The_Tesla_Phenomena_A_Business_Strategy.pdf

The Tesla Phenomena A Business Strategy Report

Sonali Sharma MBA – University of Roehampton May, 2016

CONTENT

A. STRATEGY RECOMMENDATIONS AND EVALUATION SUMMARY

B. BUSINESS STRATEGY REPORT

1. The Tesla Story 2. Defining Tesla Strategy 3. Analysis and Evaluation of Tesla’s Strategy 4. Analysis of Tesla’s Business and Revenue Model in accordance with their innovation strategy 5. The CSR Score 6. Tesla’s Performance Frontier Analysis 7. Strategic Position analysis 8. General External Ecosystem Analysis 9. Stakeholder Analysis 10.

Porter’s Competitive Force Analysis

11.

Internal Environment VRIOS Analysis

12.

SCOT Analysis

13.

Implementation is Critical

14.

Concluding Thoughts

PART A STRATEGY RECOMMENDATIONS AND EVALUATION SUMMARY The strategy of Tesla, as shared by Elon Musk, the CEO and founder of Tesla Motors is “to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower price with each successive model” (2006).

TESLA STRATEGY AND PRODUCT EVOLUTION 2008-12

2012

1. Market entry with high price low volume

1. Market penetration mid-price mid volume.

2. Launch of Roadster – first fully electric sports car

2.Launch of Model Sfully electric sedan

3. Base Price $1,09000

3. Base Price $69,900

2014 1. Expansion through Giga Factory and partnerships with Daimler, Toyota and Panasonic.

2015

2017

1. Launch of Model X: Electric crossover vehicle.

1. Market development Low price High Volume.

2. Announcement of Model 3 mass market model.

2. Model 3: affordable fully electric Sedan

3. Launch of Powerwall rechargeable battery

3. Base Price $35,000

Firms clearly defined strategy, aligned with their mission and vision has offered a competitive advantage and has helped Tesla emerge as a potential leader in the Electric Vehicle Industry (Collis & Ruckstad, 2008). Tesla’s commitment towards design, engineering, software and technology innovation is evident in its past offerings, especially in Model S, the vehicle that won the Motor Trend car of the year award. Equally strong is company’s commitment to service excellence through Super Charger networks and battery swap facility. Tesla took their belief in open innovation to a new level by opening their patents to the industry and by forming strategic alliances with industry leaders like Panasonic, Daimler, Toyota and Solar Edge, to name a few. Such collaborations served as a strong strategic move to foster innovation and growth (Lakhani et al, 2013). Despite leadership and pioneering benefits, a blue ocean innovation driven disruptive organization like Tesla is still unprofitable and would need a lot more time, money and patience to achieve financial success and business sustainability (Kim & Mauborgne, 2004). Tesla’s current valuation of $25 billion market capitalization is based on future predicted success and the company is again open for raising funds for the production of Model 3. Elon Musk’s courageous expansion strategy that led to the investment of $3 billion in robotics and $5 billion in Nevada Giga Factory is a risky approach. The company is also incurring losses

in the production of Model 3 cars as the offered price is based on the volume productions at Giga Factory which is a few years away from reaching its full production capacity. Tesla currently has a huge task of successfully completing the production of Model 3 orders and company’s future success and strategic goals would depend a lot upon this. As a part of conducting this Business Strategy Study on Tesla, I conducted the General Ecosystem PESTEL, SCANSTEP and Porter’s competitive force analysis followed by the VRIOS internal environment and SCOT analysis to analyze and evaluate Tesla’s strategic goals, positioning and actions (Pitt & Koufopoulos, 2012; Porter, 2008; Shulz, 2013). Listed below (in order of priority) are the strategy recommendations for the company. 1. Focus all energies towards Model 3 production: With 3,73,000 existing orders (as reported by The Week on 19th May 2016), it is imperative for Tesla to create a production strategy for successful and timely completion of these orders. Raising funds, expansion of production place, Giga Factory battery production plan, training in production line and assembly are few suggested actions towards this goal. Hiring Audi veteran, Peter Hotchholdinger as head of production is a good move. I would suggest Tesla to outsource battery production for Model 3, as Giga Factory being a new setup might take more time to deliver. Since time is extremely crucial, Tesla must create an action plan to accomplish above and achieve the annual target of completing the production of 2,00,000 Model 3 cars this year. 2. Revisit Business Model to generate higher revenue and profits: Tesla’s existing business model is based on direct sales to the customers through company owned stores. The company needs to revise their Business model and make it conducive to global expansion. Tesla’s ‘direct selling to customers’ strategy is based on their need to educate the customers about the product and to provide them with exceptionally good service. However, to meet the expansion targets in emerging economies, this strategy is expensive and challenging. Partnering with the right people combined with training can ensure maintenance of existing culture in distant stores. A Global distribution and franchise network would help them capture new markets. Moreover, Tesla is not yet profitable and expansion plans have led to huge investments making profits more difficult. The new Business Development model must be focused on generating immediate profits by aggressively selling all existing and new offerings: Model S, Model 3, Powertrain technology and other EV tools.

3. Need for a comprehensive Marketing strategy: Tesla needs a comprehensive marketing strategy for proper positioning and sales of different offerings. A global integrated marketing strategy for creating a consistent brand image combined with culture and market based campaign for various existing and new products would be needed. Needless to say that all campaigns must capitalize upon the green and sustainable energy aspect of the product offerings. Considering Ansoff’s matrix

(as shared below) to devise a holistic marketing strategy would be a good move (Jobber & Chadwick, 2013). ANSOFF’S MATRIX FOR DEVISING A MARKETING STRATEGY FOR TESLA MOTORS.

PRODUCTS PRESENT

NEW

Market Penetration Strategy

Plan

for

Business

Development

Product Development Strategy

and Plan for BDM and market acceptability test

Marketing of existing products in the existing for new products in existing US and European

PRESENT

USA and European markets.

markets.

Products: Model S, Powertrain technology, Products: Model 3 and Powerwall EV tools

Model 3 marketing plan focused on middle

Aggressive Marketing strategy focusing on class segment positioning it as the best innovative promotional campaigns, different offering for middle class from the luxury pricing strategies, increase in distribution brand Tesla. Capitalize on the aspirational channels.

value of the brand and Model S. Powerwall sales plan in homes as well as

MARKETS

commercial spaces. Market Development Strategy

Plan

for

Business

Development

Market / Product Diversification Strategy

and Model 3 focused marketing and sales plan in

NEW

Marketing of existing products in new emerging

economies.

Culture

based

markets – India and China

advertising campaign focused on creating

Products: Model S

brand awareness, and competitive advantage

Marketing strategy focused on high – end against similar priced sedans like BMW3, luxury market segment and environment Audi A4, Mercedes C etc. Association with conscious

market

segment.

Advertising celebrities for ad campaign will help in Indian

campaign focused on education around markets. product and positioning it as an aspirational Use Powerwall as a CSR tool in developing product with great status value.

economies to build a good brand image and trust.

4. Focused effort on battery R&D to reduce cost and increase profit: Tesla’s profits and market success depends upon the efficiency and cost of its batteries. They must have an undivided R&D focus towards further improving the battery efficiency and decreasing the battery production cost. Quick setup of Giga Factory and running it in its full capacity is important for cost reduction. Therefore, an integrated business plan that generates business worth $5,00,000 car sales per annum, complemented by battery production at Giga Factory will do the magic.

5.

Capitalize on Powerwall: Tesla’s Powerwall home battery creation is an amazing product for electricity backup. This product can be of immense use in homes of developing countries where continuous electricity supply is an issue and also in various commercial sectors. Tesla must create an exclusive business plan for marketing and sales of this product.

These strategy recommendations are aligned with the company’s existing mission and would further enable Tesla to achieve their long term and short term goals. Tesla being a smart Silicon Valley company and with Elon Musk as its leader has immense potential to raise capital and so I don’t see funding as an issue for the organization. From implementation perspective, Tesla’s biggest challenge is to achieve production success. Tesla so far has never attempted such huge production targets, and their past production issues with Model S further wavers the market belief in their production capability. Electric vehicle being a niche market, would not forgive any production and delivery failures. Therefore, Tesla’s future depends a lot on the successful implementation and accomplishment of production goals. I also believe that having a more integrated approach towards business growth and marketing along with production and innovation would be a better strategy for success. Being a socially responsible green initiative makes Tesla a CSR and ESG favorite, and a rigorous sales plan for selling all the existing offerings – vehicles, powertrain technology, as well as Powerwall will make Tesla a stakeholder favorite as well. Tesla’s long term strategy projects it as an energy innovation company with a much larger scope than an automobile company. Tesla’s innovation strategy resonates ‘Innovative Persistence’. Initiatives like ‘Tesla Energy’, connecting electric cars with large scale renewable power and ‘Tesla Solar City’, providing the renewable power are true examples of an all-encompassing strategy that will drive Tesla towards a culture of innovation persistence (Clausen et al, 2012). Tesla’s path breaking products, policies and technologies driven by their transformative vision and collaborative approach truly depicts a culture with strategic intent (Hamel and Prahalad, 2005). The company’s goals are inspired by a future that is sustainable and that makes this world a better place.

