The Link between Innovation and Competitive Advantage (Apple and Tesla)

Apple

Apple is undoubtedly one of the most innovative and valuable companies in the world today, recently becoming the first public company to reach a market capitalisation of $1 trillion (Johnston, 2018). A major source of Apple’s success and competitive advantage lies in the combination of product innovation and business model innovation that results in the creation of a strong ecosystem that attracts and maintains consumers.

Apple revolutionised the music distribution system through its innovation of the iPod/iTunes ecosystem. Although MP3 players existed in the market prior to the iPod, the fashionable design, simple and intuitive interface, and large storage space differentiated Apple’s product (first launched in 2001) from other digital music players and rendered portable CD players outdated. In addition to this product innovation, Apple innovated its business model for online music retail in 2003. Before the iTunes, digital music sales were through either subscription-based retailers that only allowed music to be downloaded through their catalogues, or illegal sharing sites such as Napster. Apple differentiated its model for digital music distribution by allowing consumers to legally purchase and download individual songs for $0.99 each through the iTunes platform. The innovative integration of hardware and software has allowed the company to achieve a sustainable competitive advantage by creating an ecosystem of product and services that is unique and difficult to imitate or substitute (Bajarin, 2011). As the number of iPod users increased, the number of iTunes users and the number of songs downloaded on iTunes also increased, and vice versa; as a result of this network effect, the iPod dominated digital music player market and the iTunes became the largest music retailer in the world by 2010 (Statista, 2018).

Furthermore, Apple extended this hardware/software ecosystem to smartphones by creating the iPhone and iOS (iPhone Operating System). Not only was the iPhone differentiated from other smartphones with its fashionable and aesthetically appealing design, intuitive interface and advanced features, but by creating a software exclusively for the device rather than relying on a software that was already available such as the Android, Apple is able to fully control and heighten the user experience. Therefore, Apple’s innovative ecosystem-based business model is a major source of competitive advantage, as all of its products and services are designed to be compatible and work easily with each other, but not with those of other companies. The functionality and convenience of the ecosystem, as well as the high costs associated with switching to another manufacturer or provider, naturally allows Apple to retain its customers and leverage its relationships with existing customers, leading to strong brand loyalty (Canada, 2012). Thus, Apple’s strategies to manufacture innovative and differentiated products, as well as to innovate its business model to attract and hold consumers into its ecosystem, have been critical in its business successes (Montgomerie and Roscoe, 2013). As clearly demonstrated by Apple, business model innovation encompasses a more fundamental transformation compared to product or service innovation, but can lead to a ‘game-changing’ outcome (Lindgardt et al., 2009).

Tesla

It is undeniable that the success of Tesla in the automotive industry is largely attributable to its innovative business solutions. Founded in 2003 by a group of engineers in Silicon Valley, the company is focused on designing, manufacturing and selling electric vehicles. Although electric vehicles themselves have existed for over a decade (first invented by Robert Anderson in 1832), Tesla took the initiative to design and manufacture luxury and technology-savvy electric vehicles and make them readily available and affordable to consumers. After launching its first luxury electric sports car (Tesla Roadster) in 2008, it has expanded its product line with the world’s first premium electric sedan (Model S) as well as a low-priced electric car (Model 3) (Tesla, 2018a).

Tesla has several competitive advantages over its competitors in the electric vehicle industry, one of which stems from its innovation of lithium ion battery cells. By making heavy investments in battery manufacturing at the Gigafactory, the company focuses on building economies of scale and optimising manufacturing processes in order to reduce battery costs by 30% (Desjardins, 2016). This allowed Tesla to achieve a competitive edge over its competitors in terms of cost advantage, manufacturing the lowest battery cost in the electronic vehicle industry (Palazzo, 2018). Additionally, Tesla continues to innovate its battery cells by making them more efficient, long-lasting and safer, in order to differentiate itself from its competitors in the industry.

Another source of competitive advantage is Tesla’s innovative and expanding Supercharger network. The company invested hundreds of millions to become the first to develop its own fast-charging infrastructure. Although this was initially seen as a risky decision as charging was something that electric vehicle manufacturers have traditionally neglected, this allowed Tesla to meet customer demand and provide an innovative solution for the issue of long charging duration of electrical vehicles (and make electric vehicles more readily adoptable for general consumers) (Bullis, 2013). The Supercharger enables Tesla’s vehicles to be fully charged in about an hour, and there are now over 10,000 Superchargers worldwide, allowing the company to differentiate itself from and easily take the lead over its competitors (Tesla, 2018b). Tesla continues innovation by developing more powerful and quicker charging Superchargers.

Moreover, while manufacturers in the industry conventionally sell their cars through dealerships, Tesla has transformed the way cars are sold by pursuing direct sales through its own retail stores and online stores. This business model not only reduces distribution costs, but customer retail experiences are considerably improved both in-store and offline, as the showrooms and retail stores are technology-enhanced and staffed by Tesla employees, and customers are able to customise vehicles before purchasing them online (Zucchi, 2018). As a result of this business model innovation, over 15,000 reservations of Model S were made in-store and online, contributing to a revenue increase of 85% in the first year (Nurun, 2015). Tesla’s unique and innovative sales model is difficult for competitors to imitate given the significant costs that are involved in establishing a global network of company-owned retail stores.