The effect of strategy and business model design on firm performance : a multiple case study perspective

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The effect of strategy and business model design on firm

performance: A multiple case study perspective

University of Amsterdam Amsterdam Business School

Faculty of Economics and Business

Study : MSc Business Administration: Strategy track Student : Dennis Reus

11112646@student.uva.nl Professor : Dr. Stephan von Delft

Date : 2017-06-22

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Page 2/72 Abstract

This study acknowledges the firm’s business model design as mediating variable influencing firm performance outcomes. It is argued that a firm’s generic strategy is related to business model design which has implications for firm performance outcomes. This qualitative multiple-case study of Tesla and Toyota, provides understanding in how these companies shaped their strategy and business model design and achieved firm performance outcomes. It is found that a cost leadership strategy is linked to an efficiency-centered business model design, and a differentiation strategy is linked to a novelty-centered business model design. Mixed results are found for business model design themes mediating firm performance outcomes. The novelty-centered business model design of Tesla indicated negative firm performance, while the efficiency-centered business model design of Toyota indicated positive firm performance. This study contributes to the overall goal in strategic management to explain performance differences among firms, and additionally extends the findings of Zott and Amit (2007, 2008) by adding Toyota as mature firm into their framework.

Keywords: Strategy, Business model design, Firm performance, Tesla Inc., Toyota Motor Corporation

Statement of originality

This document is written by student Dennis Reus who declares to take full responsibility for the content of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the content.

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1.

Introduction

A primary objective within the field of strategic management is the explanation of

performance differences among firms (Barney, 1991; Dess & Robinson, 1984; Porter, 1980, 1985; Rumelt, Schendel, & Teece, 1994). For example, the widely acknowledged positioning school of strategy argues that performance differences can be explained by firms adopting different generic strategies. According to Porter (1980, 1985), a superior position within an industry acts as source for achieving sustainable competitive advantage and enables

exceptional firm performance.

Yet, a relatively new explanation illustrating performance differences is provided by

variations among a firm’s business model (Chesbrough, 2010; Foss & Saebi, 2017; Malone et al., 2006; Zott & Amit, 2007). The increased pace of technological developments is blurring boundaries of industries and forces firms to reshape their business models in order to find new ways of creating and capturing value (Casadesus-Masanell & Ricart, 2011; Johnson,

Christensen, & Kagermann, 2008; Zott & Amit, 2007). Business models explain “how a business works” (Magretta, 2002, p. 87) and outline the logic of how a firm creates and captures value (Baden-Fuller & Morgan, 2010).

Two widely acknowledged studies that illustrate performance outcomes of business models are conducted by Zott and Amit (2007, 2008). The authors identified four main sources of value creation and qualified those as business model design themes (Amit & Zott, 2001; Zott & Amit, 2007). The authors define “the design of an organization’s boundary-spanning transactions as business model design” (Zott & Amit, 2007, p. 181), and demonstrate that the more an entrepreneurial firm adopts a novelty-centered or efficiency-centered business model design, the higher performance outcomes will be (Zott & Amit, 2007). A novelty-centered business model design aims to provide new methods for organizing economic transactions and an efficiency-centered business model design is focused on economizing transaction-cost

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Page 6/72 (Zott & Amit, 2007). The authors also emphasize that a differentiation strategy is related to a novelty-centered business model design, and a cost leadership strategy is related to an

efficiency-centered business model design (Zott & Amit, 2008). Focusing on a specific strategy increases fit with a particular business model design and aligning the contingency factors of both constructs is an important condition for achieving higher firm performance (Mintzberg, 1990; Siggelkow & Levinthal, 2003; Zott & Amit, 2008). For example, the cost leadership strategy is linked to the efficiency-centered business model design as both concepts aim to minimize costs and benefit from increased transaction volume.

Hence, this study acknowledges the firm’s business model design as variable influencing firm performance. However, although the two promising studies by Zott and Amit (2007, 2008) provide guidance, current literature is still in need for more evidence. Two major limitations remain unsolved. First of all, the studies solely focus on entrepreneurial firms, so we still know less about the impact of these variables on mature firms (Zott & Amit, 2007). Secondly, the studies do not illustrate in-depth how a firm’s strategy relates to business model design (Zott & Amit, 2008) and how these variables impact firm performance. It is argued that the business model should not be confused with strategy (Casadesus-Masanell & Ricart, 2011; Teece, 2010). The strategy of a firm is illustrated by how a firm desires to compete (Porter, 1980), while “a business model is a reflection of the firm’s realized strategy” (Casadesus-Masanell & Ricart, 2010, p. 195).

Therefore, this study aims to provide insights into how strategy and business model design impact firm performance outcomes, and asks the following question: How do strategy and

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Page 7/72 As extension of Zott and Amit (2007, 2008), this study also incorporates mature firms. The findings of this study have two contributions. First of all, the study explains in-depth how the strategy of a firm relates to business model design. Secondly, the study addresses the overall objective in strategic management by providing insights in firm performance outcomes. Additionally, this study is valuable for managers that operate in the automotive industry, because the findings illustrate how Tesla Inc. and Toyota Motor Corporation shaped their strategy and business model design.

This study adopts a qualitative content analysis methodology. Two case studies of Tesla and Toyota both support the projected relationship between generic strategies and business model design themes. Tesla signals a differentiation strategy and adopts a novelty-centered business model design. Toyota signals a cost leadership strategy and adopts an efficiency-centered business model design.

The findings provide mixed support for explaining firm performance outcomes. The Tesla case study revealed that their novelty-centered business model design reduced financial performance by investing heavily in R&D. The Toyota case study provided support for the proposition, as the company illustrated positive firm performance by benefiting from

efficiency. Additionally, this research identified that interaction among business model design themes can positively leverage sources of value creation. Both Tesla and Toyota illustrate interaction among their business model design themes. In the case of Tesla the interaction effect was unidirectional (novelty leveraged efficiency), while in the case of Toyota the interaction was reciprocal.

The next chapter introduces the theoretical framework. Chapter three provides the research design and methodology. Chapter four presents the results, and chapter five concludes with a discussion and overall conclusion.

