Tesla, Toyota, Financial dependence & Independence, Daily huddles & Gross Margin
6th September 2020 Evolution Partners Newsletter
“The only person you are destined to become is the person you decide to be.” – Ralph Waldo Emerson
Hope you’re Thriving!
This week in Australia Winter turned into Spring, and where I live that means less rain, cooler mornings and more sunshine. Not quite warm enough to go to the beach and swim yet, but there’s definitely a sense of optimism about the upcoming weather here. Let’s jump straight into it…
Rise and further rise of the electric car
On the 18th March this year Tesla stock bottomed at $72.24 on the NASDAQ, and this week it reached a peak of $498.32. Now I’ve recently spoken about Toyota vs Tesla why it makes made sense, and how at the time, at the beginning of July 2020;
– Toyota shares were trading at 10 times 2022 estimated earnings.
– Tesla shares were trading at 69 times 2022 estimated earnings.
This week then, Tesla shares were trading at 133 times 2022 estimated earnings.
There are no surprises there, we know that the stock market has possibly decoupled from logic in many people’s view.
But a really interesting development in the Toyota vs Tesla analysis occurred this week, where the number 1 selling car in the country in August was a petrol-electric hybrid for the first time in Australian automotive history. The Toyota RAV4 sold 4,405 hybrid models (up 140% on the previous year), and 420 petrol-only models, and furthermore, the hybrid has a 10-month waiting list. Interestingly the number 2 selling car was the Ford Ranger with 2,935 cars sold, around 33% less than the RAV4 hybrid. Now Tesla doesn’t report car sales figures in Australia, but it’s estimated that they will sell 1,700 electric vehicles this year, that Tesla has sold 80% more electric vehicles than any other manufacturer in Australia, and therefore most growth is occurring in hybrids, rather than pure electric vehicles, but as distance ranges and options increase this trend will continue toward pure electric. What’s important to note though, is that the wider auto market in Australia is now on its 29th month of decline in sales, further highlighting the ongoing success of electric and hybrid cars.
But let’s not forget, it’s the Tesla differentiators that form the strategy that gives them a unique and valuable position in the market. Importantly these differentiators don’t make sense for Toyota;
- Autopilot software logging all driving, for every vehicle
- Buy through the internet, not through a dealership
- Only electric vehicles
- Charging network
That leads to a powerful combination of benefits including;
- Up to 9 times safer
- Insurance 20-30% cheaper
- Better margins by eliminating dealers from transaction costs and maintenance requirements
Toyota can compete on features such as speed, price or trim, but it can’t compete where it doesn’t make sense to destroy its own business model.
Margin growth comes from a better business model
If you were to think about how to best grow your operating margins over time, which of these would you focus on first?
- Operational innovation – Innovation that improves the effectiveness and efficiency of core processes and functions
- Products/services/markets – Innovation applied to products or services or “go-to-market” activities
- Business model – Innovation in the structure and/or financial model of the business
A CEO survey from IBM I came across this week shows that, just like Tesla, the biggest impact on operating margins comes not from operational or product/service/markets innovation, but from innovating the business model. Like most of the CEOs in the survey, if you wanted to improve margins over time (it’s the most important number in your business as Kevin and I discuss in this week’s podcast) many people would go to what they might first think of – improving processes and products.
Your business model forms a key part of your strategy, and when you analyse the Tesla strategy and business model, you can see how margins will grow faster than Toyota over time. Toyota are experts at lean manufacturing, making incremental gains within operational innovation, and they are the best in the world at it. But they are operating within the same business model as their competitors. Rather than competing to be unique, they are competing to be the best.
And as the IBM CEO survey shows, the compounding impact of innovating the business model provides a far greater return in margin growth compared to operational or products innovation.