PART B BUSINESS STRATEGY REPORT

Innovation and Sustainability are two crucial drivers that distinguish a good company from a great company. A company whose strategy is well grounded in both these aspects is Tesla Motors Inc. Named after the pioneer of Alternating Current, Nikola Tesla, Tesla Motors is a Silicon Valley company with a mission “to accelerate world’s transition to sustainable transport” (teslamotors.com/about). The company envisions to trigger an electric transport revolution by being a global leader in electric vehicle industry and by making electric vehicles a lucrative automobile industry both commercially and technologically.

1. THE TESLA STORY Tesla Motors was founded in 2003 by a group of engineers in Silicon Valley with a mission to accelerate the development of sustainable transport industry by bringing compelling high performance green cars to the market. With instant torque, incredible power and zero emissions, Tesla’s offerings are undoubtedly some of the most innovative high performance cars in the world. Tesla Motors use proprietary technology, exceptional designs and highly automated manufacturing process to create high performance electric vehicles. The company launched its first car, Tesla Roadster in 2008. Roadster set a new milestone for electric cars due to its sports car performance, acceleration from 0 to 60 mph in 3.7 sec and running 245 miles per charge of battery. In 2012, Tesla launched Model S, world’s first premium electric Sedan. Model S with its exceptional technology, breathtaking aesthetics and high performance standards was named Motor trends 2013 Car of the Year. It also achieved a 5-star safety rating from the US National Traffic Safety Administration.

After successfully selling around 50,000 vehicles, Tesla is prepared to launch Model X – the crossover version by 2015 and Model 3 – the cheaper model for mass markets by 2017. The company’s out of the box customer service model with innovative service plan, supercharger stations and battery swap features, makes Tesla an all-rounder, i.e. innovative technology and service company. The company is expanding its manufacturing and sales across the world. Their giant battery plant called ‘Giga Factory’ has an ambitious plan. The plant by 2020 aspires to produce more lithium ion cells than all of the world’s combined output in 2013. Tesla proudly ranks at No.1 in the ‘World’s Most Innovative Companies List’ by Forbes 2015 ranking. The company’s founder and CEO, Elon Musk believes that Tesla is not just an auto manufacturing firm. He envisions Tesla as a technology and design company that aims at making sustainable energy available to the world.

2. DEFINING TESLA’S STRATEGY: The High end disruptive innovation model A classic disruptive innovation theory focusses on low end, price sensitive customers and inferior technology. Elon Musk, the cofounder and CEO of Tesla Motors calls Tesla a “High end” disruption innovation model. This innovation model creates products that perform better than existing products, sell at a premium price and initially focus on high end, least price sensitive customers before they target mainstream markets (Dyer & Bryce, 2014). Products like Apple’s iPod and Starbuck’s expensive drinks are few such examples. After entering the market with a high end product and waiting for acceptability, Tesla intends to penetrate the cost conscious market. In 2006, when Elon Musk was asked about their strategy, he stated: “the starting point is a high performance sports car, but the long term vision is to build

cars of all kinds, including low cost family vehicles.” Tesla’s expensive Model S & X will be followed by a cheaper Model 3 for the mass market segment. Model 3 will be launched by 2017 and will focus on Asian and other unexplored market segments as well. As per Elon Musk (2006), any new technology is launched with high cost unit and is later optimized at a lower more effective pricing.

DISRUPTIVE INNOVATION

Tesla Model S 85 KWH battery pack (265 miles, 2013) Tesla Model S 60 KWH battery pack (208 miles, 2012) Performance demanded by the market BMW i3 (100 miles; 2013) Toyota RAV4EV (83 miles, 2012)

Mitsubishi i-MiEV (62 miles, 2010)

Tesla’s performance and positioning clearly displays strategic intent. Tesla’s aspirational yet consistent strategy combined with leadership’s commitment and out of the box approaches like collaboration and open patents have truly fueled its success (Hamel and Prahalad, 2005). Tesla’s long term strategy focusses on Global Expansion, Strategic Partnerships, Technological innovation and gradual shift from ‘High Price Low Volume’ to ‘Low Price High Volume’

3. ANALYSIS AND EVALUATION OF TESLA’S STRATEGY Blue Ocean in true sense! The Blue Ocean Innovation strategy framework compels organizations to create a new demand in the market and venture in a new market space by creating innovative products or services at comparable or lower costs and higher efficiency, thus making competition irrelevant (Kim & Mauborgne, 2004).

Tesla Motors has been successfully innovating with a blue ocean strategy, aiming at solving the environment and energy concerns caused by oil dependent internal combustion engines and creating a sustainable and better technology for transport. The company not only aspires to achieve technological excellence but also aims at creating an exceptional out of the box customer experience for their clients. In traditional ‘red ocean’ market space, green motors or electric cars have been relegated to the realm of low speed reliable cars, hence catering to a very small market segment that truly values the green aspect of the car. Tesla, with its blue ocean strategy, has combined the features of green motors with premium sports car, i.e. a fast electric car with zero emissions. Tesla motors is far ahead of any competition with its proprietary technology and high performance products. It has created a new market space - ‘Green Performance Automobiles’. This is blue ocean innovation in true sense! Elon Musk, the founder and CEO of Tesla Motors aimed at building the best car in the world. Tesla’s Model ‘S’, the world’s first all-electric premium Sedan, offers a week’s worth of driving with a single charge, boasts of fast speed, beautiful aesthetics and high safety standards. The car was named the Motor trends 2013 Car of the Year in 2013 and also achieved a 5-star safety rating from the US National Traffic Safety Administration. The car’s proprietary Powertrain technology will be the basis of Tesla’s next two cars – Model X and Model 3.

The revolutionary Open Patent Move. On 12th June 2014, Elon Musk announced that “all our patents belong to you”. He said that the company’s mission is to develop sustainable transport industry and reduce carbon footprint. To realize their mission, they would adopt an open source philosophy with their intellectual property. Such a courageous and revolutionary move makes Tesla a responsible global leader that is pioneering the much needed change for a better and sustainable tomorrow.

Thousands of Super charging stations across the world. Tesla has strategically placed “Supercharger stations” where car owners can plug in for free and ride for another 270 km with just 30 min of charging.

The most useful and economical ‘Battery Swap’ facility A common concern that prevents people from purchasing an electric car is the probable investment in changing the battery in coming years. Tesla’s robotically automated Battery Swap stations is an answer to

this problem. With open patents, battery swapping would not only offer solutions to competitors but also become a new revenue source for service stations (Halla, 2015). This innovative facility is a win – win for customers, competitors, service stations and above all Tesla. Indeed, a marvelous growth for all approach!

Collaborations for better innovation and faster solutions Technology companies have time and again proved the relevancy of crowd sourcing, collaborations and alliances with external resources for better innovation (Paik & Chang, 2014; Lakhani et al, 2013). Tesla truly imbibes Open Innovation philosophy and has always been open to collaborate with strategically important companies. Tesla collaborate with Panasonic in 2010 to accelerate the development of next generation EV cells. In 2015, Tesla collaborated with Solar edge to offer distributed PV storage solutions to the global market. Such alliances with industry leaders is a wise strategic approach to create better innovations at a faster pace and achieve industry dominance. Tesla’s previous partnership with Toyota served a similar purpose.

Creating Competition Tesla follows a sustainable innovation approach offering better performance, environmental friendly vehicles at a higher cost. Currently, Tesla’s market is focused on niche customers who prefer green cars over gas powered cars. Therefore, it does not have a lot of competition. All electric vehicles accounted for just 119,710 of the 16.5 million automobiles sold in the U.S in 2014. Automobile manufacturers are not investing in Electric Automobile industry considering there is no existing market for it. This ‘Red Ocean’ approach allows them to minimize risk and focus on the products they are selling. This approach is likely to change once Tesla’s Model 3 hits the road. Model 3 is the company’s cheaper version of electric car. Priced at just $35,000 and with a performance of up to 62mph, Model 3 will compete with cars like Audi A4, BMW3 series, Jaguar XE, Lexus IS and Mercedes C- Class.

Architectural innovation – difficult to imitate Even though competitors might be able to imitate Tesla’s battery since Musk has opened the patterns, still the architectural innovation will make imitation very difficult. Tesla’s vertically integrated fully automated robotic plants make their car assembly very different from a general car assembly. This imitation challenge gives advantage to Tesla and helps it achieve dominance in industry.

4.