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2. Theory and propositions

2.1 Strategy

A central objective among strategy scholars concerns the explanation of performance

differences among firms (Barney, 1991; Dess & Robinson, 1984; Porter, 1980, 1985; Rumelt et al., 1994; Zahra & Covin, 1993). The major question centers around how firms achieve a sustainable competitive advantage (Teece, Pisano, & Shuen, 1997). Two prevailing paradigms contributed significantly to the explanation of this question. On the one hand, the positioning school of strategy states that a superior position within an industry is a source of sustainable competitive advantage (Porter, 1980, 1985). The positioning school is anchored in the ‘industrial organization’ framework (Ghemawat, 1999; Mintzberg & Lampel, 1999) which assumes that the industry determines overall profitability and thereby perceives firms as homogeneous entities (Porter, 1979). Attractive industries and favourable positions within those industries are considered to be the sources of above-average firm performance (Porter, 1979). According to Porter, industry-attractiveness can be determined by using his five-forces framework, and favourable competitive positions within an industry can be retained by

adopting generic strategies (Porter, 1980, 1985). The positioning school adopts a deterministic outside-in approach to strategy and considers strategy as fit to the business environment. On the other hand, the resource-based view (RBV) states that accrued valuable, rare, inimitable and non-substitutional resources are the sources of achieving sustainable

competitive advantage (Barney, 1991; Dierickx & Cool, 1989). The RBV is anchored in the economic concept of Ricardian rents and perceives firms as heterogeneous bundles of

resources and capabilities (Peteraf, 1993; Wernerfelt, 1984). The RBV obtains a voluntaristic inside-out approach to strategy and considers strategy as stretch shaping the business

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Page 9/72 The two main approaches to strategy illustrate different sources of achieving sustainable competitive advantage. As the notion of strategy is broad (Mintzberg, 1978), this study

follows Zott and Amit (2008) by focusing solely on the product market dimension of strategy. Practitioners as well as academia need to understand the impact of a product market strategy on firm performance (Zott & Amit, 2008). A firm’s product market strategy is displayed by the strategic market position of a firm in a certain competitive environment and can be measured by generic strategies (Zott & Amit, 2008). How a company’s desires to compete in a certain product market is reflected by its business level strategy (Hitt, Ireland, & Hoskisson, 2009). So the intention of a business strategy is to establish a distinctive position in the business environment relatively to competitors (Hitt et al., 2009). Three generic strategies are identified by Porter (1980) and explain how firms deal with competitive forces in order to outperform competitors in an industry.

2.1.1 Cost leadership

“The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors” (Hitt et al, 2009, p. 108). A cost leadership strategy emphasizes tight control of costs and efficiency for each operational dimension (Porter, 1980). Efficiency is defined as the particular condition or situation for which no possible preferable alternative can be found and implemented (Williamson, 1999). The orientation of a cost leadership strategy is

relatively more focused on competitors than on customers (Frambach, Prabhu, & Verhallen, 2003). Firms that aim to achieve a cost leadership position continuously examine new

pathways to optimize value chain activities in order to decrease its costs vis-à-vis competitors (Hitt et al., 2009). Accordingly, the firm is primarily focused on supply side activities

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Page 10/72 2.1.2 Differentiation

“The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them” (Hitt et al, 2009, p. 112). A differentiation strategy emphasizes raising the

distinctiveness of a firms value offering and thereby creating value for buyers (Porter, 1980, 1985). Differentiating firms focus on product or service dimensions that generate value for customers (Hitt et al., 2009). Differentiation can be illustrated by superior quality, service, brand name, technology and design (Frambach et al., 2003; Walker & Ruekert, 1987). Customers appreciate and value the importance of such characteristics and are therefore willing to buy at premium prices, enabling above-average firm performance (Hitt et al., 2009).

2.1.3 Focus

A focus strategy emphasizes to specialize in a specific customer or product segment and serve this segment exceptionally well (Porter, 1980). Companies adopt a focus strategy when they serve a specific market niche and aim to exclude room for competitors in this segment (Hitt et al., 2009). Specific markets are distinguished by buyer groups, product lines or geographic locations (Hitt et al., 2009). A focus strategy can be either a focused differentiation or focused cost leadership strategy. When a firm does not succeed to establish one of the generic

strategies sufficiently it might get ‘stuck in the middle’ (Porter, 1980). Such firm is

considered to neither fully adopt a cost leadership or differentiation strategy. Firms adopting a focus strategy are primarily customer orientated and can exclude competitors from their niche if they obtain comprehensive understanding on how to satisfy their customers (Frambach et al., 2003). A focus strategy differs from a generic differentiation and a cost leadership strategy because the targeted market is narrower. Figure 1 illustrates the generic strategies framework developed by Porter (1985).

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Page 11/72 Figure 1: Generic strategies framework (adjusted by author from Porter, 1985)

The generic cost leadership and differentiation strategies developed by Porter (1985) are considered suitable for this study for three main reasons. Firstly, these strategies display the impact on a firm’s business model design by organizing value chain activities in a distinctive way (Porter, 1996). A cost leadership strategy aims to reduce a supplier’s opportunity cost by focusing on efficiency. A differentiation strategy aims to increase a buyer’s willingness-to-pay by focusing on creating new value. Secondly, the firm’s generic strategy is an indicator for measuring the product market strategy of a firm (Zott & Amit, 2008). Thirdly, the generic strategies are also considered to cause the two basic types of competitive advantage (Porter, 1985) which act as source for explaining performance differences among firms.

2.2 Business model design

Over the past decade, research on business models established a significant role within the field of strategic management (Markides, 2013; Sosna, Trevinyo-Rodríguez, & Velamuri, 2010; Teece, 2010). Business model literature adopts an integral approach to analyze multiple functions of the firm, such as the value proposition, market segments, value chain activities and outline revenue mechanisms, cost structures and position in the value network

(Chesbrough, 2010). By contemplating and aligning these aspects, the business model

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Page 12/72 Lecocq, 2010). Firms can obtain a potential competitive advantage if they operate a distinct business model that creates more value than its competitors (Zott & Amit, 2008). The notion of value creation is of vital importance and the underlying mechanisms need to be understood (Amit & Zott, 2001). Value creation can be explained by using the logic of Brandenburger and Stuart (1996). According to these authors, the total value created by all players in a vertical chain is determined by the difference between a buyer’s willingness-to-pay and a supplier’s opportunity cost. The added value of an individual player within such value chain is determined by measuring the drop in total value created if that focal firm is left out of the chain (Brandenburger & Stuart, 1996).

Within business model literature four main sources of value creation are identified by Amit and Zott (2001), who adopted a comprehensive framework for analysing a firm’s economic exchanges with other entities in the business environment. The authors qualified the main value drivers of a firm’s business model activities as business model design themes. According to Miller (1996), themes are formed when the connecting aspects between elements are similar. The authors identified four sources of value creation; novelty, lock-in, complementarity and efficiency (Amit & Zott, 2001).

