Tesla Motors was founded in 2003 with the “mission is to accelerate the world’s transition to sustainable energy” and the intent of making electric cars that surpassed current gasoline-powered cars in both style and performance (About Tesla, 2017). Tesla Motors has experienced abundant growth and success starting with the 2008 release of the first Tesla Roadster which sold 2,400 in over 30 countries (About Tesla, 2017). Fueled by electric and heavy investment, Tesla has been able to redefine the automotive industry, and has recently overtaken General Motors as the most valuable US car manufacturer by market capitalization (Welch, 2017).
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Political. Upon Tesla’s introduction to the automotive industry, factors were ideal and the company was positioned for success and growth. The U.S. Government’s interest and initiatives toward environmental stability, reduced emission levels, and advanced vehicle technology allowed Tesla Motors to receive federally backed grants, loans, and tax breaks to help finance heavy investments into research and development, as well as production. Further, the U.S. Government promotes adoptions of the electric car industry by also investing directly in advancements. For example, the Department of Energy (DOE) plans to invest $4.5 billion to install 48 new electric car charging stations across 35 states every 50 miles spanning 25,000 miles starting in 2017 (O’Kane, 2016). This investment directly addresses a threat to Tesla and the industry without requiring any of Tesla’s resources.
Economic. “After a lackluster outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018…. [h]owever, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications” (International Monetary Fund, 2017). The current state of U.S. politics and the looming threat of war leaves room for uncertainty regarding the state of the economy as well as oil and material prices for all automotive manufacturers.
As for the automotive industry itself, “worldwide sales reached a record 88 million autos in 2016, up 4.8 percent from a year earlier, and profit margins for suppliers and auto makers…are at a 10-year high” (Parkin, Wilk, Hirsh, & Singh, 2017). However, the auto industry is struggling with total shareholder return and return on capital (Parkin, Wilk, Hirsh, & Singh, 2017). As Tesla has recognized, and will continue to recognize, it will be difficult to earn returns on the capital vested into research and development.
Social. As mentioned above, consumer demands for more environmentally friendly alternatives to traditional gasoline powered cars drives the electric car market. The original customer segment for Tesla Motors were wealthy men with a median income of $271,000 between the ages of 35-50 in California and Washington that were attracted to expensive luxury sports cars, wanted to own the latest and greatest sports car on the market, and wanted to follow the trend toward more environmentally friendly vehicles (Burdman, 2013; Pressman, 2016; Thompson, 2015). However, as Tesla expands its product offering beyond luxury sports cars to include SUV’s and more economical car models, Tesla is expanding its market to women and less affluent who are just as concerned with driving an environmentally friendly vehicle.
Technological. Tesla is the leading innovator of technology in electric cars and is transforming the automotive industry. However, the existing battery technology has some drawbacks. The Tesla Model S can only travel around 230-300 miles on a single charge (Thompson, 2015, p. 254). This requires a solid infrastructure of charging stations which is still being developed. This need for charging stations creates “range anxiety” because though charging stations do exist along many major highways, however, owners may have difficulty finding charging stations in more remote areas (Thompson, 2015, p. 262).
Environmental. The market for electric cars was created in response to a growing awareness of environmental issues and impacts such as global warming and climate change. These impacts are noted by both governments and consumers which have encouraged the expansion of electric car technology through government policies and changing consumer demands. Tesla’s electric cars have zero carbon emissions and do not contribute to the carbon footprint, unlike other electric, hybrids, or gasoline cars (Tesla, 2017; U.S. Department of Energy, 2017).
Legal. Tesla has faced difficulty with state laws and regulations regarding the Tesla’s decision to vertically integrate sales and service instead of selling through authorized dealers. “Legislation either forbidding or severely restricting the ability of automakers to sell vehicles directly to the public [has] been passed in 48 states (Thompson, 2015, p. 261).” This results in strategic challenges for Tesla in regards to their showrooms that offer both sales and service.
