the Tesla brand comes in part because of the fact that its executives haven't defined their business model as a car sales model. The experience of buying a Tesla is not unlike what I went through during my last visit to an Apple store. There aren't many Apple stores - only in upscale shopping malls - and you generally work with a sales associate to configure your device to your specifications and needs. It's also not unlike how I shop on Amazon.com for books and music. That company uses its technology to anticipate how many products (things like books and compact discs) it's going to need so that inventory is just-in-time.

So it is with Tesla. The consumer can personalize his car to fit his lifestyle and needs. He plugs it into a dock in his garage instead of relying on a gas station. What's most fascinating is that Musk thought about the fact that every car loses half of its value the minute its owner drives it off the dealer lot for the first time. So in the spirit of co-creation, Musk guarantees the value of the Tesla based on a formula he developed with Wells Fargo and U.S. Bank.

I also wouldn't be surprised if Telsa learned a thing or two from seeing what happened to Saturn 20 years ago. Tesla is already offering more than one model for loyal customers who want to trade up when they want to move on from their first model. It's also keeping its technology on the cutting edge, meaning batteries get smaller, lighter, and more powerful. So car cabins get roomier and new models go a lot farther on one charge.

Indeed, just as e-retailers shook the bricks-and-mortar establishment to the core with re-thinking how people shop and how to get them what they want, so, too, is this innovative car company that resembles anything but a traditional automaker.

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