2.2.1 Novelty

A novelty-centered business model design aims to provide new methods for organizing economic transactions (Zott & Amit, 2007). The novelty-centered business model design theme is anchored in the notion of Schumpeterian competition. This concepts reflects

Schumpeter’s vision on competition by the process of ‘creative destruction’ (Jacobson, 1992). In this dynamic process, an entrepreneur triggers a shift in the business environment by newly introducing innovative products, ways of production or organizational approaches. These

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Page 13/72 innovations provide the opportunity to temporarily earn above-average returns. However, in the long run these settled innovations will be replaced by a yet other innovations and thereby reactivating the perpetual process of creative destruction (Jacobson, 1992). In a novelty-centered business model design this process depicts how new value is created by; linking new entities, eliminating market inefficiencies, addressing previously uncovered customer needs or by creating new markets (Amit & Zott, 2001). Novelty as source of value creation is for example illustrated by Apple Inc. Their introduction of the iPod with iTunes redefined the music industry by connecting participants in a novel way and creating a new market.

2.2.2 Lock-in

A lock-in orientated business model design aims to raise the amount of economic transactions by enticing customers to repeatedly transact with a focal firm (Amit & Zott, 2001). The crucial drivers of such system are grounded in the concepts of switching costs and network externalities. Switching costs occur as customers gain experience with certain products and therefore become more reluctant to switch (Lieberman & Montgomery, 1998). Network externalities occur when the number of users of a product significantly increases the value of using that product (Lieberman & Montgomery, 1998). Both concepts contribute to enclose a particular entity in the focal firm’s business model and thereby preventing this entity from transacting with other players in the competitive environment (Amit & Zott, 2001). Lock-in as source of value creation is for example illustrated in the software industry. Firms that use customized software could potentially face significant switching cost as the software might alter the compatibility of data with other software programs.

2.2.3 Complementarity

A complementarity business model design aims to increase the value of a component when it is combined with yet another component. The complementarity business model design can be illustrated by the role of complementors in the Value Net model of Brandenburger and

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Page 14/72 Nalebuff (1996). These authors argue that complementors are players within a certain

business environment that increase the value of a focal firm’s product when it is combined with the complementors product. Collectively the products create more value when they are combined, than when obtained separately. The importance of this notion is also pointed out by Teece (1986), who emphasizes that owning important specialized complementary assets contributes to outperforming competitors and helps determining which company gains most from an innovation. Complementarity as source of value creation is for example illustrated in the book industry. Amazon leveraged their position as online bookstore with the Kindle e-reader to stimulate the reading of books digitally.

2.2.4 Efficiency

In an efficiency-centered business model design the system is focused on minimizing transaction-cost in order to increase overall efficiency. Gains from reduced transaction-cost stem from alleviating complexity, information asymmetries, uncertainty, coordination costs and transaction risk (Zott & Amit, 2008). The notion of transaction cost portrays the

organization by describing its governance structure (Williamson, 1999). Uncertainty,

transaction specific investments, and the amount of transactions are considered to be the main drivers of transaction cost (Williamson, 1999). The efficiency-centered business model design is specifically leveraged to address these aspects. Efficiency as source of value creation is for example illustrated in the airline industry. Low-cost airline Ryanair reduced complexity by eliminating free meals, free baggage and seat allocation to reduce costs.

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Page 15/72 Figure 2: Sources of value creation (adjusted by author from Amit & Zott, 2001)

This study builds on the business model design themes of Zott and Amit (2001) for two main reasons. First of all, the authors developed a valuable connection between strategy and business model design. Zott and Amit (2008) link a differentiation strategy with a novelty-centered business model design (explained by raised willingness-to-pay), and a cost

leadership strategy is linked with an efficiency-centered business model design (explained by reduced opportunity costs). This connection is valuable because academia and practitioners need to understand how strategy and business model design affect firm performance (Zott & Amit, 2008). Secondly, the business model design themes provide the essential characteristics of a business model system and thereby illustrate how a firm’s creates and captures value. These aspects both impact firm performance and thereby act as source for explaining differences among firm performance outcomes.

This research solely focuses on novelty and efficiency as sources of value creation because these fit with Porter's (1985) main types of competitive advantage. Additionally, innovation and cost reductions are identified as important themes related to strategy (Miller, 1996).

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Page 16/72 Therefore, this study chose to follow Zott and Amit (2008) and focus on novelty and

efficiency as major sources of value creation that affect performance outcomes.

In accordance with the generic strategies, the efficiency and novelty-centered design themes are not mutually exclusive (Zott & Amit, 2007). A particular business model can obtain multiple design themes. The focus on innovation in a novelty-centered design theme could for example reduce transaction costs and thereby leverage efficiency-centered aspects of the business model design.

2.3 Propositions

This section presents five working propositions that jointly answer the main research question: How do strategy and business model design influence firm performance?

Because the business model of a firm represents its realized strategy (Casadesus-Masanell & Ricart, 2010; Osterwalder & Pigneur, 2002), it is identified that there is a dependent

relationship between the two constructs. Importantly, contingency theory emphasizes that coherence among contingency factors is a vital determinant for a firm’s success (Galbraith, 1977). Therefore, focusing on a specific strategy increases fit with a compatible business model design and aligning the important contingency factors of both constructs contributes to achieving higher firm performance (Mintzberg, 1990; Siggelkow & Levinthal, 2003; Zott & Amit, 2008).

As pointed out earlier, the product market strategy of a firm can be measured by generic strategies (Zott & Amit, 2008). Firms that pursue a cost leadership strategy aim to establish lower cost vis-à-vis competitors (Porter, 1980). Achieving a low-cost position enables the firm to maintain profits after competing away all rivals in the market and thereby generating above-average returns. Price sensitivity is considered as vital contingency factor for

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Page 17/72 desire to operate scalable efficient facilities to benefit from economies of scale. Subsequently, these firms intent to minimize costs of activities related to research and development,

customer service and sales (Porter, 1980).

The overall aim to reduce costs in a cost leadership strategy is displayed in a firm’s business model design by minimizing transaction costs as the efficiency-centered business model design is anchored in transaction cost economics. By lowering factor market costs the firm is able to implement a low cost pricing policy towards customers, which exploits pricing sensitivity and increases the amount of transactions. In turn, this mechanism leverages the intent to benefit from economies of scale. These dominant characteristics indicate that the cost leadership strategy is linked to the efficiency-centered business model design as both concepts aim to minimize costs and benefit from an increased amount of transactions. Therefore, it is expected that firms which pursue a cost leadership strategy adopt an efficiency-centered business model design.

P1a): Firms that pursue a cost leadership strategy are likely to adopt an

efficiency-centered business model design.

