Your Executive Newsletter with Sun Wu.
Zig Zag Strategy: Why Tesla will Stop Selling Cars and The Five Tests of a Good Strategy
Friday, July 19th, 2019
Imagine you had a fleet of cars, where each car can make you $30 thousand a year in net profits for ten years straight, so roughly $300 thousand throughout its ten years of useful life.

Would you sell one of those cars for $40 thousand?

No, you wouldn't.

I mean, that'd be a really bad business decision.


Well, that's exactly the situation Tesla is going to be in if they can figure out full self-driving.

Think about it: if cars get to the point where they can safely drive themselves, why would Tesla sell a new EV for $40 thousand dollars, if that same vehicle can make them more than five times that as a robotaxi?

The math is simple.

That means that if full self-driving is solved, Tesla will stop selling cars to consumers.


And that's not an idea that I came up with. No. Your boy Elon said it himself.

According to Musk, this is all part of the original plan for Tesla but to get there, they first had to sell early models to consumers, and work their way to that future, which reminded me of a concept I read about a long time ago: the zigzag principle.

The idea is that startups craft their way to a final goal by pivoting, or "zigzagging" at different points in time, to pursue a shorter-term target that provides them with the cash and experience they need to keep moving.

For example, since its inception, lithium-ion battery manufacturer A123, a company that spun off of MIT's labs, always planned to target large scale battery applications like those used in power grids.

However, that end goal was too much of a long-shot for a barely funded startup, so they worked their way through by persuing smaller targets, like providing batteries for DeWalt's power tools.

That gave them some needed cash and brand recognition, which they levered to move to the next step: small grid pilots.

Along the way, they kept streamlining their operations, perfecting their technology, and accumulating a lot of data and experience.

Pixar did something similar by offering rendering services using their technology to movie studios while they got their own movies developed.

The idea is that along the way, you may have to offer some of the things you're good at to third parties, or target different markets from those you ultimately pursue, as a way to follow a viable path to your end goal.

And guess what? you don't need to figure it all out right off the bat. All you need is a clear path to the next stop, and make sure there's value on that's stop that you can capture in the form of cash, people, experience, branding or anything that you can leverage on your way to your end goal.

Will it work that way for Tesla?

Well, I'm not sure. All the numbers we've seen so far assume that riding fares stay the same and that everything remains as it is right now.

We still have to see how full self-driving could change the dynamics of personal transportation once market forces and offer-demand interactions settle.

But the idea of a zig-zag-shaped path to your end goal will still be a powerful concept for any startup.

I hope that makes sense.

The Five Test of a Good Strategy
A million years ago, Michael Porter, father of modern strategy theory, came up with five tests to help identify a good strategy, which have, to some extent, endured the test of time.

I revisited these tests in the book and came up with an updated version of these tests. Here they are:

Test No. 1: Your business must (still) have a unique value proposition
It is clear why need a good understanding of how your products and services deliver value to customers, which is best defined by their value proposition.

However, in a fast-moving environment, a value proposition becomes a dynamic concept that must be closely monitored and continually adapted to ensure it still clicks with its target consumers.

Sometimes, classic demographic approaches such as gender, age, and income brackets are not enough to understand why people buy, so you'll probably need to find other ways to slice the market. When none of that works, then you need to consider moving out to target other consumers or completely different markets.

Finally, different consumers may need to be reached through different channels and sometimes with different product presentations. Market conditions are not static any more, and customers are increasingly dissimilar to each other.

Test No. 2: The business (still) needs a distinctive value chain
A distinctive value chain is still at the core of a successful strategy, but it should not be so rigid as to prevent evolution with market changes.

A highly-integrated value chain (i.e., where most is done in-house) could make sense during the early stages of an industry, because that might be the only way to deliver a high-quality product, and because customers are willing to pay more for better solutions.

But over time, as competition increases and products deliver more than what customers need, you need to think about "modularizing" your value chain and outsourcing what is already good enough, keeping only the subsystems that create the dimensions critical for customer satisfaction.