Porter’s Five Forces
Industry Rivalry. The U.S. automobile industry is a mature multi-billion-dollar oligopoly. General Motors, the highest selling car manufacturer in 2016, realized $166.4 billion in revenue (General Motors, 2017). The large competitors and brands control market share and the industry is highly competitive. In a fight for flat market share, competitors design new car models and redesign existing car models, and offer attractive incentives to influence potential customers.
Bargaining Power of Suppliers. The bargaining power of Tesla’s suppliers is moderate because Tesla’s production is currently limited compared to other competitors in the industry and the Tesla is dependent upon its suppliers. Tesla is particularly dependent on its battery supplier, Panasonic, with whom Tesla has a supply agreement through the end of 2017 (Thompson, 2015). There are other potential suppliers in the industry and Tesla is expecting to significantly increase production which would increase Tesla’s bargaining power, however, Tesla is leveraging their agreement with Panasonic to create a Gigafactory that will “produce more lithium ion batteries annually than were produced worldwide in 2013” (Tesla Gigafactory, 2017).
Bargaining Power of Buyers. The power of buyers in the automotive industry is high because there are many different manufacturers, makes, and models to choose from, and many dealers will negotiate sale prices. However, the bargaining power of Tesla customers is moderate because there all electric and hybrid alternatives offered by other competitors, however, the company does not negotiate sale prices.
Threat of New Entrants. The threat of new entrants into the market are low because of the high barriers to entry and the large size of competitors in the industry. High barriers to entry include the high cost of research and development to design a car, the high cost of production (materials, labor), high economies of scale, and the high cost of brand development and marketing. New entrants would require significant upfront financing in order to produce a vehicle and compete in the industry. New entrants would be competing against established name brands that benefit from economies of scale and offer differentiated product lines.
Threat of Substitutes. The threat of substitutes to Tesla in the automotive industry are moderate because of alternatives offered by competitors, as well as public transportation. The cost to switch from one vehicle manufacturer to another, or to choose public transportation as an alternative is low. Also, competitors offer other electric/hybrid models with varying price ranges that also perform well.
Strengths. Teslahas multiple strengths which are major contributing factors in the company’s success. Offering a more environmentally friendly and technological advanced alternative to the traditional combustion engine has allowed the company increase investor buy-in, receive federally backed funding, improve sales incentives through federal and state tax credits for buyers, and partner with Wells Fargo Bank and U.S. Bank to offer special buyer financing (Thompson, 2015). Since 2004, Tesla has had significant investor buy-in and funding, receiving “$145 million in investment capital raised in [the] first five financing rounds” (Thompson, 2015, p. 247). In additional, Tesla received “about $465 million in low-interest loans from the U.S. Department of Energy” as investment financing (Thompson, 2015, p. 247).
Tesla’s product quality and brand image are also a major strength. Tesla cars offer superior speed, style, safety, and overall performance, as well as more storage space than traditional cars. All of which have allowed Tesla to meet and exceed customer expectations of internal combustion engine cars. Environmental friendliness and product quality have allowed Tesla to be successful in international markets. Also, Tesla’s product quality and brand integrity have resulted in pre-ordering of the company’s newest Model 3 car.
Tesla’s internally developed and managed designs, and core competencies are also a strength. Tesla has managed to develop core competencies in vehicle design and engineering, power train, gear boxes, computer aided design, and crash test simulation, and has even been able to use these core competencies to sell products to competitors (Thompson, 2015). Tesla also vertically integrated the production of vehicles upon the purchase of the Fremont automobile plant. Tesla integrates and oversees the portions of the production process that have a great impact on the quality of their product and the integrity of the brand, including forward integration of retail sales and services, while outsourcing of minor components that are not the core competency of the company.