On the contrary, firms that pursue a differentiation strategy aim to formulate an unique value offering (Porter, 1980). The differentiation strategy enables above-average firm performance by offering exceptional customer value while retaining customer loyalty and capturing relatively high profit margins. The unique value offering can relate to distinct dimensions such as products, services, technology, brand images or distribution channels (Porter, 1980). The overall aim to offer unique value in a differentiation strategy is displayed in a firm’s business model design by adopting a premium pricing policy and by introducing innovative ways to transact with new parties in the business environment. According to Murray (1988), a differentiation strategy can only be successful if customers adopt purchase intentions which

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Page 18/72 are not solely focused on pricing. The novelty-centered business model design theme is

anchored in the notion of Schumpeterian competition which has innovation as major rent generating mechanism. An innovative value proposition can establish a perceived customer image by offering superior products relatively to competitors (Murray, 1988). Such

innovative value proposition will link new customers and markets to increase the amount of transactions. A novelty-centered business model design illustrates a focus on research on development and new product development. These dominant characteristics enable the firm on the one hand to raise willingness-to-pay of customers and capture higher profit margins, while on the other hand facilitate an increased amount of transactions. Therefore, it is

expected that firms which pursue a differentiation strategy adopt a novelty-centered business model design.

P1b): Firms that pursue a differentiation strategy are likely to adopt a

novelty-centered business model design.

According to Porter (1980, 1985), a superior position within an industry acts as source for achieving sustainable competitive advantage and enables exceptional firm performance. The generic cost leadership and differentiation strategies act as the two basic sources for achieving competitive advantage (Porter, 1985). However, a relatively new explanation for performance differences among firms is addressed by variations among business models (Chesbrough, 2010; Foss & Saebi, 2017; Malone et al., 2006; Zott & Amit, 2007). Adopting different types of business models changes the process of how total value is created. And the notion of value creation influences how value is captured (Coff, 1999) which impacts performance outcomes. Among other scholars (Brea-Solís, Casadesus-Masanell, & Grifell-Tatjé, 2015; Malone et al., 2006), two studies that illustrate performance outcomes of business models are conducted by Amit and Zott (2007, 2008). These authors demonstrated that the more an entrepreneurial

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Page 19/72 firm adopts a novelty-centered or efficiency-centered business model design, the higher performance outcomes will be (Zott & Amit, 2007).

Focusing on an efficiency-centered business model design enables a firm to reduce its factor market costs and facilitates adopting lower prices to buyers (Zott & Amit, 2008). As the firm is able to use a lower pricing policy than competitors in the market, above-average firm performance is expected. The efficiency-centered business model design is anchored in transaction cost economics which aims to minimize transaction costs. The matching of a transaction with the appropriate governance structure enables several advantages (Leiblein, 2003). By reducing information asymmetry the firm lowers uncertainty and thereby counters opportunistic behavior. The delineation of information barriers will additionally lower search and bargaining costs. By simplifying transactions, the firm could also benefit from scale economies by for example consolidating demand and operate a higher level of purchase volume per order. An efficiency-centered business model design theme also aims to optimize the supply chain by increasing the processing of transactions and making inventory

management more effective. Therefore, it is argued that the more a firm’s business model design is efficiency-centered the more cost can be reduced and prices be lowered, causing higher firm performance.

P2a): Firms that adopt an efficiency-centered business model design are expected to

achieve high firm performance.

Exceptional profitability also stems from providing higher value to customers which enable the adoption of premium prices (Porter, 1996). The novelty-centered business model design aims to link new parties in the business environment. The firm can address new customers, markets and services by focusing on product innovation and new ways of organizing

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Page 20/72 transactions. By providing exceptional value, other parties in the business environment

perceive there are no equivalent alternatives available in the market. Firms are therefore enticed to buy at premium prices. Accordingly, the more a firm’s business model design is novelty-centered, the larger amount of customers could be targeted which increases the beneficial effect from adopting premium prices and thereby causes high firm performance.

P2b): Firms that adopt a novelty-centered business model design are expected to

achieve high firm performance.

Importantly, it is recognized that business model design themes are not mutually exclusive (Zott & Amit, 2007). As emphasized by Teece (2010), a firm can create value for a variety of markets by using different business models. A company could obtain multiple business model design themes simultaneously. Firms that adopt multiple business models designs should importantly find a balance between design theme elements. This balance contributes to achieving legitimacy (Zott & Huy, 2007), which acts as factor for venture growth and performance (Zimmerman & Zeitz, 2002).

As described in Amit and Zott (2001), novelty as source of value creation can be a

complementary driver of efficiency. The focus on innovation in a novelty-centered design theme could for example reduce transaction costs and thereby leverage efficiency-centered aspects of a business model design. The inverse could also occur when a focus on efficiency leads to the discovery of innovative solutions that lowers marginal cost of additional

investments in R&D. Therefore, it is argued that if novelty and efficiency as business model design themes are in balance, an interaction effect might occur which stimulates value creation and thereby firm performance.

P3): Firms that combine a novelty-centered with an efficiency-centered business

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Page 21/72 Figure 3 illustrates the propositions in the conceptual model of this study.

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3. Research design

A multiple case study analysis is conducted to examine the propositions. According to Eisenhardt (1989, p. 534), case study research “is a research strategy which focuses on understanding the dynamics present within single settings”. The notions of strategy and business models are broad, complicated and context dependent and therefore case studies are considered as an appropriate research method (Baxter & Jack, 2008; Eisenhardt, 1989; Mintzberg, 1979). Additionally, the case study research method facilitates examination of various levels of analysis within an individual case study (Yin, 1984), which is necessary to examine the strategy and business model design of a focal firm. By adopting multiple-case studies, the research design facilitates analysing various aspects which increase insights in the phenomenon. Subsequently, a multiple case study methodology enables comparisons between similarities and differences among cases (Baxter & Jack, 2008) and extends understanding of the phenomenon (Miles & Huberman, 1994).

The research philosophy encloses beliefs about how the researcher perceives the environment which constructs the chosen research strategy and methods (Saunders, Thornhill, & Lewis, 2009). The main research inquiry of this study focuses on explaining the ‘how’ question of a phenomenon within a particular setting. An interpretivist research philosophy is adopted to explain this perspective with an interpretivist view that can be useful in case study research (Saunders et al., 2009). The approach of this explanatory study is deductive in nature. The objective is to provide insights in how the theory of Zott and Amit (2007, 2008) can be explained more in-depth by examining and clarifying real life cases.

