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Entrepreneurship in Corporate Communication

‘’Differences between business models: A comparative analysis between traditional and

modern car companies’’

Group 2: Business Models 1

Evgenia Karvouni 10696989

Roland van Lienden 10703055

Olga Christina Santikou 10697039

Lisanne Zethof 10172866

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Introduction

The automotive industry is an important pillar of the world economy and an important global

driver of growth, income, employment and innovation. Unexpectedly, in 2008 the global

economic crisis struck the auto industry with devastating effects. Due to the freezing of credit

markets, car companies came across many difficulties such as huge debt loads, high labor

costs and unpaid supplier invoices (Sturgeon & Van Biesebroeck, 2010). These events caused

uncertainties for well-established car companies as well as for relatively new ones. In the

present market, the automotive industry is marked by widespread uncertainty with traditional

car companies being challenged by modern car companies like Tesla, which sells energy

efficient cars. The automotive industry faces the fourth ‘green’ revolution, which is described

as automotive sustainability. Automotive sustainability aims to increase fuel efficiency and

renewable energy, because of the high fuel price, commodity prices, environmental pollution

and global warming (Unido, 2009). Obviously, a company like Tesla is not negatively

impacted by such a revolution, as their whole business model is already based on the

environment.

Taking into account the impact of the economic crisis in the automotive industry and

the high rise of competition between the traditional and modern car companies, some

reflective questions regarding the importance and the structure of the business models of both

traditional and modern car companies emerged. What are the components of their business

models and what are the main differences in their construction?

The research question of this paper concerns the differences between the business

models of traditional car companies and modern car companies. The classifications of

traditional and new in this case are related to the age of the company. To elaborate, while the

car industry has existed for a long time, it does not happen often that a new company is

founded. Taking this into consideration, we will classify a new company to be established in

the 21st century. Consequently, a traditional car company is any company established before

the turn of that century. In order to investigate the structure of the business models and to

make a comparison between traditional car companies and modern car companies, this

research is focused on one traditional car company, BMW Group, and on one modern car

company, Tesla. The main goal of this paper is to analyze whether newer companies are

fundamentally different in their business models from a longer standing company. In addition,

should significant differences be found, a foundation can be made from which future research

can craft advice for both new companies and traditional companies, potentially benefitting

both.

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Theoretical Framework

The central position of the Business model in the organization

Every business needs to design its own ‘life’ based on a plan, that which sets them apart from

their competition and gives them unique value for the customers. Sometimes, a good plan is

half the business. Business models are necessary features of market economies, where there is

consumer choice, transaction costs, and heterogeneity amongst consumers and producers, and

competition (Teece, 2009). Business models are fundamentally the representation of a firm’s

core logic and strategic choices that differentiate them from the competition and they can be

used to help analyze and communicate strategic choices with their stakeholders (Shafer et al,

2005).

Business models are used by many organizations, in order to help them with business

– design, decision – making, communication with the stakeholders, learning and management

(Kajanus eta al, 2014) and to outline the architecture of revenues, costs, and profits associated

with the business enterprise (Teese, 2009). However, many questions arise like ‘How you will

succeed as a firm based on a specific plan or how you will acquire and retain your customers’.

In order for a business to enjoy success, this requires the ability to be transparent with their

stakeholders, and to be open to any change. This suggests that a traditional company should

retain its flexibility and adapt to changes in the market, potentially caused by the rise of newer

companies.

Equally important, the business model is described and reflects on organizational design, the

'resource – based view' (RBV) of the firm, narrative and sense making, the nature of

innovation, the nature of opportunity and the trans active structures (Gerard & Bock, 2010). In

other words, business models are, at heart, stories that explain how a company works and

answer questions about who the customer is, what the customer value is and most important

what the underlying economic logic of each company is through which it makes money

(Magretta, 2002).