ANALYSIS

OF

TESLA’S

BUSINESS

AND

REVENUE

MODEL

IN

ACCORDANCE WITH THEIR INNOVATION STRATEGY The Electric Vehicle industry involves innovation in vehicle, battery as well as infrastructure to support the vehicle functioning and service (Chen & Perez, 2015). The Tesla Motors business model involves value creation through complete control over production, selling and servicing.  Direct sales to the customers helps Tesla enhance customer sales experience and eliminates the hassle of dealing with the distributors. This also minimizes the risk of bad sales or bad services by distributors (Zucchi, 2015).  Service experience: Tesla’s ‘service plus’, ‘Tesla ranger’ and ‘Supercharger stations’ concept provide free charging and home service options to the customers. The connectivity features also offer online service options (Zucchi, 2015). As per a recent report by International Business Times, Tesla generated $4 billion revenue in 2015 which is an increase from $3.2 billion revenue in 2014 (Young, 2016). However, Tesla incurred a loss of $888.7 million or $6.93 per share in 2015 (Young, 2016). The company is losing around $4000 operationally in the production of each car. The company’s dependence on continuous innovation forces it to invest in R&D. The infrastructure costs and free Super Charger and Battery Swap facility also negatively impacts revenues. Moreover, the investment in robotics to achieve production excellence and Giga Factory to maximize battery production and reduce cost has made it difficult for Tesla to earn immediate profits. If the company’s strategy of building 5,00,000 cars annually and running Giga Factory in full capacity by 2020 is achieved, then they will be in a position to turn the tables and earn respectable profits.

5. THE CSR SCORE The age old gasoline-powered internal combustion engine has raised some serious concerns about environment and human health. Moreover, dependence on oil which is a non-renewable source of energy has exposed customers to volatile fuel prices. Tesla believes that their innovative Powertrain technology is the real answer to these problems. Electric transportation vehicles are the future of automobile industry. Tesla Motors mission to develop sustainable transport industry is a much needed green innovation. The company creates environment friendly, no emission all electric vehicles and this makes Tesla a Socially responsible initiative. The company’s stable strategy that is consistent with its green mission displays a socially responsible intent and approach. Tesla’s Open Patent move that makes all its patents available to

the world also displays the company’s commitment towards overall development of the electric vehicle industry. Tesla does not rate very well on Gender equality and Diversity in workforce and must improve these scores for a much balanced employee base and a better CSR score (CSR Hub, 2016). Despite this the company offers a safe work environment and has a progressive culture that offers equal opportunities to gay and lesbian couples. The company rated 51 overall for Community Involvement ratings according to CSR Hub. Apart from the positive environmental effects of the Tesla offerings, the Model S’s exceptionally good score in safety ratings makes it an ideal option for the community. Tesla’s CEO, Elon Musk is the real force behind the company’s vision, mission and innovative strategy. The company’s winning elements – disruptive offerings, innovative strategy, stakeholder network, strategic collaborations, government funding, stand with patents and competition etc. can be attributed to Elon Musk’s vision and action. As a socially responsible initiative, Tesla Motors is pushing the automobile industry towards a sustainable future, thus making this world a better place.

6. TESLA’S PERFORMANCE FRONTIER ANALYSIS ESG Programs in a company must improve the financial performance. Companies with a sustainable innovation strategy can ensure improved performance in both areas – ESG as well as Finance (Eccles & Serafeim, 2013). Tesla motors received the Global Green USA Product / Industrial design award in the year 2010. Tesla was awarded for developing Tesla Roadster, the world’s first all-electric, Lithium ion battery powered sports car. The Global Green award recognized innovations that positively impact our sustainability by making this world a safer, healthier and secure place. Presented below is the Performance Frontier Analysis for Tesla Motors Inc.  Identifying material ESG issues: Identifying important ESG issues that will have direct impact on the company’s financial performance and sustainability is crucial (Eccles & Sarafeim, 2013). A per the Sustainability Accounting Standard (2014, SASB) for Automobiles, the material ESG issues for automobile industry are: 

Material efficiency and recycling



Product safety



Labor relations



Fuel economy and use-phase emissions



Material sourcing

Tesla motors mission is to accelerate the world’s transition to sustainable transport. Transportation causes Global Green House gas emissions and air pollution that cause considerable damage to our health and environment. With ‘Fuel economy and use-phase emissions’ as a material ESG issue for automobile industry, Tesla’s zero emission green products are a perfect innovation. Increasingly stringent emission standards are pushing auto industry to innovate and design electric vehicles. Tesla Motors with its Model S and upcoming model X and 3 is a pioneer in designing, developing, manufacturing and selling the first all-electric sports car.

 ESG and Financial Performance: Tesla Motors is currently producing and selling Model S Sedan. Model S deliveries started in June 2012 and the company delivered 56,768 vehicles by Dec 31st, 2014. Apart from Model S, the company continues to develop Model x crossover vehicle with deliveries commencing in 2015 and Model 3 lower priced Sedan for mass market in 2017. As per the company’s annual report (2015), In 2014, Tesla did a total revenue of $3.20 billion and a gross margin of 27.6% which was significantly more than the gross margin of 22.7% in 2013. The company attributes higher vehicle production volume, supply chain efficiencies and component cost reduction for higher gross margin. Tesla anticipates huge demand for Model S and X and are executing a plan to produce over 2000 units per week. They are also focusing on continuously lowering the manufacturing cost. They expect to deliver approximately 55,000 Model s & X vehicles worldwide by 2015. To support these vehicles, the company plans to expand the Supercharger and service infrastructure worldwide. Tesla’s Model 3 which is intended to release in 2017 is a lower cost Sedan for capturing the mass market segment. Tesla’s Giga factory for Lithium battery production is another milestone in which the company invested over 5billion dollars. Although the Giga factory is an important step towards achieving company’s ambitious production goals with Tesla Motors as well as Tesla Energy, but it is a long journey before it becomes financially profitable for the company.

 Innovation in Product and Services: Tesla tops the list of the world’s most innovative company ranking by Forbes in 2015. As a company it has demonstrated sustainable innovation in its mission, technology, products, company policies as well as services.

Company’s mission to make sustainable energy available to people is an innovative and ambitious mission. Its proprietary battery and powertrain technology is a revolution in transport industry. Designing and producing world’s first all-electric sports car that also wins the car of the year title is one of the greatest innovations. Open Patents show innovation in company policies and the company’s customer focused service and charging facilities talk about innovation in service. The table below summarizes Tesla’s innovations:

PRODUCT Tesla Roadster

Model S

INNOVATIVE FEATURES -

First high performance electric sports car

-

Can accelerate from 0 to 60 mph in 3.7 sec

-

Speed: 120 miles per hour

-

Range of 245 miles on a single battery charge

-

Fully electric, 4 doors, 5 adult Sedan with compelling range and performance

-

Zero tailpipe emission

-

Range of 265 miles on a single charge

-

Fast charge at supercharger facilities

-

Modular battery pack that can be swapped at service center.

-

Premium luxury features like 17-inch touch screen driver interface, advance autopilot system with safety features like collision warning, automatic braking and traffic aware cruise control.

-

Advanced wireless connectivity and climate control system

Model X

-

First vehicle developed by leveraging Model S technology

-

Space and functionality of Sport utility vehicle with high performance features

Model 3

-

Fully electric and all-wheel drive dual motor system

-

Third generation electric vehicle at lower price point for mass market.

Stationary

energy

storage

-

applications

The SES systems are used in homes and commercial sites for power backup, peak demand reduction, demand response and wholesale market services

Powertrain development and

-

sales

Tesla designs, develops, manufactures and sells electric vehicle power train components for other automobile manufacturers.

TECHNOLOGY

INNOVATIVE FEATURES

Battery Pack Technology

-

Tesla designs high energy, safe and reliable lithium battery packs at a lower cost.

Power electronics

-

Tesla’s power electronics technology manages the flow of electrical current throughout the car.

Vehicle

control

and

-

Infotainment Software

Tesla’s in-house vehicle control and info software is used to optimize performance, customize vehicle behavior and control infotainment functions.

Vehicle design and engineering

-

Tesla’s state of the art manufacturing unit is fully automated with robotics.

-

The complete in-house integration of vehicles through robots is an architectural innovation making Tesla creations difficult to imitate.

-

The team has core competencies in computer aided design and crash test simulations to reduce the development time for new models.

SERVICE SUPERCHARGER NETWORK

INNOVATIVE FEATURES -

Tesla has strategically built a network of Supercharger stations throughout North America, Europe and Asia for fast charging of Model S and future Tesla vehicles. This is a great strategic move to break the perception of limited vehicle range and to make free charging access available to Tesla users across the world.

 Stakeholder Communication: Tesla Motors annually files a proxy statement with the U.S securities and exchange commission. This proxy material is available to all stakeholders over internet. The stakeholders are informed about the company events, proceedings, wins and losses through this Proxy

statement and this helps the stakeholders take informed company decisions. All the stakeholders are invited for the annual meet and can also cast their vote over internet. As shared by Peters, an airline pilot and a shareholder in Tesla, the shareholders spend a lot of time together to achieve resolution and take the appropriate decisions (Young, 2015).