3.1 Case selection

This study adopts a purposive sample technique by selecting cases that logically should contain the necessary information to provide insights into the research question (Marshall,

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Page 23/72 1996; Saunders et al., 2009). The logic behind the case selection procedure is grounded in the two main sources of value creation; novelty and efficiency (Amit & Zott, 2001). The sample contains two mature publicly traded firms that operate in the same industry and each

individual firm is expected to display a particular dominant business model design theme. The novelty business model design theme is anchored in the notion of Schumpeterian competition in which innovation is the major rent generating mechanism. An organization’s degree of innovation can be measured by calculating the ‘innovation premium’ using a method developed by Dyer, Gregersen and Christensen (2011). In this method, the base value of a firm is calculated by estimating the net present value of cash flows generated by a firm’s current business without any growth projections. This base value is compared with the firms total enterprise value from which it can be inferred if a firm displays a higher enterprise value than base value. If the enterprise value is higher than the base value, the company faces an innovation premium in its stock price. American business magazine Forbes established a global ranking displaying the top 100 of most innovative firms based on the innovation premium method. Forbes (2016) concluded that Tesla Inc. is the world’s most innovative company in 2016. Therefore, Tesla Inc. is considered to be an appropriate case to add in the sample as it logically should reflect the characteristics of a novelty-centered business model design.

The second company stems from the same industry to increase comparability among cases. In order to contrast the novelty-centered business model design, the second company should display an efficiency-centered business model design. This contrast is helpful because heterogeneous samples enable the recognition of particular patterns (Saunders et al., 2009). The major objective in an efficiency-centered business model design is to minimize

transaction cost (Amit & Zott, 2001). An acknowledged company for reducing transaction costs in the car industry is Toyota Motor Corporation (Dyer, 1997; Dyer & Nobeoka, 2000;

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Page 24/72 Lieberman & Asaba, 1997). Toyota managed to reduce transaction costs by introducing the Toyota Production System (Dyer, 1996; Dyer & Nobeoka, 2000). Therefore, Toyota is considered to be an appropriate case to add in the sample as it logically should reflect the characteristics of an efficiency-centered business model design. The global car industry is subsequently appropriate for this study as it is currently exploring a dominant business model design to incentivize mass-market customers in regards to the rising demand for electric vehicles (Bohnsack, Pinkse, & Kolk, 2014).

3.2 Data collection

A qualitative research approach is adopted using secondary literature. The propositions are examined by performing a content analysis. According to Krippendorff (2004), content analysis is a major influential research technique in the domain of social sciences. Content analysis is defined as “a research method for the subjective interpretation of the content of text data through the systematic classification process of coding and identifying themes or patterns” (Hsieh & Shannon, 2005, p. 1278). A distinctive characteristic of the content analysis technique concerns analysing pieces of text and taking their specific contexts into consideration (Krippendorff, 2004). A directed content analysis approach is chosen to link the data with the research question (Miles & Huberman, 1994). The initial categories used for coding the data are borrowed from the framework developed by Zott and Amit (2007, 2008) which can be found in appendices 7.1 and 7.2. Hence, all pieces of data are interpreted and placed within this framework. This approach enables pattern matching among variables in order to find a possible explanation for the phenomenon (Yin, 2003). By adopting this framework the deductive approach of this study is underlined, and the scope of the study is clearly demarcated (Hsieh & Shannon, 2005). The content analysis method is considered as appropriate because business model design themes concern the firm’s boundary-spanning transactions within the total business environment and therefore a broad perspective is

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Page 25/72 necessary. Subsequently, as the focal firms operate globally, a wide perspective increases insights in the phenomenon by triangulating data from multiple secondary sources.

Three different types of data are collected for each individual case. Firstly, annual reports are adopted as data source. Previous research has shown that investors use the content of annual reports as important indicator of firm performance (Bühner & Müller, 1985). Annual reports not only contain justification of previous firm performance, but also provide an outlook towards future firm performance (Staw, McKechnie, & Puffer, 1983) and yield insights into organizational cognition (Kaplan, 2008). On top of this, annual reports are compiled based on International Financial Reporting Standards which increases comparability. Secondly,

newspaper articles published by the Financial Times are retrieved from LexisNexis Academic. The Financial Times is an English newspaper that is widely acknowledged for covering international topics related to the field of business and economics. In 2016 the Financial Times held a total of 846,000 subscriptions on printed and online news (Financial Times, 2016). The search criteria for the Financial Times articles excluded opinion related articles and duplicated content. Thirdly, peer-reviewed articles are retrieved from Scopus. The Scopus database is considered to be one of the largest peer-reviewed journal collection in the world (Elsevier, 2017). Peer-reviewed articles are valuable for this study as they already possess descriptions and findings that relate to the particular firms in question. Additionally, peer-reviewed articles are an important channel for communication among researchers (Seuring & Gold, 2012). Only English articles from the subject area ‘Business, Management and Accounting’ and ‘Economics, Econometrics and Finance’ published in academic journals are included in the search criteria of Scopus. The top ten most cited and relevant articles are added in the data collection for each company. The scope of the annual reports and newspaper articles is limited to previous three years (2014, 2015 and 2016), to prevent the study from

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Page 26/72 being threatened by data overload (Miles & Huberman, 1994). Slightly different search

criteria were used to extract peer-reviewed articles from Scopus for Tesla and Toyota because more relevant literature was available for Toyota as the company exists longer. Table 1 illustrates the amount of material gathered per type of data for each company.

Table 1: Data collection per company

Company Data type Amount1

Tesla Inc. Annual reports 3

Financial Times articles 292 Scopus peer-reviewed articles 10 Toyota Motor Corporation Annual reports 3

Financial Times articles 439 Scopus peer-reviewed articles 10

Each collected document was imported in the qualitative data analysis software program called Atlas.ti. Systematically using computer assisted qualitative data analysis software can contribute to increase rigor and transparency (Saunders et al., 2009). The main variables from the conceptual framework are adopted as initial coding categories (Miles & Huberman, 1994; Potter & Levine-Donnerstein, 1999). During the data analysis procedure the data is coded and assigned to one of the following overarching categories; differentiation strategy, cost

leadership strategy, novelty-centered business model design, efficiency-centered business model design or firm performance. By adopting this approach, data analysis and data collection occur in an iterative process which contributes to the understanding of the phenomenon (Miles & Huberman, 1994). During the coding analysis process, meaning is extracted from the content which enables examination of the propositions (Miles & Huberman, 1994). The overall research question is answered by the combined findings of each proposition. Table 2 provides an overview of how each variable is linked to the propositions.

1_{The exact search criteria and steps undertaken in the data collection process are carefully documented and can}

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Page 27/72 Table 2: Overview variables and propositions

Variable P1a P1b P2a P2b P3

Cost leadership strategy X

Differentiation strategy X

Efficiency-centered business model design X X X

Novelty-centered business model design X X X

Firm performance X X X

Overall, a total of 2322 quotations were placed into 59 individual sub-categories. Appendix 7.4 provides an overview of the number of quotes per relevant overarching category for each company.

