How Engineers do Business

After studying a lot of Elon Musk and Robert Pera, I found they have a lot of similarities.

First, they are both engineers and later started to do business.

The way they do business is quite different from traditional business schools.

Why would Tesla choose to not make money on car service, and gives supercharging for free? Why would Ubiquiti prices something that can easily sell for $1500 – $2000 (still a lot cheaper than competitors) for $1000?

Why would Tesla sell their luxury car at the same price in China as US? Didn’t Musk know that China’s demand is already so high, and reducing the price of a luxury goods won’t necessarily boost the demand? Plus all the other luxury brands are often selling twice more expensive in China.

Why would Ubiquiti give out software for free? Is it not nice to have a steady revenue stream by charging the annual license fees like other big companies did?

Instead of milking every penny out of their consumer, they pass on the value to consumer.

Instead of playing all kinds of tricks and put hidden charges, they put everything straight forward with just one price tag.

Instead of just getting excited by the profit growth, they also get excited by the value they create.

Instead of getting the best margin possible, they focus on getting the best efficiency possible.

Instead of following everyone else on conducting business, they have their own business model.

What happens then? Is that a good choice or a bad one?

With Tesla and Ubiquiti, we see trust from customer, fans all around the world, efficient corporate structure and production, and amazing growing speed that is rocketing way above expectations or even imaginations.

The disruption they brought to their industry is profound, which goes much beyond a particular industry. It brings a new perspective on how we conduct businesses, and it is what the engineering mind brings to the business world.

 

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6 Responses to How Engineers do Business

  1. Cheng says:

    Agree!
    The only other company I can think of that is doing the same thing is Costco.
    Everyone talks about passing the value to the customer, but very few really do it.

    • dajian888 says:

      Yeah, although Costco did it within the traditional business bound. In another word, that strategy is understandable for normal business school people (using lower price to boost demand). When lower price doesn’t actually increase demand, and you still price much lower than needed, that seems silly to normal business guys. And that is what the engineers did 🙂

    • dajian888 says:

      In another word, the trust and enthusiasm from the customers are intangible, and hard to quantify. This non-quantifiable factor wasn’t built into the traditional business models.

  2. Cheng says:

    There are similarities between Costco and UBNT in terms of business philosophy.
    They both embrace minimalist – focus only on the things that really matter and ignore the rest which conventional wisdom thinks are mandatory (e.g. sales force, endless number of ‘talkers’ in the teams, ‘must-haves’ in a retail store…). In other words, they understand that what not to do (by choice) is often more important than what to do. (BTW similar philosophy can be found in Apple product design, focused investing, simple/frugal life style choice by Buffett, etc.) They really value their employees – pay and treat them very well. They really sacrifice short term money for long term sustainability.

  3. sinksmith says:

    I think in terms of ‘good’ and ‘bad’ profits, which is my shorthand for sustainable and unsustainable profit. A lot of that can be about the value a company provides for customers, as well as general good practice. At the wrong end of the scale, there’s all the banks that hit trouble in the financial crisis, usually after years of reporting growing profits. As just one example, Countrywide originated and sold on shoddy mortgages, and Bank of America incurred $50 billion for lawsuit settlements and legal costs, mostly from acquiring Countrywide.

    I live in the U.K. where there are plenty of cases of ‘bad’ profits which run out one way or another. Apart from corrupt and incompetent banking, insurance companies that exploited ignorance and inertia to sell poor-value annuities have been hit by deregulation. High-margin U.K. grocers have been hit by competition from a German company and a subsidiary of Wal-Mart. Pharmaceutical company Glaxo-Smith-Kline have been accused of bribing doctors in China, Poland, Jordan and Lebanon. Rolls Royce are being investigated over bribery and corruption. I won’t need to tell you about BP.

    That’s a varied list, and I don’t really blame a grocery chain for charging a high margin while they can. The common factor is the unsustainability of the extra profit, whether it’s from a temporary absence of real competition, breaking the law, or cost-cutting that affects safety. So far as I can tell, the U.S. is not that bad, which is one reason why I look to the U.S. for most of my investment. It’s still a problem, that when the income is real enough (backed by cash flow, and not manipulated) it’s often not easy to gauge the sustainability until bad news hits. Even Berkshire Hathaway got it wrong when they invested in U.K. grocers Tesco plc. I also have some doubts about their investment in IBM.

    Ubiquiti looks safe enough. They had a problem with illegal export to Iran, but I see that as part of the business learning curve, possibly a risk of the outsourcing model, but not due to the company culture. As the article implies, sales and profits are more sustainable (and growable!) when the customers get good value.

    • dajian888 says:

      Yeah. Beyond sustainable profit, sometimes Tesla’s move is beyond traditional business, and defy the rules we learned from microeconomics. For example, We know reducing price for a luxury product will not increase demand much, since a lot of people buy luxury stuff to show off, and they only feel the value from the price tag.
      This is especially true in China. That is why the luxury car costs a lot more there than other countries.
      Musk knows this and he still chooses to sell at the same price. Is that a wise choice? Just based on profit, it is not. But if you consider the trust and enthusiasm it brings, it maybe a good thing to do. He did say this is a “risky” move though. By calling it “risky”, apparently he was thinking about profit too, not just fairness.

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