7. STRATEGIC POSITION ANALYSIS Successful companies have a clearly defined strategy, supported with their unique value proposition (Collis & Rukstad, 2008). The strategy of Tesla, as shared by Elon Musk is “to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model” (2006). The above mentioned strategy statement is comprehensive as it clearly defines the company’s objective, scope and means to accomplish the objective (Collis & Rukstad, 2008). Although Tesla is not yet profitable, the company’s jump in revenue, increase in gross profit margins and the predicted success of Model 3 (based on existing pre orders), suggest that Tesla’s steady strategic approach has offered advantage. The company’s actions are aligned with their mission and long term strategy. Tesla understands that its value proposition lies in its proprietary disruptive technology. Hence, to keep up the growth all free cash flow is plowed back into R&D to drive down the costs and bring the follow on products to market as fast as possible. When someone buys the Tesla Roadster sports car, they are actually helping pay for development of the low cost family car with competitive innovative technology. Tesla’s technological innovation based blue ocean strategy has potential but so far has been very expensive. They remain unprofitable, are still losing money on each car and $5 billion investment in Giga factory has not gone down well with all stakeholders. The company intends to tremendously bring down production costs once the Giga-factory works in full capacity but that requires patience. The current valuations supporting the $25 billion market capitalization ae based on future expectations. Therefore, despite being the technological pioneer and global leader in the electric vehicle industry, Tesla’s remains a speculative stock. I personally think that the high end disruptive strategy of entering through premium customer base, creating an aspirational brand and then targeting the mass market segment by launching an affordable yet elegant product is a strong strategy. However, I think a $5 billion investment in a Giga factory at this stage when the company is not yet profitable is a risky step. Outsourcing and collaborations for mass battery production would have been a safer approach. Currently Tesla is selling only through its own stores and services through its owned super charger and battery swapping stations. With global expansion and volume sales strategy on cards, it is important for them to look at franchising and partnership options for sales and service.

Tesla has a mammoth goal of achieving a considerable market share before any new imitation or competition hits the market (Dyer & Bryce, 2014). Musk’s goal of creating and selling 500,000 cars in a year needs to be realized and a lot rides on the Model 3 car. If Tesla cannot achieve its ambitious goals it could still emerge as a successful niche player in the ‘performance green motors’ industry without creating much competition / interest from the big players like Toyota, GM or Ford. However, if its strategy and business model is a success, then with considerable market share and lack of good imitation, Tesla could create some real change in the automobile industry leaving the big sharks behind (Dyer & Bryce, 2014). So far I have presented Tesla’s strategic positioning along with an analysis of strategic actions and ESG. The rest of the paper is focused on conducting various external and internal environment analysis to understand, evaluate and recommend strategic moves for the organization.

8. GENERAL EXTERNAL ECOSYSTEM ANALYSIS AND STRATEGIC IMPLICATIONS FOR TESLA MOTORS, INC. Competent enterprises rely upon Macro Environment analysis for effective strategizing (Pitt & Koufopoulos, 2012). General Ecosystem analysis like PESTEL and SCANSTEP not only help the organizations to understand the positive or negative influence of external stakeholders but also lays down the path for prioritizing issues, assessing risks, evaluating goals and understanding markets as a whole (Pitt & Koufopoulos, 2012). Presented below is the Macro Environment analysis for Tesla Motors Inc. I have taken inputs from “Tools for Tracking Your Strategic Thoughts; companion to spreadsheet” provided by the University (Schulz, 2013) along with the PESTEL and SCANSTEP analysis framework mentioned in the book “Essentials for Strategic Management (Pitt & Koufopoulos, 2012).

GENERAL FORCES

POSSIBLE INDICATOR

ASSESSMENT

DESCRIPTION

LEGISLATION AND REGULATIONS (GOVERNMENT): Electric Vehicles being environment friendly invite a lot of Legislative and Political support across the world.

Environment

Global concerns about pollution

Tesla was awarded $465 million

Regulation and

and climatic changes has led to the

dollars in US energy department loans

Political support.

creation of stringent federal and

to develop and build Electric Cars

state level policies for improving

(Eisenstein, 2013). The company has

air quality and lowering the

also received Millions of Dollars of

emission of greenhouse gases. The

direct funding from California and

Energy Independence and Security

indirect revenue generation through

Act of 2007 and Corporate

selling Cal zero emission vehicle

Average Fuel Economy (CAFÉ)

credits to other auto companies

have steered USA towards

(Weinberg, 2013). The various

increase in production of clean

incentive programs from US

renewable fuels, promote research

government like ‘Advanced Battery

and improvement in green

Loan Guarantee Program’, ‘Advanced

performance, hence promoting

Technology Vehicles Manufacturing

access of loans and grants to Auto

(AVTM) Inc. program’ and ‘Energy

manufacturers producing Electric

Storage Competitiveness’ have

Transport technology (KPMG

offered great deal of advantage to

International Cooperative, 2010).

Tesla Motors for technology R&D and production first high performance electric sports car. These regulations not only made financing easier for the company but also exhibit a unanimous support from the government for the success and development of the company.

Political support in the form of

Tesla customers get Federal Income

Tax and rebates.

tax credit as a rebate for the purchase of each Tesla vehicle. These rebates aim at incentivizing the purchase of green vehicles.

Selling cars through Auto

Tesla Motors sells cars directly to the

dealership vs directly to the

customers as it believes that auto

customers

dealership harms the customers and direct selling helps them to educate the customers of their product. IT is facing challenges to follow this business model. Whereas in some states it is selling directly to the customers, other states with strong auto dealership hold are not allowing Tesla to sell its cars. This is affecting the company sales. The company must revisit the merits / demerits of this plan and consider franchising options based on the global expansion goals and overwhelming response for their latest Model 3.

SAFETY OR OSHA

OSHA safety regulations for the

Citations were issued to Tesla Motors

REGULATIONS

automobile industry demands

Inc. by Cal/ OSJA for 6 serious and 1

factories to follow the safety

general OSHA violation. The lack of

regulations for employee and

periodic inspection of Die Casting

environment safety.

machine resulted in injuries to 3 employees. Employees were not trained in the hazards of using the machine and the machine was not serviced. There was a penalty of $89000 on the company. The company must abide by all OSHA regulations. The hiring of Safety and Regulations officer to handle all this is a good step.

CUSTOMER

Tesla collects data on driver usage

PRIVACY

and sends over the air updates to

PROTECTION

vehicle’s operating system. Although

LAW

the company assures that the data is protected and is used solely to improve user experience and solve tech issues, but it could face future privacy laws related issues. Today when user security is becoming a primary concern with the online and cloud industry, the company needs to be at the top of their game in this matter.

ECONOMIC CONDITIONS: Electric vehicles being a disruptive new technology, creates a variety of economic development challenges and opportunities.

FUEL IMPACT

According to U.S Energy

Tesla has the future potential to

Information Administration, 80%

provide a boost to national economy

of cost of gallon of oil income

due to non-dependency on oil. Sales

leaves the local economy and the

so far show that electric cars industry

inflation in gas prices further

is at a very nascent stage and is

reduce the local profits (U.S

nowhere close to mainstream

Energy Information

industry. With a huge industry

Administration, 2012; National

depending upon Fuel economy, the

Association of Convenience Store,

fuel driven vehicles rule the market.

2011).

Tesla is the first performance vehicle offering speed and design features better than gasoline based cars. But the small market and disruptive technology will take a long time to reach an impactful level.

AUTO INDUSTRY

Although stringent environment

Tesla intends to decrease the cost of

IMPACT

and emission laws have increased

electric vehicles and its Giga factory

the popularity of electric cars, but

is a step towards this aim. The

at the same time they have also led

company’s Model 3 which will hit the

to the revolution in Gasoline

road in 2017 is the cheaper model for

vehicle technology resulting in

the mass market segment This high

more fuel efficient and better

performance, aesthetically built Sedan

performance vehicles at a lower

is priced at just $35000 and the

cost. This inhibits Electric Cars

company has already received a

from entering in the mainstream

whopping advanced booking order of

market.

400,000 Model 3 cars. The numbers point of that there is an increase in demand of the electric auto industry and will create good competition with cars like Audi A4, BMW 3 series, Jaguar XE, Lexus IS and Mercedes C Class.

High cost of Electric battery makes Tesla’s strategic moves like battery Electric Cars more expensive than

swap and super charger stations

Gasoline cars.

across the world are good moves to

boost sales. Company also intends to collaborate with other auto makers to offer their super charger and battery swap technology.

Other limitations like Battery

As per the annual report (2013)

limits and charging infrastructure

Company’s Model S leasing program

further favors gasoline based cars.

with Company’s resale value guarantee may result in lower revenues and profits. Moreover, investment of $5-6 billion in Giga factory in Nevada created tension

Aggressive expansion and sale

amongst the stakeholders as the

program at the cost of existing

profits are in distant future. Such

economic conditions

aggressive expansion and sale policies might be somewhat important for disruptive tech business but it also comes with its own risks. Risk assessment at every step is important to modify strategy and assure best direction in the favor of company and its stakeholders.