3.3 Credibility and generalisability

Validity concerns the extent to which results accurately correspond to the real world

phenomenon (Saunders et al., 2009). The trustworthiness of this case study research primarily faces the threat of ambiguity regarding the casual direction of the proposed relationships. Especially the relationship between a firm’s business model design theme mediating firm performance outcomes deserves special attention as firm performance can be influenced by various other factors. However, the objective of this study is rather to explain how firm performance outcomes can be explained by presenting in-depth insights of a firm’s strategy and business model design. By adopting this perspective, the other variables influencing firm performance are of less interest and are therefore excluded from the scope of this study and acknowledged as limitation. To strengthen validity, this research uses data obtained from multiple sources which help define and differentiate constructs (Eisenhardt, 1989). On top of this, the multiple-case study research design enables a replication logic between cases which increases validity of relationships (Eisenhardt, 1989).

The reliability of findings must be consistent in order to increase the quality of this research. “Reliability refers to the extent to which your data collection techniques or analysis

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Page 28/72 procedures will yield consistent findings” (Saunders et al., 2009, p. 156). The reliability of this research primarily faces the threat of being influenced by interpretation error and bias. This study controls for such error by adopting the framework developed by Zott and Amit (2007, 2008), which decreases room for interpretation during the data analysis process. Subsequently, this study controls for bias by systematically using qualitative data analysis software to independently structure the data.

Generalisability refers to what extent findings are applicable to other research settings (Saunders et al., 2009). This implies to what degree the results of this study also apply to other companies or industries. The generalisability of this study is limited because the sample contains only two firms. However, the goal of this study is to provide in-depth insights of the phenomenon rather than to increase generalisability to an overall population. Therefore, this study aims to establish transferability for practitioners by illustrating case settings in a detailed manner. Subsequently, by generating a deep understanding and becoming familiar with particular patterns among cases, the researcher establishes the capability to make cross-case comparisons (Eisenhardt, 1989). Overall, the research design is conceptualized in figure 4 by using the research onion framework of Saunders et al. (2009).

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Page 29/72

4. Results

This chapter first provides a short company description. Secondly, the results and propositions are evaluated for each individual company. Thirdly, cross-case comparisons are specified.

4.1 Tesla Inc.

On July 1, 2003 Tesla Motors (currently Tesla Inc.) was founded in Silicon Valley. The company aims to successfully introduce electric vehicles to the global automotive industry. The company intends to show the world that electric vehicles can be superior over

conventional internal-combustion engine vehicles. Additionally, Tesla focuses on related products in energy generation and storage. Tesla aims to “accelerate the world’s transition to sustainable transport” (Tesla, 2016, p. 1). Currently, Tesla operates two main business segments. One the one hand, the company develops electric cars, while on the other hand the company operates energy generation and storage facilities. Subsequently, Tesla provides financial services to sell their products to customers. Figure 5 illustrates the product organizational structure of Tesla.

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Page 30/72 4.1.1 Strategy

From the content analysis it is identified that the strategy of Tesla illustrates an evolving pattern. Initially, the company adopted a focused differentiation strategy by entering the car industry and solely providing a fully electric luxury sports car called the Roadster. According to Bohnsack, Pinkse and Kolk (2014), this relatively expensive car was targeted to attract price-insensitive buyers that care about other product characteristics such as fast-acceleration and clean driving. The company sold only 2,500 cars of these exclusive cars which indicates that Tesla started out as niche player (Bergek, Berggren, Magnusson, & Hobday, 2013).

Subsequently, the company moved into a more generic differentiation strategy. Tesla broadened their product line by introducing new vehicles and services. Firstly, the company presented the luxury model S with specific premium features such as a 17 inch touch pad and advanced autopilot hardware. Secondly, the company introduced the model X that provides seats for seven adults and has a unique falcon wing system to access the back seats (Tesla, 2014). Thirdly, the company announced to incorporate new products and services related to energy generation and storage such as powerwalls and powerpacks. The introduction of the model S and X and the energy generation and storage solutions signal that Tesla moved away from a focused differentiation strategy into a more generic differentiation strategy by

targeting a wider customer segment.

Although focusing on advanced innovative premium products, Tesla also signals cost

leadership characteristics. The company for instance intends to sell lower priced mass-market products in the nearby future. For example, “After the Model X, our goal is to introduce the Model 3, a lower priced sedan designed for the mass market, in 2017” (Tesla, 2014, p. 4). This low-priced mass-market vehicle indicates the intent of Tesla to adopt a cost leadership strategy by aiming for higher sales volumes at lower margins. The company expects to lower

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Page 31/72 manufacturing costs as their experience cost curve is projected to decline. Tesla emphasizes, “As we have gradually ramped production of Model S and Model X, manufacturing costs per vehicle have decreased” (Tesla, 2016, p. 17). Additional cost reductions are also expected to be realized from several acquisitions. The acquirement of SolarCity Corporation and

Grohmann Engineering GmbH are most discussed publicly. Tesla (2016, p. 35) states that, “Through our acquisition of SolarCity Corporation, or SolarCity, on November 21, 2016, we lease and sell solar energy systems and sell renewable energy to our customers, typically at prices below utility rates”. And, “In January 2017, we completed the acquisition of Grohmann Engineering GmbH, a German manufacturing company with expertise in automated

production. We expect this acquisition will facilitate and expand vehicle production” (Tesla, 2016, p. 35). This acquisition is expected to increase efficiency by enhancing automation processes (Tesla, 2016). Additionally, the company believes to reduce costs by building a Gigafactory that is able to produce enough batteries to achieve an annual production of 500,000 cars (Financial Times, 2015). It is estimated that such large-scale production can decrease the costs per kilowatt hour by over 30% which is considered as vital contingency factor for the global expansion of electric vehicles (Financial Times, 2015).

Importantly, the company maintains to emphasize its own distinctiveness. Tesla states that, “We believe our customers enjoy several benefits including…high performance without compromised design or functionality” (Tesla, 2014, p. 4). By allowing no compromises on design or functionality, the company underlines its differentiation strategy which is illustrated by a continuously increased amount in R&D investments (Tesla, 2014). The quality of design is also acknowledged by Avci, Girotra, and Netessine (2014, p. 773) who state that, “Tesla Motors, which has arguably brought the most highly regarded electric vehicle design to the market in recent years”.