Business model framework

The structure of a business model is based on the assets that sets a business apart from the

competition. By doing a common thing uncommonly, this brings the differentiation and the

success of a business. The structure of a business model establishes the context and

boundaries for activities and processes of a firm, which are associated with resource and

capability development and boundary spanning transaction (Gerard & Bock, 2010). Business

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models’ structure is a trademark in order to enable the comparison of important characteristics

across the organization such as value configuration, customers, resource acquisition and

development speed (Gerard & Bock, 2010). The main functions of a business model are to

articulate the value proposition, identify the market, define the value configuration, estimate

the cost structure and profit potential of producing the offering, describe the partner network

and formulate the competitive strategy of the firm (Chesbrough & Rosenbloom, 2002). To

clarify, the business model starts by creating value for the customer and constructs the model

around delivering that value (Chesbrough & Rosenbloom, 2002). Value structure is the

differentiating point between the firms that establishes the boundaries and enabling

mechanisms for entrepreneurial action and competition (Gerard & Bock, 2010). Even though

the creation of value is necessary in the structure of a business model, it still is insufficient for

a firm to profit from its business model. That is, added value is not the same as turning a

guaranteed profit. For the above reason, the identification of a market and the partner network

of the firm is also very important, in order to define the ‘architecture of the revenues. For

example, how the value created will be dedicated between the customers and the firm itself

(Chesbrough & Rosenbloom, 2002), with attention to customer desires, customer

assessments, the nature and likely future behavior of costs, and the capabilities of competitors

(Teese, 2009).

What makes a business model successful

A successful business model presents a better way than the old existing alternatives for a

company to promote its products and to be profitable, because it offers more value to a

specific group of customers. Additionally, the market gains value by the company becoming

the standard for the next generation of entrepreneurs to beat (Magretta, 2002). Business

success depends on both leveraging the strengths of a company and addressing the

weaknesses. Given these points, the main success of a business model is to be simple and

intuitively understandable by including internal factors as well as external factors concerned

with customers, suppliers, and the broader business environment (Teece, 2009).

The transformation of the business landscape in the 21st century

Nowadays, everybody is talking about digital transformation. First, we need to discuss how

we came to this point and everything was changed. The expansion of technology increased the

need to bring new discoveries into the competitive market and boost new and better ways in

order to satisfy the needs of customers.

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Mitchell and Coles (2003, p. 17) write: "When a company makes business model

replacements that provide product or service offerings to customers and end users that were

not previously available, we refer to those replacements as business model innovations."

Business model innovation has been conceptualized. Business models are necessitated by

technological innovation (Gerard & Bock, 2010). In particular, through technology a business

can be profitable. Technology can lead a business to a great success’ by taking advantage of

the media provided. Therefore, a business can attract customers and markets and become an

important competitor to the market and make the difference (Gerard & Bock, 2010).

According to previous research, a successful innovative business model must contain

the following elements: customers, different types of goods and services provided. It is

important to contain as well the way they produce value, organization and network partners

and their roles in value creation, and finance and the cost and revenue sharing between

partners (Kajanus et al, 2014).

One of the most important aspects in the transformation of the old business model to

an innovative business model is the integration of web 2.0 technologies. With the upgrading

of the Internet, and particularly the new generation of the Web that includes new features and

functionality that was not available in the past, Web 2.0 technologies, a two-way

communication is provided where broadcast media monologues are transformed into social

media dialogues (Bickart and Schindler, 2001). As mentioned above, network partners and

customers are important in the success of the structure of a business model. In order for a

successful relationship to be achieved between organization and customers, communication

has a central role in developing and maintaining trust. Enterprises are being transformed from

an old business model to a new one, where social networking has the essential components in

defining a business value through two-way communication with the stakeholders (Lytras et al,

2009).

Social media transforms a business’s life

The importance of technological advances is vital to succeeding and transforming in

the 21st Century business landscape (Brynjolfsson & Hitt, 2000). Social media comprises a

dynamic and rapidly expanding resource in today's business environment. It can promote trust

and other presuppositions for meaningful collaboration in organizations, by increasing the

interactions between organizations and stakeholders (Cogburn & Espinoza-Vasquez, 2011).

Social media in comparison with traditional communication channels, ends up with higher

levels of efficacy. Consequently, companies tend to participate more and more in Facebook,

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Twitter, MySpace, and others, in order to succeed in online business environments (Kaplan &

Haenlein, 2010). Social media provides an unparalleled platform for organizations to promote

and share their products and for consumers to share their thoughts and experiences, for

instance, through word-of-mouth or consumer reviews (Bickart &Schindler, 2001).