The spectrum of financial dependence and independence
Ever since money was invented there has been a long list of reasons why money doesn’t make you happy, and yet while that may be true, a lack of money can definitely make you unhappy. We spend most of our lives pursuing financial goals such as owning a house, or a business, with the goal to avoid the unhappiness that a lack of money brings, and for many people, the goal is to become less financially dependant, and more financially independent. This week I saw an interesting measure that defines where a person might be on the spectrum of financial dependence, and independence.
It’s interesting to place yourself, your business and other people you know onto this list, and consider what actions you might need to take to progress to the next level of the spectrum.
Interesting COVID information
Generally, I’m trying to only share relevant COVID articles here, as there’s been so much written about it now I’ve been looking for more interesting things to share – especially things that aren’t political. But this week I’ve come across a few interesting and relevant articles you may be interested in.
Firstly, the second wave has hit Europe.
The first time around generally only the very sick in hospital were being tested (and testing positive) and this time around the testing and tracing seems a lot more widespread, and they are more able to manage outbreaks. Yet I’m still not considering an Autumn European holiday.
Edelman COVID Trust Barometer
Edelman, the publisher of the annual Trust Barometer report, conducted a survey of 3,400 respondents in 7 countries and found that there is a big trust issue on return to the workplace. Here are the 6 key findings;
- A big trust issue on return to the workplace.
- There is no agreement on essential measures that would enable a safe return to workplace.
- Employees feel confident that they can work from home.
- There is little appetite for return to everyday activities.
- We have an “info-demic”, a plethora of information, little of it credible.
- We face another potentially catastrophic dichotomy: a deep fear of a second wave but alarming resistance to vaccination.
As CEO Richard Edelman states, this trust issue cannot be overcome by CEOs pronouncing the duty of employees to return to work. We must overcome these 6 key issues.
Read the article here ‘COVID19 and return to workplace; we have a trust problem‘
CNN Business recovery dashboard
CNN Business and Moody’s analytics have created a dashboard showing key US data, and how it’s tracking over time which you might find interesting. In particular, I liked the Back-to-Normal index, which is currently at 79%.
Leading into the post COVID recovery
This HBR article seemed quite relative and practical for the current mood.
The unexpected high points brought on by the crisis are waning, there is an unresolved tangle of emotions and there is a burden of work to be done.
So how can leaders tackle the recovery phase?
From the article, there are three main objectives.
First, the recovery marks the onset of a broader challenge, not the end of the crisis.
Second, recalibrate your team.
Third, reopen with attention to the small stuff.
The skills our business leaders need to help us out of the pandemic
I found this article interesting because it approaches the recovery from a different perspective. Rather than looking to tackle the recovery looking at opportunities, or even core competencies to build new revenues, it suggests looking at Core Vulnerabilities. It suggests that in order to look beyond short term fixes, vulnerabilities must be addressed using these four steps.
- Recognising and managing core vulnerabilities, not competencies
- Managing vulnerabilities differently from risks and threats
- Accepting that vulnerable businesses require vulnerable CEOs
- Changing perceptions of business partners
Read the Monash University article here ‘The skills our business leaders need to help us out of the pandemic’
This week on The Growth Whisperers podcast
On episode 21 of The Growth Whisperers, Kevin Lawrence and I talk about the following.
Gross Margin – Understanding the most important number in your business
This week on The Growth Whisperers Kevin and Brad talk about the most important number in business – Gross Margin, and why it’s the output of a great strategy, how to understand your Gross Margin and what to do when you see a declining Gross Margin. Also, they talk about how salespeople affect Gross Margin, and what to do about it, as well as provide simple tools to analyse Gross Margin and one tool to bring discipline to and turn around Gross Margin erosion.
Listen to The Growth Whisperers
From the vault
How to improve daily huddles
What are the most important things you must do to improve Daily Huddles?
How do you prevent a Daily Huddle from failing?
What makes a Daily Huddle succeed?
In this video, I explain what is a Daily Huddle, how Daily Huddles work and how to prevent Daily Huddles from failing.
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