TECHNOLOGICAL IMPACT

TECHNOLOGICAL The new automobile regulations ADVANCEMENT

Tesla’s innovative battery pack

demand higher efficiency

technology, power electronics, battery

standards and reduction of CO2

super charging technology and

emissions by 2025. This has led to

architectural innovation has given it a

a drastic boost in research and

substantial lead in making batteries

technology advancement in Auto

cheaper and better. This is helping

industry. The standards also give

Tesla to lower costs faster than its

auto makers special credit for

competitors. Model S winning the car

making advancement in

of the year award and Model 3 prized

technology like plug in electric

so competitively are good example of

vehicles. More automakers are

Tesla’s leadership in Electric Car

developing different exotic electric

technology industry.

drive configurations and hybrid models to comply with existing

What’s not in favor of the company is

mandates like Cal’s zero emission

the terrific advancement in gasoline

vehicle regulation.

driven technology. Gasoline direct injection turbocharging, transmission with more gears and optimized control, new dual clutch transmissions, sleeker aero dynamics, advanced light materials etc. are more cost effective than the electric car technology. This provides little scope for the niche electric vehicle market to grow and compete in mainstream auto industry. Tesla’s open patent move is a step towards facilitating more collaborations like the existing ones with Daimler, Toyota and Panasonic to encourage further development of electrical auto industry. Its collaborations to offer its Battery pack and supercharger technology is an interesting strategic move as it not only boosts revenue but also positions Tesla as a leader in electric auto industry.

SOCIAL CULTURAL IMPACT

SOCIAL

High cost of electric vehicles limit

Tesla has a loyal and proud customer

CULTURAL

buyer demographic.

base with rich class that consider

IMPACT

Tesla as a tool for improving their

Eco-friendly has become a social

social status and make them appear an

status and affluent customers

environment conscious human being.

exhibit pride in owning an electric

The ‘WOW’ factor associated with

car.

this car makes it an aspirational product for the upper middle class.

Performance issues and battery charging constraints limit the

Tesla models are high performance

market segment.

electric models. Their state of the art features positions them at par with the Audis and Mercedes of the main stream. What is needed is better awareness for increasing its acceptance in the markets. Tesla’s strategic move to enter the mass market through affordable prized Model 3 is an excellent move to make the Tesla phenomena a worldwide success.

STRATEGIC IMPLICATIONS: Tesla being an environment friendly company enjoys several benefits from the government and regulation bodies. The exemption of taxes and grants have contributed greatly to company’s innovation and growth. Tesla’s Business Model is based on exercising full control over manufacturing, sale and service. The direct selling to customers has its advantages but it also restricts the scope. Tesla is not allowed to sell in few locations due to the strong dealership network. This is a disadvantage. Tesla’s strategy allowed it to penetrate the high-end market by creating an aspirational premium product and thereafter target the middle class and mass markets by launching the affordable Model 3 sedan. With Model 3 advance booking reaching 400000 numbers, they need to rethink production planning for effective and timely delivery of the car. Company’s success and future depends on this.

Competition in Electronic industry is good for Tesla as it will enhance the development of the industry that Tesla currently leads. But it won’t take long for Auto giants like GM, Toyota to up their game and utilize

their resources to offer better competitive products. The increasing reservation numbers for Model 3 has created some serious ripples in the market and the other auto makers are now taking Electric car industry seriously. The recent, General Motors backed bill to remove Tesla’s retail license in Indiana and to force the company to go through auto dealers like other auto makers, is a move that shows GM looks at Tesla as a serious threat (Nelson, 2016). Tesla’s current strategy of Open patens, collaborations and collective growth is an innovative and disruptive move. Tesla’s value proposition lies in their battery performance and existing roadblock is the battery cost. They must continuously focus on reducing battery cost and further improving performance to remain in the lead of the game. This alone however is not enough. In today’s competitive market, they need to seriously reconsider their position and growth plan in the global industry. Whether they remain sole leaders of the electric auto industry, or they bring some real transformation in the global automobile industry and greatly impact global economy as well as environment is the question that will drive their strategy and path.

9. STAKEHOLDER ANALYSIS The external environment analysis of Tesla Motors shows the various concerns and contingencies that the organization faces from the external environment factors. To achieve improved competitiveness, it is extremely important for Tesla Motors to analyze and monitor these factors and adapt their strategy around it (Boyd & Fulk, 1996; Nandakumar et al, 2010). Another key factor that impacts organization strategy and helps the organization prioritize its focus and engagement is Stakeholder analysis (Pitt & Koufopoulos, 2012; Schulz, 2013). Presented below is the Stakeholder Analysis for Tesla Motors.

HIGH

- Competitors: Automakers making electric cars like

- Shareholders / Investors

Nissan Leaf, BMW I3, Automakers making hybrid models

- Customers

like Ford Fusion, Chevy Bolt, Automakers making

- Senior leadership team

technologically advanced Gasoline based cars like Audi,

- Collaborators for technology

Jaguar, Mercedes, Lexus.

advancement like Panasonic for battery technology and Daimler / Toyota for

Competition determine the profitability and viability of an industry and is key to strategy formulation (Porter, 2008). These Stakeholders are critical to the success of the Tesla idea. Tesla’s mission is to develop the sustainable automobile industry. To achieve that it is important to attract competition. The new Model 3 is creating ripples in the market and hopes to create good completion from the Auto industry giants like GM, Toyota etc. Tesla must understand their competition’s strategy in event of rising popularity of electric cars. Understanding competition and basing your strategy around it will help the company succeed.

- Federal Law agencies that impact loans, grants and policies (U.S Dept. of Energy, U.S Dpt. Of Transportation,

Super charging technology. - Innovation collaborators like Tesla Energy, Tesla Solar for continuous innovation.

Engage closely with these stakeholders. They are the partners in success and largely influence company’s development. Effort should be made to build life long relationship by creating success for them and by positively influencing them.

National Highway Traffic Safety Administration, U.S Environmental Protection Agency, U.S Federal Energy Regulation Commission, California Air Resource Board) - International Trade Administration and other agencies worldwide that define norms for global sales and trading.

POWER / IMPACT FOR CHANGE

- Suppliers for manufacturing materials and battery

LOW

products. - External agencies for labor

- Employees

- External advertising agencies & market research agency

- Labor – Full time and contract

- Media / Press - OSHA and safety standards These stakeholders do not impact strategy setting as well as execution. Hence, they take the lease amount of time and effort. They must be monitored regularly so that the required interests are positively met.

INTEREST / SUPPORT FOR CHANGE

These stakeholders are important for achieving company’s goals but they don’t impact overall strategy and decisions. It is important to keep them aware about the strategy, goals and targets. Proper training and communication is needed to help them and the company succeed.

HIGH

The Stakeholder analysis shared above shows the key stakeholders that are of high importance to the company. The key stakeholders,  Investors / Shareholders  Customers  Senior Leadership Team  Alliance partners like Daimler, Panasonic, Toyota, Solar Edge, Lotus Cars not only determine the company’s strategy but are directly responsible for the successful implementation of the same. Currently, Tesla’s focus is customer-centric, which is conducive especially for new players. Their exclusive service and other free charging, software and data connectivity features for the customers allows the company to create a loyal and happy customer base. The alliance partners have equal vested interest in the company’s success. Their partnership is key to timely innovation, production as well as service and hence very important for company’s success. Tesla shares good relationship with most of its collaborators. The area which really needs more focus is the investors and shareholders. Tesla has made huge investments based on their long term growth strategy. Currently the company is not profitable and losses are increasing every year. In this circumstance it is possible for investors to get impatient and lose interest. It is important for the company to keep shareholders interest in mind and revisit their strategy to incorporate returns and generate positive interest from investors.

10. COMPETITIVE FORCE ANALYSIS FOR TESLA MOTORS Porter’s competitive force analysis provides a framework that identifies the structure of an industry, helps understand the competition effectively and determines the root cause of profitability (Porter, 2008; Dobbs, 2014).

Automobile Industry Analysis Automakers steer the U.S economy and are responsible for 3% of America’s GDP unlike any other manufacturing sector (Hill et al, 2013; American automotive policy council, 2014). They are America’s largest exporters over the past 5 years with over $563 billion worth expenditure in vehicles and auto parts (United State Department of Commerce, 2014). Chrysler, Ford and General Motors are the key players based on their investment, R&D costs, production, sales and export figures that are much higher than other competitors in the market. They produce nearly one and a half times more of their vehicles in the U.S market and employee 2 out of every 3 auto workers (American automotive policy council, 2014). U.S auto sales have increased by more than 50% since 2009 and the auto production is expected to reach or exceed 11.5 million vehicles per year through 2016 (American automotive policy council, 2014). Auto industry is

so competitive, the profit margin on each vehicle is comparatively small. Being so capital intensive, scale is also important.

Disruption in the industry: Auto industry so far has been least disruptive with the similar key players in the top 15 automotive original equipment manufacturers (OEM) list in last 15 years. With the interest of tech giants (Google, Apple) and specialty OEMs (Tesla), the complexity and dynamism of the market is increasing. This unpredictable and heterogeneous environment where manufacturers have to struggle with wide range of customers, service providers & suppliers have a profound impact on the company’s performance and strategy (Dess & Beard, 1984; Andrews & Johansen, 2012). Moreover, government regulations around increasing fuel efficiency, reducing emissions is not only impacting the costs involved but is also shifting the market positions, pushing automakers to form mutually beneficial alliances and partnerships. Cost competitiveness and Product differentiation are key determinants for success and better performance in a dynamic competitive environment (Nandakumar et al, 2010). The existing competition in the mainstream auto industry and the newly formed electric car industry is driven by product diversification and cost effectiveness. The shift in consumer demand towards better machines with more sophisticated software and infotainment systems are forcing the industry to adopt product differentiation (Muller, 2015). Tighter Corporate Average Fuel Economy regulations in U.S and the other parts of the world are increasing the overall manufacturing cost and making markets more cost competitive. Increase demand of software and electronics have also increased the R&D costs. Consumers demand more features at a competitive price and this is further reducing the profit margins.