People spend more than one third of their waking day consuming social media

(Kietzman, Hermkens, McCarthy, & Silvestre, 2011). The trademark of social media is

indisputably Facebook, which has in total over 800 million active users. Real estate

professionals for instance , who already use Facebook, follow marketing practices to step up

advertising and promotion and create even more powerful connections with people on

Facebook (Hanna, Rohm, & Crittenden, 2011).Thus, it can be considered that industries, in

general, benefit from social media, where they can develop their communication strategies.

By using social media, a business shares its norms, values, and interests (Gangadharbhatla,

2008). Social media takes into consideration both the channel and the content through the

interaction between stakeholders and organizations (Kietzman, Hermkens, McCarthy, &

Silvestre, 2011). In that sense, customers demand a multichannel approach with the

companies, meaning that they want to be able to contact and be contacted by them via social

media. Consequently, a company should develop a suitable and highly functional

communication with regard to their customers and allow them to experience a variety of tasks.

Comparison

Comparing origin and mission

Before comparing the separate features of the business models, the origin and mission of both

companies should be taken into consideration. The origin of both companies differs on

numerous points. Firstly, the long history of BMW is in sharp contrast to the fledgling status

of Tesla as a car company. What is more, as BMW is based in Germany, it is likely the

German culture has had its influence on the product. It appears this has been the case as the

mission statement of the company primarily focusses on characteristics such as quality and

durability, while stating that sustainability is innate in their processes already. In contrast,

Tesla was founded in the epitome of innovation: Silicon Valley in California. As a result, the

main focus of their mission statement is developing and creating new ways of making cars

more environmental. In addition, there is a substantial difference towards the target of these

missions for both companies. To elaborate, BMW talks about premium vehicles made for the

individual, clearly showing that their focus is on providing separate individuals with a good

product. On the other hand, Tesla’s mission statement is based on creating electric cars to take

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over the entire market. This focus shows their ambition to provide environmental friendly cars

for everyone, stimulating sustainability as a whole, while BMW limits their ambitions to their

product. Finally, the mind-set towards their own product differs between the two companies.

That is, Tesla aims to get their product into the mainstream and make it as accessible as

possible, aiming for a very broad market. In contrast, BMW focusses on creating a premium

product that is designed for the higher income population, limiting their market. To

summarise, it appears there is a contrast of individual versus community focus of Tesla and

BMW, respectively. Additionally, the integration of sustainability in the companies’ missions

varies.

Comparing Business Models

value proposition. As the central part of a business model, any differences in the

value proposition of the companies will most likely echo through the other features of the

model. The most apparent discrepancy in the value propositions is, as with the mission

statement, the focus. To elaborate, BMW’s focus is on their car, or as they call it: “The

Ultimate Driving Machine”. This entails that they offer, what they call, the best premium car

available, focusing on quality and durability. However, the company does communicate that

they are focused on the possibilities of electric cars in the future, next to their fuel efficiency

programs for traditional cars. In sharp contrast, Tesla’s value proposition is essentially a

cooperation between the company and its consumers to improve their product. The main

difference here is that the goal of this cooperation of Tesla is positively influencing the car

market in such a way that improves the total sustainability, while BMW is only interested in

their own section of the market. Moreover, this is further exemplified by the fact that Tesla

also designs electric motors for other car companies.

value configuration / core capabilities. Tesla’s way of guaranteeing their value

proposition, the sustainable cooperation with their consumer, is best explained by looking at

their product. To elaborate, Tesla describes their Model S in a marketing plan for 2014 (Tesla

Motors, 2014). The attributes that are focused on are all relatable to the value proposition.