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Page 32/72 Tesla mentions that, “We believe our vehicles, electric vehicle engineering expertise, and business model differentiates us from incumbent automobile manufacturers” (2014, p. 4). This is also identified by Xavier Mosquet (senior partner at Boston Consulting Group), by emphasizing that customers who currently buy expensive cars, are expected to purchase electric vehicles. He states, “Its price allows for enough battery capacity to give it sufficient range. It is also a well-designed car, with seven seats and a great consumer interface. Probably the best choice if you want to feel different" (Financial Times, 2014, p. 4).

Firms that adopt a differentiation strategy are expected to excel in service dimensions (Hitt et al., 2009). This is illustrated by Tesla who operates specific ‘Service Plus’ service locations. These luxe facilities are located in geographically important locations and provide a

combination between customer service and sales. Firms that adopt a differentiation strategy are also expected to distinct themselves by superior technology and design (Frambach et al., 2003; Walker & Ruekert, 1987). This applies to Tesla who is acknowledged by winning important awards. For example, “Since its launch, Model S has won several awards, including the prestigious Motor Trend Car of the Year for 2013. Surveys by Consumer Reports gave Model S the highest customer satisfaction score of any car in the world in 2013” (Tesla, 2014, p. 4). The major strategic characteristics signalled by Tesla are placed within the framework of Zott and Amit (2007, 2008) in table 3.

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Page 33 of 72 Table 3: Tesla strategy characteristics

Differentiation strategy Example

Importance and use of product–service-related patents “our vehicles incorporate our proprietary on-board charging system, permitting recharging from almost any available electrical outlet, and also offer fast charging capability from our Supercharger network” (Tesla, 2016, p. 1).

Importance of new product development, innovation and R&D activity

“Our R&D expenses in particular will continue to increase as we complete the development, validation, and testing of Model X and accelerate design and engineering work on Model 3” (Tesla, 2014, p. 48).

Emphasis on growth by acquiring, or merging with R&D/technology intensive firms

“As part of our acquisition of SolarCity, we acquired certain PV cell manufacturing and technology assets” (Tesla, 2016, p. 22)

Branding and advertising as part of firm’s marketing strategy/approach

“Our marketing efforts include events where our vehicles are displayed and demonstrated. These events range from widely attended public events, such as the Detroit, Los Angeles, and Frankfurt auto shows, to smaller events oriented towards sales, such as private drive events” (Tesla, 2014, p. 9)

Cost leadership strategy Example

Offering products/services at low prices/prices lower than competition

“We intend to offer this vehicle at a lower price point and expect to produce it at higher volumes than our Model S. Importantly, we anticipate producing Model 3 for the mass market and thus we will need a high-volume supply of lithium-ion cells at reasonable prices” (Tesla, 2014, p. 16) Minimizing product-related expenditures, in particular

through process innovations

“we have introduced a number of new manufacturing technologies and techniques for our vehicles, such as aluminum spot welding systems and high-speed blow forming of certain difficult to stamp vehicle part” (Tesla, 2015, p. 13).

Emphasizing economies of scale and scope with products and services

“Mr Musk had a different plan. It was taken from the computer industry, where he had made his first fortune. Starting with the Roadster, a high-price, sporty vehicle based on a vehicle shell made by Lotus, he counted on a declining technology cost-curve to bring his company's vehicles to a mass market” (Financial Times, 2016, p. 19).

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Page 34 of 72 All in all, it is concluded that Tesla started out with a focused differentiation strategy but currently adopts a rather generic differentiation strategy. In the future it is expected that this strategy could shift towards a hybrid strategy that also leverages cost leadership

characteristics.

4.1.2 Business model design

The business model design theme adopted by Tesla is identified as novelty-centered. Two major characteristics illustrate the novel aspects of the Tesla business model design. Firstly, the company is widely considered as pioneer in developing battery-energy storage solutions that provide new combinations of products and services and introduce new methods for organizing economic transactions. For example, Tesla works together with international hotels, shopping centers and tourism resorts to provide charging facilities for electric vehicles. Additionally, the company doesn’t sell their vehicles by using a traditional dealership

network. The company allows customers to buy cars via their corporate website and operates their own network of service centers and thereby potentially eliminates market inefficiencies. The business model design of Tesla also enables a customer to generate energy by installing a solar roof top and store this energy into a powerwall while consuming the energy with their electric vehicle. This makes customers potentially less dependent on traditional suppliers of electricity and thereby introduced a novel way to create value for customers.

Secondly, the company is the first car manufacturer that produces fully electric vehicles, and continuously innovates functionalities and services by providing over-the-air software updates for free. This increases the utility value of Tesla’s products after a buyer has made their initial investment. For example, Tesla executed a major software update that launched the Autopilot functionality for car owners.

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Page 35 of 72 On top of this, the business model design offers access to a wide variety of participants and goods. For example, the company needs more than 3000 different parts to manufacture their vehicles which are purchased from around 350 suppliers of whom a large part is not considered as traditional supplier for the car industry. Although the company buys some major components from suppliers, Tesla positions itself as being a highly integrated company by for example stating, “We are the world’s only vertically integrated energy company, offering end-to-end clean energy products, including generation, storage and consumption” (Tesla, 2016, p. 1). The novelty-centered business model design characteristics illustrated by Tesla are placed within the framework of Zott and Amit (2007, 2008) in table 4.

Table 4: Tesla novelty-centered business model design characteristics Novelty-centered business model design theme Example The business model offers new combinations of

products, services, and information.

“In October 2016, we revealed the solar roof, integrating solar energy production with aesthetically pleasing and durable glass roofing tiles, designed to complement and power customer homes and commercial buildings” (Tesla, 2016, p. 3).

“the solar roof is being designed to work seamlessly with Tesla Powerwall 2” (Tesla, 2016, p. 5) “The introduction of Model X now provides customers with a performance electric vehicle option in the sport utility segment for the first time” (Tesla, 2015, p. 32).

The business model brings together new participants. “We are working with a wide variety of hopitality locations, including hotels and popular destinations, to offer an additional charging option for our customers” (Tesla, 2015, p. 7).

Incentives offered to participants in transactions are novel.

“Traditional automobile manufacturers in the United States do not provide maintenance and repair services directly. Consumers must rather service their vehicles through franchised dealerships or through third party maintenance service providers. We do not have any such arrangements with third party service providers and it is unclear when or even whether such third party service providers will be able to acquire the expertise to service our vehicles” (Tesla, 2014, p. 28).

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Page 36/72 The business model gives access to an unprecedented

variety and number of participants and/or goods.

“The applications for these battery systems include the provision of backup power, grid independence, peak demand reduction, demand response, reducing intermittency of renewable generation and wholesale electric market services” (Tesla, 2016, p. 2).

“Our energy product portfolio includes systems with a wide range of applications, from use in homes to use in large grid-scale projects” (Tesla, 2016, p. 3).

The business model links participants to transactions in novel ways.

