The Executive Newsletter with Sun Wu.
Disruption Theory and Tesla’s Elon Musk Problem, Walmart Keeps Beefing Up and More
Friday, May 24th, 2019
The original version of this email (sent an hour ago) had the wrong title for one of the sections. Not a big deal but here's the corrected version. Disregard the previous. Sorry for emailing you twice today.

Ok, I get it, Elon Musk is the true Tony Stark of our generation, and since I love Iron Man I must love Elon Musk, right?.

Well, not really, so slow down Kemosabe.

Tesla just reported that so far this year it has lost $702 million, and delivered only 63,000 cars during that time, a 31% drop from the previous quarter.

And as of the end of March, Tesla has a working capital deficit of $2.2 billion.

Elon Musk keeps making promises to take the company to profitability, but like analyst Dan Ives put it Tesla faces a "Kilimanjaro-like uphill climb".

To understand how much of a climb Tesla has in front of it, let's take a look at what Clayton Christensen's disruption theory has to say about the nature of Tesla's competitive threat.

What the Disruption Theory Has to Say About Tesla
I'm not going to bore with basic disruption theory since I have already covered it extensively in the book and in our website, so instead, let’s focus on what it means for a company like Tesla.

Christensen’s disruption theory explains that in most markets competition over time converges around a common definition of who the target market is and that in response, companies specialize in serving the needs of those particular segments which they protect at all costs.

Over time, incumbents keep improving their products (e.g. making them better, bigger and faster), to increase their perceived value for customers. A process he calls sustaining innovation, which means that incumbents' products follow a predictable trajectory of linear improvements.

Think about whiter teeth in toothpaste, faster internet, bigger and smarter phones, etc.

Now, a disruption happens when new companies enter the low-end of a market, meaning that they target customers that are not the main target of the incumbents but do it with a different value proposition and an asymmetric value chain with respect to incumbents’ offers.

An asymmetric value chain means that the new entrants are very good at doing things the incumbents are not, because incumbents’ value chains have been optimized to serve a better segment of the market, therefore, they are not that good at serving the needs of these customers.

The disruption theory explains that when these new entrants first show up, because they target the low end of the market, incumbents don’t see any threat as the upcomers are not targeting their main customers, and they don’t retaliate.

Think about digital cameras attacking the geek, male-intensive market when they first came out, as Kodak and other companies kept serving the needs of the best film photography customers: women.

At that time, there was no reason for Kodak and the rest of the film-makers to feel a threat, since digital cameras were not even targeting their customers, and these new devices were too complex to appeal to them anyway.

That meant that if film-makers wanted to make their own digital cameras to compete with the upcomers, they'd have to go through the corresponding learning curve. But again, these incumbents didn't see the need to do that since digital cameras were not targeting their main customers.

At the same time, the capabilities (resources, people and processes) needed to succeed in digital cameras involved digital technologies among other things, capabilities that were entirely different from the things that film photography incumbents were good at, which made their value chains asymmetric in nature.

But what happens, Christensen explains, is that over time these new entrants increase the performance of their products way faster than incumbents' (since they have more room for improvement) and reach a point where their products become a serious threat for incumbents.

Because of the asymmetries in value chains, incumbents are not able to catch-up fast enough when they finally see the threat, and in most cases, therefore, they end up losing the battle to the new entrants.

Now, if instead of targeting the low-end of a market with an asymmetric value chain, the new entrants tried to target the gross of the market (i.e. incumbents’ "good" customers) with a product that’s just an improvement to incumbent’s existing products (meaning that the entrant’s solution just a sustaining innovation with respect to incumbents’, and not set as a low-end disruption), incumbents would then be forced to retaliate as soon as they see the treat.

And because incumbents have the resources to aggressively fight and protect the market, they will aggressively fight and protect their market, and that’s a fight that the new entrant will almost always lose.

That’s why in my list of five rules to create disruptive products the first rule is not to target incumbent’s best customers. Because if you do that, you’re most likely doomed to failure.

Back to Tesla, you can see now then how its electric vehicles (EVs) are just a linear improvement to existing cars, meaning that their solution is by definition a sustaining innovation, and not set as a disruption, and what does Christensen’s theory say about new entrants that try to enter the market with sustaining innovations?


As soon as the incumbents saw the treat (Tesla getting traction with high-end customers offering a beautifully designed and affordable EV solution), they used their resources to aggressively fight and protect their market.

And how are they fighting and protecting their market?

By launching their own EV cars. Because guess what? they can do it with their existing Value Chain. There’s no asymmetry involved in their existing capabilities and those needed to make EVs.

They can do it with their own people and resources. Because EVs are just a linear improvement to internal combustion engine vehicles.

Now every car maker and their sister is making EVs, and now all these models will saturate the market soon, probably before Tesla becomes profitable.

At Tesla’s current burn rate, it is difficult to see how they can make it to profits. In CAPEX-intensive industries like in automobile, it is not possible to close a big gap by reducing costs alone.

The costs you can optimize are just too small to move the needle, for that you need sales (and margins). But if the market is already saturated, it is harder to make sales, and make a profit.