Firstly, as their cars are fully electric, there are no fuel emissions, which is obviously positive

for the environment. However, as the focus is also on the consumers, they highlight that their

car battery is the best on the market, which means consumers get the highest range on a single

charge. This combination of environmental advantages and a positive consumer experience is

present in all the characteristics. For instance, the absence of moving parts and oil changes

result in lower maintenance costs for the consumer. Simultaneously, if fewer parts need to be

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replaced or repaired, fewer parts need to be made, meaning the pollution from production is

reduced, benefiting the environment. In addition to less maintenance, Tesla also employs a

different vision with regard to storage. Customers can fully design their own car, as it will

only be made after it is ordered. Obviously the downside is the waiting time, but this is

compensated with the freedom of designing the car yourself, as well as the environmental and

cost advantage by not having storage. So, Tesla manages to achieve their goal of cooperating

with consumers for a better environment by ensuring that their technologies not only limit

pollution, but also have other advantages, such as cost reduction, for their consumers.

In comparison, BMW has two main focusses, the quality of their product and

sustainability being innate in the process. To achieve producing the highest quality product,

BMW cooperates with their suppliers and other external servicers to ensure innovative ideas.

Additionally, programs are run that attempt to engage all of the employees to contribute their

own input. To ensure their position as one of the market leaders, they work together with

technological experts from outside the company so that they can implement new technologies

more quickly and without issues.(BMW group, 2014) As a result, BMW can stay ahead of

competitors on the technological level. With regard to the sustainability part of the value

proposition, BMW undertakes several steps. Firstly, BMW invests in making their fuel

powered car more fuel efficient, for instance by reducing the weight of the car. This results in

fewer emissions, which generates more sustainability. What is more, BMW also heavily

invests in possibilities for fully electric cars, which would, as with Tesla, completely

eliminate the fuel emissions and reduce maintenance.(BMW group, 2014) However, the main

difference is that Tesla focusses only on the electric car, which is objectively the best possible

result for the environment. In contrast, BMW still invests in fuel driven cars, which somewhat

undermines their statement about sustainability.

target consumer. The target consumer of both companies, in this case, originates

from the combination of the value propositions and the mission statements. To clarify, as

Tesla aims to impact the entire car market with their sustainable product, they will have a very

broad definition of a target consumer as they need widespread support to achieve their goal.

However, accessing everyone simultaneously appears to be somewhat unpractical. As the

company is still in early stages, their current focus is on eco-friendly customers with an

interest for technology, and an above average income, as the product is still rather expensive.

Moreover, with any new product a group of early adaptors is required to initiate the first buzz

about the product. (Tesla, 2013) However, the future aim will be to broaden the target

consumer to any eco-friendly adult. The target consumer for BMW is actually quite

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comparable to the current version for Tesla. That is, the focus is on middle aged people with

above average incomes. In addition, the target consumer will be interested in fuel efficiency,

but primarily high quality.(BMW group, 2014) So, the main difference with regard to target

consumer lies not in the current version, but in the goal for the future. That is, while BMW’s

target consumer is unlikely to change, as they show no interest in doing so, Tesla aims to

broaden their approach to the complete market.

distribution channel / customer relationship. traditional media. The channels that

are used by BMW and Tesla to distribute and market their product, as well as communicate

with their consumers are substantially divergent. First of all, the traditional media such as TV

and radio, have been and are extensively being used by BMW to broadcast new products to

the general public. On the other hand, Tesla does not use any traditional media whatsoever.

This has several effects, firstly, their advertisement costs are lowered significantly, but this

will be discussed later on in the essay. Additionally, this implies that Tesla relies solely on

word of mouth and electronic channels for marketing, thus having far less control. However,

this can be explained through the value proposition and mission of Tesla. To clarify, the

company wants to fulfil their goal to establish a more sustainable market through cooperation

and interaction with their consumers. As a result, any type of one way communication

towards these consumers would be inconsistent with the value proposition.

dealerships. Another channel used for distribution and communication by both

companies is through dealerships. For BMW this entails around 5000 dealerships worldwide,

in addition to the vast amount of subsidiary companies and independent importers. (BMW

Group, 2013) In contrast, Tesla has only 80 company owned stores and some service stations.