Emergence of electrical vehicle industry: Stricter emission regulations, lower battery costs, launch of high performance electric cars, growing network of battery charging infrastructure, increasing awareness amongst buyers about global warming and increasing acceptance in the world for sustainable green vehicles is creating considerable interest in Electric vehicles across the world (Gao et al, 2016). With the development of electric vehicle industry, it is predicted that the share of electrified vehicles could range from 10% to 50% of new vehicle sales (Gao et al, 2016). Populated cities with strict emission laws like California will be suitable markets with better performance in this industry. It is also expected that electric vehicles achieve cost competitiveness and compete directly with mainstream cars on performance, aesthetics as well as cost (Gao et al, 2016).

Tesla Motors: The innovator and disruptor! The automobile industry has very high barriers for a new entry. High Capital investments, R&D costs, Scale- economies, fuel impact, distribution and service networks etc. make new entry and innovation difficult.

Tesla Motors has smartly overcome some of these barriers and have positioned themselves as the global leaders in the electric car industry. With the mission to develop sustainable transport industry, Tesla has shown tremendous innovation and growth. Today, Tesla produces a top selling luxury car – Model S and has received over 4,00,000 registration orders for their new mass segment car – Model 3 which is scheduled for deliveries in 2017. Tesla’s current market capitalization is about twice that of Fiat Chrysler and half of General Motors (Stringham et al, 2015).

THREAT OF NEW ENTRANTS: LOW TO MEDIUM LEVEL THREAT Currently Electric Vehicle industry is a niche market and has high barriers for new entry. The high cost for R&D, power train technology and battery development makes it difficult for a new entrant to enter this market. Having said that, there is a threat from already existing fuel based auto manufacturers to diversify and enter this market. Increasing fuel efficiency and emission regulations are creating more interest in this market. As shared by Porter (2008), if a new entrant diversifies from other market, they can leverage from existing capital and resources and create competition quickly. Tesla’s open innovation and collaborative development approach also inhibits new entry competition and promotes mutually beneficial modular relationships.

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES: LOW LEVEL THREAT In the existing electric car industry, Tesla can be considered as the leader. There are a few competitors offering high performance fully electric cars but the numbers are few. Tesla’s overall package with high – performance car, stunning aesthetics, latest technology with safety and infotainment features combined with array of customer service initiatives like free charging at super charging stations, battery swap facility, Tesla owned customer service centers, does not have a substitute in the market. The launch of mass segment Model 3 at a competitive price of $35000, makes Tesla the no.1 choice in the electric vehicle industry and also an attractive choice in the mainstream automobile market. The other electric cars in the market like BMW i3 hatchback., Volkswagen e-up! Hatchback, Nissan Leaf hatchback, Ford Focus Electric hatchback offer some competition to Tesla. Increasing automobile costs and environment conscious behaviors have also increased consumer’s dependency on group mode of transport like public transport – trains, buses or private car pools. This might also effect the overall automobile industry including Tesla motors.

RIVALRY AMONG EXISTING COMPETITORS: MEDIUM TO HIGH LEVEL Although stringent environment and emission laws have increased the popularity of electric cars, but at the same time they have also led to the revolution in Gasoline vehicle technology resulting in more fuel efficient and better performance vehicles at a lower cost. This makes new technology and fuel efficient cars a competitive threat for Tesla. The market for Gasoline vehicles is huge and cannot be compared to

Tesla’s market. Tesla is a new entrant that has disrupted the decades old, change- resistant automobile market. Tesla being an innovation driven company has succeeded so far due to its better technology and high value for customer service like the supercharger stations and battery swap facility. Tesla’s CEO, Elon Musk wants to create more competition in electrical car industry as he believes competition is significant for the overall development of sustainable transport. The open patent move has also positioned it as a leader in this industry. However, the substitute models in the market like the hybrid model, fuel efficient new models by the Auto Giants like Ford and GM pose a real threat to the future success of the company. These big players have the avenues to invest in better technology at a faster pace. Tesla’s collaborative approach like with Daimler and Toyota can help the company create more partners than competitors. But the very competitive mainstream market with its hybrid models like Ford fusion hybrid / Energi, Toyota Camry hybrid, Toyota Highlander, Porsche Panamera E Hybrid are some popular hybrid models that are a threat to Tesla Motors. Tesla must continue its approach of continued innovation both in products and services. Its strength lies in its powertrain and battery technology combined with Elon Musk’s progressive and futuristic vision. The company must stick to its mission of development of sustainable transport and hopefully with the predicted success of Model 3, Tesla might pose threat to the existing leaders of automobile industry.

BUYER POWER: LOW LEVEL THREAT IN ELECTRIC VEHICLE INDUSTRY AND HIGH LEVEL THREAT IN MAINSTREAM AUTOMOBILE INDUSTRY Since Tesla is the leader in Electric Vehicle industry and with Model S being the best high-performance electric car in the market the buyers have very less power in is area. Further launch of affordable Model 3 makes car more accessible to the masses. Additional innovative customer service features like super charger stations, battery swap, Tesla service centers and regular software updates for the cars further make these cars as the best choice in the electric car industry. Contrary to this is the mainstream auto industry that makes customers very powerful. Wide range of cars with different features, better performances and competitive costs give consumers power to affect profitability and hence strategy. Tesla must focus towards creating more awareness amongst customers about the environmental benefits of electric cars. If Tesla can position their cars as better performing, cost effective cars and keep the marketing focus towards environment sustainability, then they stand a chance to impact buying decisions at a greater level.

SUPPLIER POWER: LOW LEVEL THREAT Tesla was dependent upon external suppliers for battery production. The collaboration with Panasonic and setup of Giga factory for the in-house production of cost effective Lithium batteries have minimized the supplier risk. The company aims at vertical integration with least dependency on external manufacturers.

STRATEGIC IMPLICATIONS OF THE COMPETITIVE FORCE ANALYSIS: There is no doubt that innovation and design thinking culture has driven Tesla’s development, but a lot of credit goes to the excellent strategy. Partnering with right organizations, leveraging other firm’s capital, utilizing government grants and quickly launching new and better products are some of the steps that have led to Tesla’s success (Stringham et al, 2015). Partnering with Lotus for design, engineering and technology not only saved time and money but gave them a reliable partner for production and assembly. Daimler partnered with Tesla in 2009 and gave them an order for supplying the drive train technology along with investing $50 million in the company. Panasonic also invested $30 million in Tesla for the co-development of battery and collectively they have opened the Giga Factory at Nevada. The most beneficial collaboration was the one with Toyota who invested $50 million for shares in Tesla’s IPO and sold its United Motors manufacturing plant to Tesla at a subsidized cost of $42 million. Tesla benefitted immensely from the already existing manufacturing unit and ended up producing 35000 Model S cars in 2014. Today they have an order for 4,00,000 model 3 cars and they aim to commence delivery from 2017. Tesla’s holistic approach towards continued innovation in both products and services combined with their global expansion plan and product differentiation approach for different market segment seems to be the right strategy. Being proactively prepared for fulfilling the Model 3 orders by increasing production capacity as well as battery development at existing and new Nevada factory has also been a well thought strategic move. Tesla’s strategy was closely aligned with external environment and their existing structure, making this an important contributing factor towards company’s success (Dess & Keats, 1987; Nandakumar et al, 2010). Tesla has carefully positioned itself in the highly resistant auto industry by creating a space for itself in the new and nascent Electric vehicle industry. As an innovator it intends to shape the industry structure by making the competitors follow its lead (Porter, 2008).

11. INTERNAL ENVIRONMENT ANALYSIS The VRIOS framework helps organizations determine the areas they have a competitive advantage. Identifying their most valued skills or competencies helps them to formulate an effective strategy and capitalize upon them (Pitt & Koufopoulos, 2012). Presented below is the VRIOS analysis for Tesla Motors. VRIOS ANALYSIS

GRADING KEY

V: Value creating potential

A: Outstanding generator of value, genuine

R: Rarity

strategic importance.

I: Imitability

B: Valuable, but not crucial source of

O: Organization Appropriability

advantage.