Weaknesses. Tesla’s major weakness is price – both of car and of repair. Though the company is in the process of offering a differentiated product line, the cost of the vehicles currently on the market are still very high compared to other alternatives. Cost of repair can also be very expensive for both for body work on the aluminum body and general maintenance such as brakes that can cost around $8,500 (Hines, n.d.). Access to sales and service can also be a challenge for owners. Tesla has only 36 total service centers across the U.S. which can make it very difficult for customers to receive service in states without a service center or with only one service center in a state (US Tesla Service Centers, 2017).
Tesla’s low production rates are currently a weakness. The company is not able to develop economies of scale and is struggling to implement manufacturing efficiencies due to low sales volumes. Improved economies are scale are very important based on the size of the competitors, the resources available to these competitors and the competitiveness of the industry. Tesla will also have to continue heavy investments into research and development to continue innovation and technology advances to keep its place in the market.
Another weakness is the car’s battery. The battery’s ability to only run about 300 miles on a full charge and the 75-minute recharge time is restricting to owners (Thompson, 2015). Also, owners are facing the difficulties with decreased battery capacity after extended use or use in adverse weather, as well as high costs to replace the battery pack ($29,000 for the Tesla Roadster) (Blanco, 2015; Thompson, 2015).
Tesla’s Supercharger network is also a weakness. Though there are 828 Supercharger stations with 5,339 Superchargers in the US, the infrastructure of the Supercharger stations still needs large investments to improve and expand (Supercharger, 2017). There are still several states within the US where Supercharger stations are non-existent or scarce, such as Arkansas, Maine, North Dakota, and New Mexico (see Appendix A).
Tesla’s current marketing strategy is based on word-of-mouth referrals, as well as free media coverage of the company, products and awards (Thompson, 2015, p. 263). Tesla is still in the early stages of the product life cycle, so outside marketing and referrals have been beneficial. However, going forward, Tesla will need to create a competitive marketing strategy to continue to set themselves apart from traditional combustion engine car manufacturers in the market.
Opportunities. Tesla’s advanced technology and expansive investments in continued research and development offer major opportunities. Advances in battery pack technology including faster charger and increased traveling distance on one charge will help further develop the adoption rates and market share of electric cars. If Tesla could offer an economical, high performing model, like the Model 3, with a battery pack that was able to charge in the same amount of time as fueling up at a gas station and drive more miles on one charge, it would reduce barriers to adoption.
Tesla also has some major opportunities with increased demand and production allowing for economies of scale, as well as manufacturing and supply chain efficiencies associated with increased experience. These improvements and efficiencies will help to reduce costs of production and materials. Tesla could then reduce the sell price of the cars in order to increase demand and sales. Another option would be to reinvest the revenue increase back into research and development. This opportunity is supported by Tesla’s manufacturing plant in Fremont, California also being able to facilitate increased growth and production (Thompson, 2015).
Tesla’s brand recognition is also an opportunity within the market. Tesla has become a well-known brand, and was “America’s fifth best-perceived car brand” in 2014. (2014 Car-Brand Perception Survey, 2014). The Tesla brand has helped define a positive perception of electric cars, and prove that owning an electric car is better for the environment and does not reduce performance. The Tesla brand is recognized for advancements in technology and top of the line performance.
Tesla’s opportunities with continued technology advances, economies of scale, improved production efficiencies, and brand recognition contribute to the opportunity for continued international and product expansion. The company has many opportunities internationally as more governments are supporting electric vehicles initiatives, such as “Canada, China, France, Germany, India, Italy, Japan, Korea, the Netherlands, Norway, South Africa, Sweden, [and] the United Kingdom” (International Energy Agency, 2017). Tesla also has opportunities in expanding its product line to include new models, such as pickup and commercial trucks.