What is more, Tesla does not sell their product via third parties. Besides the difference in

sheer spread of dealerships, the interior of these stores is disparate as well. (Tesla Motors,

2013) However, this will be discussed further in the customer relationship section.

events. Tesla also hosts events, varying from small private parties to public events,

where they show their new products. Corresponding with their vision, the main goal for these

events are to create more word of mouth amongst their consumers about their product, while

also getting feedback from them. As the company does not use traditional media, these events

are organised and discussed on social media and the company website (Tesla Motors, 2013)

social media. Furthermore, both companies use internet as a possible alternative

dealership for consumers. Moreover, both BMW and Tesla are active on Twitter, Google +,

Instagram and Facebook. However, there are some differences in the usage of these media.

At least that is suggested by Tesla in their communication strategy on their website. Tesla

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suggests they are built on interaction with the consumers, so a more interactive

communication style is expected to be apparent on their social media. Although Tesla does

have a considerable base of followers on Twitter and fans on Facebook, especially when

taking into consideration the size of the company, the interaction with consumers is not that

apparent. To elaborate, in a short investigation of the Facebook account, it becomes clear that

besides broadcasting new models or events, there is no response towards consumers by the

company. BMW’s page shows a similar pattern of broadcasting without interaction. What is

more, spam messages were found in the comment sections, suggesting there is even a lack of

monitoring in this regard. The differences in strategy are found instead on Twitter. Although

the value proposition of Tesla would suggest interactivity towards their consumers, a short

analysis shows that only around one in six tweets is a reply to a consumer. Moreover, these

other messages are all promotions of new models and events. In comparison, BMW’s recent

activity shows around 98 in 100 messages being responses to consumer questions. It should

be noted that only recent activity was looked at, and taking into consideration the comparative

numbers of total tweets, around 4000, it suggests BMW has only recently taken this strategy.

Finally, while the total amount of followers is somewhat comparable, 500,000 for Tesla and

800,000 for BMW, the activity on Twitter is quite different. That is, BMW is currently

sending approximately 20 tweets per day, while Tesla sends only 1 message per day on

average. This emphasises that BMW is likely to have recently increased the interactivity level

of their social media strategy, as their total amount of tweets is still comparable to that of

Tesla. All in all, when taking into consideration the value proposition of Tesla, the

cooperative setting with their consumers to improve their product, these results are rather

surprising.

finance. Over the last four years Tesla has managed to increase their revenue from just

over 204 million dollars to 3,2 billion dollars. However, the expenses have been increasing

simultaneously. To elaborate, the expenses on research and development, as well as

administrative and sales costs, have increased from a combined cost of around 40 million to

600 million dollars (Tesla Motors, 2014). As a result, Tesla has not been able to turn a profit

yet, with 2014 being a step back rather than forward, increasing the loss from 70 million to

nearly 300 million dollars (“Tesla Motors”, 2015).

On the other hand, BMW had a very slight reduction in revenue in 2013, from 77

billion to 76 billion dollars, after steadily increasing it in the years before it. However, in spite

of this slight decline, the net profit actually rose by another 4,5% to 5,3 billion dollars. The

main costs for BMW lie in their personnel and production section. BMW spends 4,8 billion

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dollars on research and development, which is around 7% in relation to their total revenue. In

comparison, Tesla spends 25% of their total revenue on this goal, once again showing their

dedication to innovation. So, when taking the financial situation of both companies into

account, the differences are night and day. Although there is a stronger focus on research and

development for Tesla, due to substantial differences in income and expenses, it is difficult to

fully compare both companies in this regard. That is, the 25% Tesla is currently spending

might be lower in comparison to their total revenue, when, or if, they grow the company

further (BMW group, 2014).

Conclusion / DiscussionTo find out how the business models of a traditional car company and of a modern car

company compared, BMW and Tesla were used as examples. What is more, to structure the

comparison, this essay focusses on separate characteristics such as value proposition and

configuration, media used, and finance. By comparing the two business models, it becomes

clearer on what fronts these new companies differ, and therefore what potential adaptations

the traditional car company can make. On the other hand, the traditional companies have

generally been around for a while, and in the case of BMW, very successful. So, the opposite

learning direction could also be a valid conclusion.