S: Substitutability

C: Useful but declining significance. D: Already declining significance, unlikely to be sustainable. V

R

I

O

S

STRATEGIC IMPLICATIONS

A

A

A

Tesla’s most significant resource is its

SKILLS (People strengths) Elon Musk

A

A

award winning CEO, Elon Musk. His vision, skills and networking capabilities has helped Tesla emerge as a global leader in Electric vehicle industry in such a short span of time. Elon, who is also leading SpaceX and Solar City has helped Tesla earn worldwide recognition, good funding, government grants and a series of awards. Management

A

A

A

A

A

Tesla’s cofounder and CTO, JB Straubel is

and

an expert in vehicle engineering and design

Leadership

with degree from Stanford. Tesla also has industry veterans at various VP positions like VP I.T, VP Powertrain Operations, VP Supply Chain etc. Recently, Tesla hired Audi veteran, Peter Hochholdinger as VPVehicle Production to lead the mass production of Model 3. The combination of experts and industry experience offers a

great competitive advantage to the company. Networking

A

A

A

A

A

Elon Musk’s networking skills has helped Tesla form an effective network of

skills

stakeholders. His involvement in SpaceX, Tesla Energy and Tesla Solar offer immense technological and resource advantage to the company. Fund and

A

A

A

A

A

Tesla due to its socially responsible mission

Grants raising

and promising leadership has attracted good

skills

investments and government grants. Having access to these funds and grants have played a key role in company’s timely launch of high performance pioneer electric vehicles.

Design and

A

A

A

A

A

Tesla cars, especially Model S is an

engineering

architectural excellence. Tesla cars excel in

excellence

design as well as H/ware and S/ware engineering capability. Tesla’s state of the art manufacturing unit is fully automated with robotics. The complete in-house integration of vehicles through robots is an architectural

innovation

making

Tesla

creations difficult to imitate. The team has core competencies in computer aided design and crash test simulations to reduce the development time for new models. Pioneer in long A

A

A

A

A

Tesla, today is the global leader in designing

range high

and producing long range, high performance

performance

electric vehicles. Their Model S won the car

electric

of the year award in 2013. Although their

vehicles design

success is generating tough competition in

and

this developing industry, but the being the

production

pioneers in electric vehicle technology offers them a lot of advantage.

CAPABILITIES (Tangible assets) Powertrain

A

A

A

A

A

Tesla’s proprietary Powertrain and Lithium ion battery for powering the Electric

technology

vehicles is an innovative technology and gives its cars a technological and performance edge over other electric cars. Tesla has over 140 patents awarded and over 240 patents pending for the revolutionary Powertrain technology. Tesla also sells this technology to other auto manufacturers. State of the

A

A

A

A

A

The Tesla Factory in Vermont, California is

Art

one of the world’s most advanced

Manufacturing

automotive factories, containing 5.3 million

Plant

square feet of manufacturing and office space.

Giga factory

A

A

A

A

A

Tesla has invested $5 billion to set up a battery production plant in Nevada. The Giga factory will handle the worldwide production of Lithium ion batteries and would bring down the overall production costs by 50% by 2020. The factory would be a net zero energy footprint and will run by renewable sources of energy (wind and solar). The factory will play a key role in the production of 400000 Model 3 cars.

Company own

A

A

A

A

A

Tesla’s sales strategy involves selling the

network of sale

cars directly to customers. This gives them

stores

immense advantage towards rightly educating the customers about their cars and provide hassle free service.

Network of

A

A

A

A

A

Tesla has and is continuously building an

Super Charger

extensive network of Super Charger stations

stations

across the world to help their customers fast charge their cars and even swap their batteries during travel. This service offers

Tesla a huge competitive advantage against any other competitor in the EV industry. Safety and

A

A

A

A

A

Tesla’s Model S won the car of the year

Efficiency

award in 2013 by Motor Trend. Apart from

features

its design and engineering excellence, the car won accolades for its efficiency and safety features. The car also received the 5star safety rating by U.S National Traffic Safety Administration.

Strategic

A

A

A

A

A

Collaborative alliances offer great competitive advantage in today’s

Alliances

competition and innovation driven environment (Holmberg, 2011). Tesla has intelligently capitalized upon this by forming various strategic alliances: 1. Supplier alliance: Lotus Cars, Panasonic 2. R&D alliance: Panasonic 3. OEM alliance: Toyota, Daimler STRATEGIC ASSETS Innovative and A

A

A

A

A

Tesla’s work culture is driven by innovation

Design

and design thinking. As per Elon Musk, the

thinking

revenue generated by sales is directly put in

culture

the R&D. Firm’s technological innovations offer it a key competitive advantage and it is extremely important for them to have a persistent innovation culture to stay ahead of their competitors.

Long term

A

A

A

A

A

Tesla’s long term diversification strategy to

diversification

grow Tesla into an energy innovation

strategy

company creating sustainable products for the power generation industry like ‘Powerwall’ is an excellent strategy to solve the future energy crisis.

Business Model

B

B

B

B

B

Tesla’s business and sales strategy is not well aligned with their global expansion

goals. The company owned sales and service centers are expensive and not conducive for achieving sales target. Marketing Strategy

B

B

B

B

B

Company does not have a well-crafted marketing and advertising campaign. The lack of awareness and education about the Electric Vehicle industry along with high performance features of Tesla cars is a great disadvantage in the existing competitive market.

The evaluation of above analysis clearly shows that Tesla’s strength lies in its dynamic leadership, innovative culture and technological excellence. Firm’s mission is derived from solving one of the most important energy crisis problem and envisions the development of a socially responsible Electric Vehicle and Sustainable energy industry. Tesla’s core- technological competencies like the Powertrain technology, Lithium ion batteries, Robotics driven manufacturing innovation along with strategic alliances with industry leaders are real source of competitive advantage. If we do a risk-benefit analysis on the Giga Factory, currently I would call it a risky investment keeping in mind the mammoth investment and time needed for it to be fully functional. Keeping this in mind, outsourcing of battery production for existing Model 3 orders would be a good strategic move. Tesla also needs to strike a balance between R&D costs and other operational costs. Despite R&D’s advantages being at the core of the company strategy, the existing industry and stakeholder demands advise them to focus more on business growth and revenue generation. Tesla needs to revisit their business model and be more open to franchise and co-owned sales and service stores across the world. Currently Tesla has company owned stores and super charger stations and their business model allows selling directly to the customers for educational and better service experience. However, global expansion and volume sales would make this model very expensive and challenging to follow. Partnering with like-minded ventures and properly training them would make the sales and service infrastructure viable. Any disruptive technology product needs good investment in marketing and advertising strategy as its success lies in the awareness, accessibility and education around the product. Tesla has not given much importance to this area so far. An integrated and culture based marketing campaign is extremely critical for company’s growth and acceptability.

12. SCOT ANALYSIS After completing the external and internal environment analysis, the below presented SCOT analysis offers a summary of skills, capabilities opportunities and threats. This analysis plays an important role in formulating an effective future strategy (Schulz, 2013).

SKILLS

CAPABILITIES

1.Elon Musk’s bold and thoughtful leadership

1.Tesla’s state of the art manufacturing plant at

skills.

Vermont is one of the most advanced

2. Pioneers in designing and production of long

automobile manufacturing unit in the world.

range high performance electric vehicles.

2. Complete In-house production capability

3. Creators of revolutionary Powertrain battery

with advanced robotics, computer aided design

technology.

and test simulations.

4. Persistence innovation culture leading to

3. Giga Factory for the production of Lithium

over 300 patents.

ion battery with a capacity to produce more

5. The car of the year for Model S shows that

batteries by 2020 than the entire world’s output

Tesla is skilled to design the best Long Range

in 2013. The factory will also make Tesla

High Performance Electric Car in the world.

capable of accomplishing their goal of

6. Highly skilled production team to handle

producing 5,00,000 annually.

complete in-house computer aided simulations

4. Super Charger Network for charging and

and production.

battery swapping.

6. Networking Skills to form strategic alliances

5. Company owned sale stores for direct sales

and partnerships.

and exclusive service to Tesla customers.

7. The company’s technological innovation

6. Advanced safety, efficiency, infotainment

skills get an advantage from the innovations in

and software enabled features to offer improved

Elon Musk’s other ventures like SpaceX, Tesla

experience to customers.

Energy and Tesla Solar.

7. Strategic alliances to further improve the production and R&D capability with other industry

leaders

like

Panasonic and Lotus Cars.

Toyota,

Daimler,

OPPORTUNITIES

THREATS

1. Capitalization on the growing support by

1. Competition for large Auto companies like

government to the global EV industry through

General Motors, Toyota, Ford etc. in electric

duty exemptions and research grants.

vehicle, hybrids, alternate fuels as well as

2. Predicted growth in Electric Vehicle

higher efficiency gasoline based vehicles.

industry due to stronger emission rules and

2. Increasing efficiency of Gasoline engines.

gaining popularity of sustainable green

3. Sales through existing Business Models.

products.

4. Lack of awareness of EV products in the new

3. Model 3 can be the real game changer!

especially emerging markets.

Amazing interest in Model 3 evident through

5. Dependence on continuous innovation to be

pre-orders show an immense opportunity for

a leader in EV industry is very expensive.

this car to rule the market.

6. The prize skimming strategy for Model 3 is

4. Increase in Oil and Gas prices make EV

not a tested strategy in Automobile industry.

market more lucrative.

The challenge is to make Model 3 profitable at

5. Large potential of emerging markets: China,

the existing $35,000 price.