That’s why the disruption theory predicts that a likely future for Tesla, is that they will be acquired by a competitor or a company that's being left behind in the EV race, but that has a balance sheet strong enough to pull it off.

It is a sad ending for Tesla, but that's the way it could turn out.

I know, the disruption theory is just that, a theory, not a law of physics, but it can give you an idea of how this could end for Tesla, based on previous occurrences of the same pattern.

Of course I don’t buy Morgan-Stanley super bearish theory that Tesla stock could make it all the way down to $10 (right now is sitting at around $200), and is more likely that if the stock fall too deep it would be picked up on its way down by another company that wants to leap ahead in the EV race (Anyone for an APPL?).

The Visionary Elon Musk
Of course, I'm not going to blame it all on Musk, but over and over again he seems to get distracted from the company problems as Tesla navigates into deeper waters, and is difficult to see a clear shore in the horizon, and even more challenging to picture Musk as the captain that can take the company there.

A problem that Elon Musk has, just like many other visionaries have, is that he lacks the discipline and self-control to stir a company through rough times.

But please don’t stop reading, at least not yet. Just give me a chance to explain what I mean.

In my opinion, Elon Musk, just like Donald Trump, is one of the greatest marketers of our time. They are both full of shit, but they also manage to appeal to the bigger side of the audience they polarize.

They live by the old "Divide and Conquer" motto, but they do it in their own terms. They fracture believes keeping the bigger shards for themselves.

The way they do it is by creating impossible visions that inspire millions, and then "pick" themselves to take us there.

That is no different than Tom Cruise buying the Mission Impossible franchise to take the lead role in saving the world (you know, to continue the analogies with movies).

And is not that what these visionaries say is untrue or impossible to achieve. It’s just that they don’t have the "management skills" to pull it off, and they end up (inadvertently, I hope), screwing the people that invest in their vision.

Elon Musk has proven, by himself, that electric vehicles were a big thing NOW, and that space travel could be made less expensively NOW, demonstrating that the existing incumbents were just fat, sloppy and happy.

But he has also proven, also by himself, that he doesn't know how to manage.

These visionaries truly believe in what they believe, something that’s evidenced by the amounts of money of their own and personal sacrifices they invest to promote and make their ideas a reality, but the same skills that make them great visionaries, make them horrible managers.

And the way they try to do it in many cases is by becoming dictators.

Elon Musk the Dictator
Last week I suggested that Uber made a mistake by letting its co-founder Travis Kalanick (yes, this guy) go too early, at a time when the company still needed his stamina, but the more I think about it, I come to realize how hard it is for a company to transition from startup into an established business.

Not many people have the ability to switch from entrepreneurial mode into a manager role and be equally good at both. But those who can, undoubtedly, are the ones that make the most impact.

So, if my thesis about Kalanick was right, then, by extrapolation, what Tesla needs is adult supervision rather than letting the guy go, but sometimes I kind of contradict myself on that point.

My argument against my other argument is that people like Musk, just like Kalanick was as well, have a problem respecting authority, and the basic idea of forcing controls on them make them act more erratically.

I mean, if Elon Musk is insolent enough to disrespect the SEC without facing true consequences internally, do you really think he’s going to respect a new COO let alone a new CEO?

The guy controls the board and at the same time is Tesla’s largest shareholder, kind of what Zuckerberg is to Facebook right now, so to have their vision pursued these individuals "kidnap" their companies and destroy any internal structure that could weaken their position to keep the top job.

They are, by definition, dictators to their companies. Just like Maduro is to Venezuela and like Hussein was to Irak.

There’s no difference.

They control the company, and the people in power (those who can do something about it) align with them.

And that’s where I feel that the idea of forcing them out is in most times going to be the end of the story, no matter how you write it or how much you try to avoid that conclusion.

To explain that, let me tell you a short history.

A fictitious Tesla’s Story that Actually Happened
Allow me to paint the following fictitious scenario for Tesla: Let’s say that investors find a way to designate a new, independent board and that the new board then hires a new CEO, moving Elon into a technical executive job to keep him around, something like SVP of manufacturing or product development.

What may happen then, is that Elon, who will still have the admiration and loyalty of a good portion of the company’s employees, starts running stealth missions, pulling people from their day jobs to work on special projects that nobody else, including the board, knows about. Things like robotaxis, car insurance, or underground tunnels.

In the end, he's still the largest shareholder, and he can fire (or protect) anyone, at least that what he will tell people, and what people will believe.

Once the CEO finds out about these projects, because he will find out at some point, his first reaction would be to call Musk and ask about it immediately, but Musk, in his irreverent style, will most likely challenge the new CEO arguing that the project represents the future of the organization and that in X years the CEO will be grateful he was working on it now.

The lovely conversation probably ends up with Elon saying something along the lines of: "Fuck you, you can't fire me anyway".

The CEO, who has heard and seen this before, don't buy Elon's BS and go straight to the board asking them to fire Musk, or he will leave.

I can pretty much hear the guy yelling at the board "I’m done with this shit. I’m not gonna' try to work with this asshole anymore. It’s either him or me. So I'll step out of the room, and you make a fucking decision RIGHT …FUCKING…NOW.".