Threats. Tesla’s electric cars are a potential disruption to the automotive industry, and the company’s successful entrance into the electric car market has spurred the competition to follow suite in order maintain market share as the automotive industry transforms. Volkswagen, in particular, stated in 2013 that “it intended to become the world’s largest seller of electric vehicles by 2018” competing directly with Tesla’s market share (Thompson, 2015, p. 270). Volkswagen and other existing car manufacturers have large assets at their disposal to invest into research and development, and many of these manufacturers are already producing electric vehicles that compete with Tesla (Welch, 2017, p. 271). Tesla faces threats of competition with competitor’s more economical models that are already in production, as well as consumers purchasing used cars from other manufacturers rather than purchasing a new Tesla model.
Minimal or no advancements in technology are a major threat to Tesla. Tesla is able to add value to its products and brand through innovation. Slowed or no innovation also allows time for the competition to catch up or surpass Tesla’s technology. The current battery technology’s low mile per charge, decreasing battery life, and expensive replacement leave room for improvement. Also, consumer expectations are for Tesla to continue to be an industry leading technology innovator and to always have top of the line technology. Not meeting these expectations would allow room for competitors, as well as be detrimental to the Tesla brand.
Tesla is also at risk for not having long term agreements with suppliers. Tesla could be missing supply chain efficiencies and lower cost options by not creating agreements while the company establishes itself in the market. Because of this, material prices can be more volatile and Tesla could be at risk for unanticipated increases in material costs directly affecting the bottom line.
Decreasing fuel prices, lack of charging station infrastructure, and poor publicity on safety are also threats to Tesla. As fuel prices decrease, drivers are able to save money and are less likely to adopt an electric vehicle (Korosec, 2017). Lack of charging station infrastructure also creates a challenge for consumers who may be less likely to purchase an electric vehicle given the restrictions of the current infrastructure. This creates a challenge for the electric car industry as a whole, including Tesla.
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Current Business Strategy
Tesla Motors is currently employing a transnational strategy as the company does not alter the product based on the region in which it’s selling. Currently Tesla has stores and galleries throughout the U.S., Canada, and Mexico, as well as stores across Europe, Australia, China, Hong Kong, Japan, South Korea, Taiwan, Jordan, and United Arab Emirates (Find Us, 2017). Tesla’s initial strategy was focused differentiation which targeted high income males living on the West Coast (particularly California and Washington) who wanted a car that was high tech, high performance, and environmentally friendly. Tesla created a niche market in which the company was able to thrive because the large industry competitors did not have product offerings in this market. Tesla is currently adapting their strategy to include a larger target market by offering the Model 3 at a much lower, more economical price.
Tesla implements a highly controlled and regulated business strategy which is evidenced by the integration of manufacturing, core competencies, sales, and service into the business model. This allows Tesla to directly control the quality of products and service that a customer receives, as well as control the price by removing markups by third-party car dealerships. This also includes Tesla’s strategic business alliances with industry competitors Daimler, Mercedes Benz, and Toyota. Tesla is able to leverage their core competencies with competitors who are unable to compete within the same market in exchange for the competitor’s core competencies. A specific example would be Tesla teaming with Toyota to create an electric SUV—combining Tesla’s technology and electric vehicle competency with Toyota’s lean and more experienced manufacturing competency.
Some of the major strategic challenges Tesla is facing is the ability to meet product release deadlines, state legislature, and continued international expansion. First deliveries of Tesla’s new products have been delayed on each of the three releases, and is likely to happen again with the forth product release of the Model 3 (Randall, 2016). These delays can reduce stock prices and reduce profits, as well as have effects on customer trust and brand loyalty. State legislature and court decisions regarding whether a company is able to both manufacture and sell cars also present a strategic challenge to Tesla’s controlled business strategy. Tesla will have to set up strategic alliances with car dealerships within the states that decide Tesla is not legally able to sell their products, and decide what to do with existing sales/service locations set up within that state. Further, it will be a strategic decision whether to maintain sales facilities in the states that allow both manufacture and sale, or to back out of the sales/service business and establish partnerships in all states.
Lastly, continued international expansion is a strategic challenge for Tesla.
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Appendix A: Tesla Supercharger Stations Map
Appendix B: Tesla’s History of Delays
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