A decade ago many people would pay top dollar to have the latest microprocessor and the largest hard drive in their desktop computer. But today, it is more difficult to find buyers willing to pay premium prices for those even though they perform many times better nowadays.

Test No. 3: A strategy must have clear tradeoffs and decisions about what NOT to do
This is completely true; however, what doesn't work today may actually work tomorrow. Kodak invented digital cameras but decided not to pursue them through a different business model, and that's why the story didn't end very well for them.

What you must realize is that industry environment, customer preferences, and technologies evolve, and they may intersect at some point in the future to present opportunities that didn't previously exist. Apple didn't invent the tablet, but it was ready to take over the market when the conditions were right.

Assumptions change, and so must decisions, and your job is to continually check the conditions under which decisions to NOT do something were made, and validate whether or not those fundamentals are still in place.

Test No. 4: A business must have a value chain where activities reinforce each other and fit together
A better view of your business is by thinking in terms of a Customer Value System within which value is created by your business's products and services and consumed by your customers.

Within that value system, your vendors, partners, sales and distribution channels, retailers, value chain, business models, and customers all interact to create an efficient ecosystem.

Value systems are specifically designed to address the needs of a particular customer segment with a particular product. A beer company, for example, sells its products to women, young men, sports fanatics, and other groups, but each segment must be approached through a distinctive and unique value system.

Described this way, it is the entire value system from vendors to product disposal that needs to be optimized when seeking to maximize the value we extract from an opportunity.

Test No. 5: Strategy must have continuity
While it is true that consistency can help improve learning curves and economies of scale, both important components of a sustainable strategy, you must also recognize when it is time to let go.

The ability to align and disengage as needed is probably one of the most important capabilities you can develop as a modern executive.

Leaders must be able to see the signs of industry decline early on and take the proper actions to slowly disengage while doubling down on other cores. Thinking across more than one core business doesn't come naturally to most executives, but it is a trait that differentiates multidexter leaders from the rest.

When buying NBC, Jack Welch was continually criticized by expert analysts and other CEOs because the deal would put GE into foreign waters. He was constantly advised not to pursue the deal because he didn't know anything about movies or TV shows. But to his critics, Jack Welch gave the multidexter answer:

"Well, I can't build a jet engine, either. I can't build a turbine. Our job at GE is to deal with human and financial resources. The idea of getting great talent, giving them all the support in the world, and letting them run is the whole management philosophy of GE, whether it's in turbines, engines, or a TV network."

Test No. 6: When in doubt, move in the customer's direction
This is my addition to Porter's quintet: adopting a mentality of helping customers improve. For years, most of the strategic advice that leaders and managers received has been focused on being best at something you are already good at.

That mentality is a centralized and outdated piece of advice, product of an industrial era when the United States was fighting highly efficient Japanese competitors. Managers trained under these frameworks tend to put more emphasis on upstream activities like supply chain and manufacturing, and less on downstream work like sales, customer service, and post-sales support.

Their core idea is that the more you sell, the more money you make, so under this mentality managers keep trying to find ways to sell more units of the products and services they make, to increase utilization factors of their assets and spread their fixed costs. In a way, it is like trying to tell customers what they should want based on what you can sell.

Because most companies are still influenced by those process-centric approaches, it creates opportunities for downstream value creation: companies which, instead of thinking about what they want to sell, start trying to find out what customers actually want to buy.

To quote Niraj Dawar, author of Tilt: Shifting your Strategy from Products to Customers, "companies must shift the center of gravity of their businesses towards customer-value activities instead of keeping going the other way to upstream and cost-focused jobs."

A more customer-centric approach, which pay serious attention to buyers' needs and wants and that seriously researches what, why and how people buy, will usually be better equipped to defend your market position over the long run.

In the early days of, when confronted by mortified book publishers angered by all the bad book reviews that users were posting on the site, Jeff Bezos responded.

"We don't make money when we sell things, we make money when we help customers make purchase decisions."

That can help understand the market position where Amazon is today.

Talk to you next week.

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