Fair enough.

The new board then, who now responds to the investors (in my story anyway), will invariably side with the CEO, and will invariably fire Musk.

But Musk doesn’t want to leave the building, and the board has to call security to get rid of the guy, who throws expletives as he’s escorted out.

Then right from the parking lot, he takes the fight to Twitter where he shares with his 27 MM followers how lousy, lame and much of losers the current management is, and why the company is doomed to fail without him.

In the meantime, Tesla stock takes a dive and investors a big hit.

Does that sound like a realistic scenario?

Yes, it does. Because it actually happened.

Well, kind of.

Not at Tesla but at Apple, when Steve Jobs (another great marketer), was let go from the company he co-founded.

Yes, Steve Jobs came back to Apple and turned the company into the cash cow it is today. But the Steve Jobs that did all that was not the Steve Jobs that was fired a few years back.

The Steve Jobs that came back to Apple was a mature, more rational version of Jobs, not the hotheaded maniac he was before. He was still an asshole, but a different kind. Smarter and stronger, and came back at a time when the company needed him.

While Steve was out, he became what we all hope Elon Musk will become at some point, but sometimes these guys have to go through life-changing and shameful experiences like these before they turn into the people that change the world.

The Elon Musk Premium Problem
If you look back at the origins of many tech companies, they were founded by two guys working out of a garage, where one guy mastered the technical side of the company while the other took care of the business side.

That's the classic story of every other tech startup including HP, Apple, Microsoft, and Google.

But in Tesla’s case, Elon Musk has half-played both roles for a long time, and at both he’s struggling.

Now Tesla has a severe Elon Musk problem, because getting rid of the guy would wipe out a premium he adds to the stock, which is supported by people who genuinely believe in his vision, most of them individual investors and employees who look up to him.

See how John Scully (the CEO who got Steve jobs fired) acknowledges the importance of a visionary founder in an organization:

But keeping the guy in the house may cause all kind of trouble, also destroying value for shareholders.

While I’m not proposing any magic bullet to this problem, in fact, I’m not sure I can think of a perfect solution to this problem, but Tesla has a severe Elon Musk problem, and it has to deal with it, like yesterday, because judging by its financials the worse is yet to come.

Walmart Keeps Beefing Up
Walmart dropped the hammer again this week, announcing three low-price tablets under its Onn electronics brand.

I'm not 100% sure about the strategic reasons behind this move, but Walmart is evidently trying to close the gap with Amazon and is working overtime to upgrade its entire Value System.

Here’s a theory about Walmart’s tablet strategy I found in Fobes:

But the Walmart tablet isn't about the tablet.

And it's not about the top-selling tablet, Apple's iPad, either.

Rather, it's about Amazon. And not even really about Amazon's Fire line of tablets, either, which start at just $50 and run up to $200. Because even Amazon's tablets are not really about the hardware. At that pricing, they're about the same thing as Amazon's hardware.
And that is the future of retail.

Amazon's Fire tablets, like Amazon's Echo line of smart speakers, are about being present in consumers' digital lives at the point of purchase. As such, they come jammed with Amazon's apps for buying, watching, and listening.

Not shockingly, Walmart's tablets do exactly the same thing.
Break open an Onn tablet, and you'll find the Walmart app. And the Walmart Grocery app. And an app for Sam's Club, plus a Walmart ebooks app, plus the Vudu app: Walmart's company for streaming movies and TV.

Sound familiar?

It should. This is exactly Amazon's playbook for owning digital sales of both physical, real objects -- including daily consumables like groceries -- and virtual digital experiences that you cannot own but can rent access to. Clearly, Walmart has learned from the best.

I can’t wait to see how this is going to play out, an although my heart and admiration are with Amazon on this fight, my money (if I had to bet) would be with Walmart on this one.

Amazon has created a parallel retail market that resides mostly online, but it has been sucking up customers from brick and mortar stores into its vortex.

Most retailers are succumbing to these forces, evidenced by the number of stores and malls closing down, but Walmart has upped its game and is quickly becoming into a fierce player as Amazon grows its legs onto the real, physical world.

The problem Amazon has right now is the problem that most innovating companies will have as they try to disrupt an industry: If the pace of innovation slows down (as it will eventually happen in any industry), players that are left behind may have a chance to catch up.

So unless they can continue innovating fast, they may eventually lose their edge and will face fierce competition in their own game.

Many retailers are having a hard time catching up since some of them (like SEARS for example) may be loaded with high levels of debt, a residue of previous leveraged acquisitions and may not have the ability to do anything about it.

Just watch as it all crumbles in front of their eyes, like Toys R Us just did.

This week I changed the header of this newsletter to make less about me and more about the content. Sorry if you still wanted to see my big face in there :)

I still have to work on getting these newsletters shorter. Ironically, I don't have enough time to make them shorter, so I have to work on this.

Don’t forget you can reply to this email with any feedback or suggestions for future editions. And you can always chat with me through google hangouts.

Just plug my email address in there ([email protected]) and shoot me a message. If I'm not available at that time, I'll definitively get back to you as soon as I see your message.

Checking out now. Talk to you next Friday.


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