India

7. Limited production capability.

6. Opportunity for the sale of Electric Vehicle

8. Vertical integration and complete in-house

components and Battery.

production is expensive.

7. Investment opportunities for the promising

9. Giga Factory is a huge investment and will

stock of Tesla

need substantial time to reach full potential.

8. Huge potential in the Power Generation

8. Supplier problems can emerge when the

industry and sale of Powerwall battery.

demand increases.

9. Opportunity to tremendously reduce battery

9. Industry critics and competitors have little

costs through the use of Giga Factory

trust in the production capabilities of Tesla and

production facility.

do not see Tesla as a big threat currently.

10. Opportunity for more strategic alliances to

10. Tesla is not yet profitable and so far has

further strengthen the R&D, supplier network,

made huge investments to accomplish future

production capability as well as sales network.

goals. Lack of profitability can threaten stakeholder’s

interest

and

trust

in

the

organization.

Tesla’s SCOT analysis shows immense growth opportunities for the organization in the newly formed Electric Vehicle industry. With the successful production of Model 3, Tesla has the opportunity to be the global leader in Electric Vehicle industry. Tapping emerging Asian markets and forming strategic partnerships with other suppliers, manufacturers and distributors should be the primary strategic goal for

Tesla. Promising stocks would attract investors and funds offer opportunities to invest in R&D and further improve the offerings. With adaptability being the key to success in today’s unpredictable markets, it is important for organizations to be good at learning, experimenting and changing (Reeves & Deimler, 2011). Tesla being a new entrant in transport technology industry, needs to be open to experiments and change. Big Auto makers like General Motors, Toyota, Ford etc. are ready to offer some tough competition to Tesla in near future. In order to maintain its market position, it is imperative that Tesla keeps improving their battery technology making it more efficient and less expensive. Further unpredictability of markets also demands Tesla to continue their efforts towards creating products in the Power Generation industry like the Powerwall. After completing the analysis for firm’s strategy and suggesting future strategy goals, the next very important aspect is creating a structure for proper implementation of suggested strategy. The last section of this paper stresses on the importance of adopting a well-integrated implementation tool and shares an example for the same.

13. IMPLEMENTATION MANAGEMENT IS CRITICAL Research shows that organizations struggle in properly implementing their strategy and this execution gap negatively impacts future strategic goals (Crittenden & Crittenden, 2008; Bonoma & Crittenden, 1988; Johnson, 2004; Mankins & Steele, 2005). I would recommend Tesla to use strategy and performance management tools like Balanced Score Card for effective goal setting and action planning (Kaplan and Norton, 2007). I also think that incorporating Drucker’s eight focus areas for strategic goal setting into the Balance Score Card tool would further enable the organization to form a comprehensive strategic Implementation plan (Schulz & Hofer, 1999). Presented below is a sample of suggested strategic goals implementation plan integrating Balanced Score Card with Drucker’s focus areas.

FOCUS

OBJECTIVE

AREA

MEASURE

TARGET

INITIATIVES /

(KPI)

(KPI

ACTIONS

TARGET) Market

To capture mass

Achieve sales

Achieve 5,00,000

- Create a global

Standing

market segment

targets for

units per annum

integrated marketing

in existing and

Model 3 and

sales target by

plan for building a

emerging

Model S.

2020.

strong and consistent

economies with Model 3.

brand image. Achieve

- Create a culture based

exponential

marketing and

To continue

increase in sales

advertising campaign for

expanding market

in environment

the Model 3 sales

presence in

conscious

especially in Asian

luxury high end

market

markets.

markets with

segments.

- Organize worldwide

Model S.

education campaign

To create and

80% and above

around benefits of using

customer

electric vehicles.

maintain

Customer

satisfaction score

delighted and

feedback score

100% customer

loyal customers.

Customer

retention score

retention score

To continuously

Quality index

improve the

score

overall quality of products.

Productivity

To successfully

Achieve

Produce 3,73,000

- Expand production

produce and

production

Model 3 cars by

capacity.

deliver Model 3

targets for

2017 end.

Streamline production

cars.

Model.

To increase

processes. Produce 5,00,000

- Continue R&D for

productivity by

% reduction in

cars per annum

reduction in battery

reducing

production cost

by 2020.

production cost.

production costs

- Giga Factory setup and

and making each

% reduction in

Reduce battery

execution plan.

unit profitable.

labor,

production cost

Investment drives for

administrative

by 50% by 2020.

fulfilling the production

cost

costs, expansion costs and R&D costs.

Innovation

Increase in

- Partner with other

production

organizations to further

efficiency and

improve production

capacity.

capacity and capability.

To continuously

Improvement in

30% increase in

improve battery

battery

battery efficiency

technology

efficiency.

by 2020.

focusing on

Reduction in

increasing

battery cost.

50% decrease in

efficiency and

Power

battery costs by

Partner with key

reducing cost.

Generation

2020.

technology players like

To continuously

products.

Apple, Google, Auto makers. Battery makers

software, safety

Launch of

and infotainment

Improved

features in the

varieties of

cars further

Powerwall

enhancing

technology

experience. To continuously innovate and

Hiring experts in various technological initiatives.

add innovative

consumer

Investment in R&D.

etc.

create products in the Power Generation industry.

Physical and

To completely

Giga Factory

Giga Factory

Create a global

Financial

setup Giga

fully functional.

must reach full

expansion plan.

Resources

Factory.

Manufacturing

production

Giga factory setup plan

To open new

plant setup in

potential by

Annual plan for setting

manufacturing

emerging

2020.

up global Tesla stores.

plants across the

economies.

Tesla must setup

Investment drives for

world.

Regular increase

targets for

accomplishing short

To open company

in sales and

opening company

term and long term

owned as well as

service stores

owned and

targets.

franchise /

across the world

franchise sale as

Profitability

partnered stores

well as

and Super

supercharger

Charger stations

service centers

across the world.

across the world.

To achieve net

% reduction in

Sell 5,00,000 cars

Create a Business

profitability.

production cost

per annum by

Development plan

To make Model 3

Achieve sale

2020.

Create a Financial

/ unit sale

targets for

50% reduction in

Management Plan.

profitable

Model 3, model

battery

S, Powertrain

production cost

technology,

by 2020.

Other EV tools

Tesla must setup

and Powerwall.

annual sale and net profitability targets for all the offerings.

Management

To create a strong

All leadership

Zero vacancy in

Learning and

Capability

leadership team

and strategic

key strategic

Development plan for

that is fully

positions are

positions.

leadership and teams.

committed to

held by efficient

Leadership team

Integrated strategy

organization’s

talent

collaborates and

development by all

mission and

resonates

leaders for entire

objectives.

company’s

organization.

mission, values

Well- crafted team

and strategy.

development, goal setting, communication and performance management processes.

Employee

To achieve

Employee

70% above

1. Launch employee

Satisfaction

employee

satisfaction

employee

connect motivation and

and

satisfaction and

feedback

feedback score.

reward programs.

improved

Employee

2. Attractive incentive

performance.

performance

programs.

To improve

graph

3. Fully equipped

gender ratios and

Internal

training team

diversity counts

promotions

4. Training initiatives for

in the employees.

Attrition rate

skill, language and

Hire more

attitude building.

women in

5. Performance

various

Measurement Metrics

Performance

leadership positions. Hire people from various cultures, races and age groups to improve diversity.

CSR

To actively

Powerwall use in

Identify remote

Create CSR policy.

Initiatives

contribute in

remote areas

areas in

CSR plan for

community

with no access to

developing

involvement in various

development and

power.

countries like

community

other social

Africa, India and

development, employee

initiatives with

offer community

development programs.

sustainable

development

energy offerings

services by the

like Powerwall

use of Powerwall technology.

14. CONCLUDING THOUGHTS Tesla Motors with its mission to transform the existing transportation industry into a sustainable Electric Vehicle industry boasts of a ‘shaping strategy’. A ‘shaping strategy’ depicts bold leadership that believes in the organization’s power to cause change and conquer (Reeves, Love & Tillmanns, 2012). Tesla’s existing strategy has gained popularity due to its disruptive innovation and distinct positioning. The firm’s strategy to consecutively launch offerings that are better than competitors and are creating a need in different market segments is extraordinary. Today, with leading Powertrain technology, the award winning luxury Model S sedan and the latest affordable Model 3 sedan, Tesla has the momentum and opportunity to emerge as a global leader in the growing Electric Vehicle industry. Elon Musk’s courageous strategic moves like investment in Giga Factory and opening Patents show a very optimistic and bold strategic position. Despite gaining popularity due to its innovative practices, Tesla has also attracted critic from the industry and media. The company is not yet profitable and has yet to prove its production prowess. Having said that, its ambitious strategic goals has invited competition and has led the spark in the very nascent Electric Vehicle industry. Amidst all the excitement and speculation, the question is that are we on the verge of a new era in the transportation industry or will Tesla change its ‘Shaping strategy’ to an ‘Adaptive strategy’ due to the immutable environment of automobile industry (Reeves, Love & Tillmanns, 2012)?

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