Business Models

As a business model is primarily based on a value proposition, any differences in this aspect

will echo through the other parts of the model. In the case of BMW and Tesla the main

difference in this regard lies in the focus implored. To clarify, while both companies preach a

sustainable angle on their operations, Tesla’s mission is to change the entire market through

developing fully electric cars and eventually eliminate the fuel driven cars. In comparison, the

sustainability offered by BMW lies in their own production process and developing more

efficient cars with regard to fuel. The difference in the focus of the companies here, shows in

the other features of the business model. For instance, while BMW cooperates with external

suppliers, they only develop upgrades for their own cars. In contrast, Tesla creates electric

motors for other car companies as well, showing their commitment to changing the entire

market rather than just their own share.

Furthermore, Tesla’s mission for changing the market shows also in their target

customer, or more specifically, their target customer in the future. To clarify, the current

target customer of both companies are relatively similar, having an above average income and

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a liking for design and sustainability. However, BMW has had this target consumer for a long

time, while it is Tesla’s goal to broaden their reach to the point where everyone will be

driving an electric car. This would require a substantial decline of price of course, so it is a

long term mission in this sense.

communication. The aspect of the two business models that is most intriguing is

probably the communication, the combination of distribution channels and customer

relationship. Tesla’s approach to this is quite revolutionary. To elaborate, the company uses

almost no traditional channels for advertising. That is, Tesla does not run any TV adds, and

only print advertisements when they are linked to a bigger story in that magazine or

newspaper. What is more, most of the broadcasting is done via social media, where they

promote upcoming events and give information about models currently in production.

In comparison, BMW does use traditional media for commercials. However, the

company also uses the newer channels, such as Facebook and Twitter. What is more

interesting however, is the way in which these new media are utilised by the two companies.

Even though Tesla has such a focus on new media for their marketing strategy, the full

potential of these media is largely ignored. That is, to become fully adept at using social

media, the company has to realise that one way communication has little value on this media.

To clarify, the strength of social media lies in the ability to directly communicate with your

customers in a way that fosters direct feedback (Van Belleghem, 2012). Additionally, to

obtain this feedback, which is beneficial to the company, a social media strategy must be

employed that considers several factors. This means a company should be active, interesting,

humble, and honest (Kaplan & Haenlein, 2010). As most of these factors would require an in

depth analysis to assert, this essay focussed on activity primarily. With regard to activity,

BMW posts more tweets in an hour than Tesla does in a day. What is more, the type of

activity, or the type of communication rather, is also different. While Tesla only posts

messages that are related to an event or upcoming new product of theirs, BMW is actually

primarily responding to customers who are asking questions. The disparity in engagement

towards customers is especially surprising as Tesla’s value proposition and mission statement

are based on customer engagement, second only to the environmental approach. If this

cooperation with customers is not happening via social media it is hard to imagine it being in

effect at all. On the other hand, BMW as the traditional company is showing promise in their

interactions with costumers via social media, doing better than the new car company in this

regard. It should be noted that this media strategy applied by BMW seems to be a recent

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change. This becomes apparent when taking into account the low amount of total tweets in

comparison to the recent activity.

Implications

The general conclusion from this comparison is that the newer car company has a more

ambitious plan for the future, to turn the entire market environment friendly, but the execution

of this mission is not quite there yet with regard to communication and, not unimportantly,

making profit. On the other hand, the traditional company has set slightly less ambitious, or

perhaps more realistic, goals, while still being able to adapt features of their business model,

which is shown best by the recent social media strategy change. All in all, new companies

bring change to the market, but the traditional successful car companies already have the

capability to adapt to these changes. This means that new companies should look at the

current market and learn from the market leaders on how to continuously adapt and stay

relevant, while the traditional car companies should look towards newcomers for inspiration.

Limitations

As this essay is primarily based on information from annual reports and websites, most of the

information is biased towards that company. In addition, due to the resource and time limit, an

actual in depth content analysis of the media use was not possible, but could be very

interesting for further research. Furthermore, by selecting only two companies the differences

may not be generalizable to the entire market, let alone other industries. Finally, due to the

substantial difference in size, market location and financial situation, any comparison made

between BMW and Tesla may be influenced by those factors.

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