“The business model of human-driven, privately owned internal combustion vehicles was

fundamentally changing, said analyst Adam Jonas (analyst at Morgan Stanley) in a note to clients. Instead, the future would be in "shared mobility" - or self-driving electric cars shared by people going to different places” (Financial Times, 2016, p. 23).

“Traditional automobile manufacturers in the United States do not provide maintenance and repair services directly. Consumers must rather service their vehicles through franchised dealerships or through third party maintenance service providers” (Tesla, 2014, p. 28).

Number of patents that the focal firm has been awarded for aspects of its business model.

“electric motor and battery management system – is key to competitive advantage. Tesla decided to use the design and assembly facilities of Lotus, but developed the battery, the motor and the

control system itself. It used more than 6000 thousand small standard laptop batteries and a proprietary management system to cool, charge and discharge them” (Bohnsack et al., 2014, p. 293).

Extent to which the business model relies on trade secrets and/or copyrights.

“We manufacture Model S and certain components that are critical to our intellectual property and quality standards for Model S at the Tesla Factory” (Tesla, 2014, p. 10).

“consistent with our mission to accelerate the advent of sustainable transport, we announced a patent policy in which we irrevocably pledged that we will not initiate a lawsuit against any party for infringing our patents through activity relating to electric vehicles or related equipment for so long as such party is acting in good faith. We made this pledge in order to encourage the

advancement of a common, rapidly-evolving platform for electric vehicles, thereby benefiting ourselves, other companies making electric vehicles, and the world” (Tesla, 2014, p. 15).

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Page 37/72 Does the focal firm claim to be a pioneer with its

business model?

“Our distribution model is not common in the automobile industry today, particularly in the United States. We plan to continue to sell our performance electric vehicles in company-owned Tesla stores and over the internet” (Tesla, 2014, p. 24).

“We have also pioneered advanced manufacturing techniques to manufacture large volumes of battery packs with high quality and low costs” (Tesla, 2015, p. 6).

“Ford said in March that it would start over-the-air updates that allow the car to download software fixes - something Tesla, the electric carmaker co-founded by Elon Musk, has pioneered” (Financial Times, 2015, p. 9).

The focal firm has continuously introduced innovations in its business model.

“Similar to our electric vehicles, our energy storage products have been developed to receive over-the-air firmware and software updates that enable additional features over time” (Tesla, 2016, p. 2). “Tesla chief executive Elon Musk unveiled a "master plan" to make a full range of electric cars, buses, trucks and when self-driving is approved by regulators an app that would let Tesla owners earn money by renting out their self-driving cars” (Financial Times, 2016, p. 19).

There are other important aspects of the business model that make it novel.

“Using only an electric powertrain enables us to create more energy efficient vehicles that are mechanically simpler than currently available hybrid or internal combustion engine vehicles” (Tesla, 2016, p. 1).

All in all, it is concluded that Tesla adopts a novelty-centered business model design. Innovation as rent generating mechanism is an important driver within the business model design of Tesla. This mechanism is primarily displayed by Tesla by providing new combinations of products and services in energy generation storage and usage. Additionally, the business model design theme organizes economic transactions in novel ways by directly linking consumers with the car manufacturer without making use of an external dealership network. On top of this, the business model design of Tesla provides novel incentives such as free over-the-air software updates which increases the value of their products after the initial purchase has been made which illustrates continuous innovation. Altogether this provides support for proposition 2a).

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Page 38 of 72 4.1.3 Interaction within business model design

The business model design adopted by Tesla shows interaction between novelty and

efficiency-centered business model design characteristics. The studied content indicated that a vital factor of positive future firm performance outcomes of Tesla is primarily determined by the extent to which the company is able to achieve a lower cost position. As Tesla’s novelty-centered business model design is focused on innovation, the company’s learning curve fosters productivity which enables more efficient manufacturing of new products. This is delineated from the following two statements of Tesla, “Our team has core competencies in computer aided design and crash test simulations which we expect to reduce the product development time of new models” (Tesla, 2015, p. 7) and, “we have developed proprietary software to reduce system design and installation timelines and costs” (Tesla, 2016, p. 5). These statements exemplify that the innovative technological knowledge and skills possessed by Tesla stimulate increased efficiency in the long run.

Accordingly, a decline in manufacturing cost of battery systems is an important factor to trigger a large-scale market for electric vehicles. Tesla is only able to introduce an

economically viable fully electric mass market car, if their technological experience curve causes a decline in the manufacturing costs of the Model 3 (Financial Times, 2016). As Tesla is expanding and building capacity with their Giga-factory, their business model becomes more scalable, which is a characteristic of the efficiency-centered business model design theme. So in the case of Tesla, it is identified that their novelty-centered business model design leverages a future efficiency-centered business model design which is supportive for proposition 3.

4.1.4 Firm performance

From the content analysis it is inferred that the novelty-centered business model design of Tesla negatively influences firm performance. The novelty-centered business model design is

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Page 39/72 grounded in innovation as rent-generating mechanism which requires R&D investments. In the case of Tesla, the company chose to invest a high amount in R&D as the company decided to internally develop the latest technologies, software and other major product functionalities. The investments in R&D are relatively high when compared to the total amount of cars sold. For example, “For every car it had sold by the end of last year, Tesla Motors had burnt through about $40,000 in research, development and capital expenditure” (Financial Times, 2015, p. 7). These substantial investments are necessary to stimulate a decline in

manufacturing costs, however the current financial performance is negatively influenced as is illustrated by reported annual losses. For example Tesla (2014, p.22) states, “We have had net losses on a GAAP basis in each quarter since our inception, except for the first quarter of 2013”. This negative financial performance outcome indicates disfavour of proposition 2b). In contrast, the Tesla content analysis rather provides support for a relationship between efficiency-centered business model design characteristics and higher firm performance. Tesla for example states, “In order to achieve profitability as well as long-term commercial success, we must continue to achieve our planned cost reductions, control our operational costs while producing quality vehicles, increase our production rate, maintain strong demand in North America, and grow demand abroad in Europe and Asia. Failure to do one or more of these things could prevent us from achieving sustained, long-term profitability” (Tesla, 2014, p. 22). This statement underlines the importance to minimize costs and make the business model scalable in order to achieve positive firm performance. On top of this, the company also emphasized that the realization of previously achieved higher profit margins was caused by several cost reductions instead of offering innovative solutions to link new parties in the business environment. Tesla states for example that:

“Gross margin for the year ended December 31, 2014 was 27.6%, a significant increase from 22.7% for the year ended December 31, 2013. Higher vehicle production volume,

The effect of strategy and business model design on firm performance : a multiple case study perspective