Tesla Motors

Tesla Motors in 2016: Will Its Strategy Be Defeated by Low Gasoline Prices and Mounting Competition?

1. Evaluate the business processes and strategies of Tesla. Determine which of the five generic competitive strategies best applies to the company. Explain and justify your selection.

Tesla Motors is a company that builds luxurious, chic and eco-friendly electric vehicles with innovative technologies. Tesla was incorporated in Silicon Valley in July 2003 by Martin Eberhard and Marc Tarpenning. In February of 2004 entrepreneur and futurist Elon Musk became the company’s majority investor and became chair on the company’s board of directors.  Tesla Motors relies on displaying their Tesla EVs in showrooms for marketing. Tesla Motors has a fairly minimal advertising budget; instead, the company relies on brand loyalty, customers who believe in Musk and the company’s futuristic vision, and word-of-mouth advertising to garner the attention of potential buyers. Tesla sells its vehicles directly to buyers and provides after-sale services through company-owned service centers in contrast to the industry standard of relying on franchised dealerships. There are four models to choose from for the 2022 production season; the Tesla Model S, the Model 3, the Model X, and the Model Y. S3XY. Nice one, Elon.

Musk and Tesla Motors have a focused differentiation strategy. Tesla Motors has been successful at satisfying the needs and expectations of their niche market with the company’s sleek designs and constant innovation that resonate with consumers. Tesla buyers are typically not only a fan of the electric vehicles, they tend to be fascinated by Musk himself, who’s candid tweets and visionary ambition strike the imagination and wonder of the greater public. All things considered, the electric vehicle (or EV) plug-in hybrid and battery-powered EV market is still a relatively small market in comparison to the traditional fossil fueled vehicle market. However, the hybrid and battery EV market has rapidly expanded over the last 8 years, growing by an average of 55.5% annually since 2012, including a 98% increase in EV sales last year in 2021 (Irle, 2021).

2. Musk has stated that the near-term strategy of Tesla was to sell about 500,000 vehicles by the year 2020. Explain how this goal can be impacted by the external forces brought by competition and/or gasoline prices.

Musk’s aim to sell 500,000 vehicles by the year 2020 was reliant upon several factors. Demand for the product doesn’t appear to be too much of an issue, as Musk’s and Tesla Motors’ innovative and unique automobiles have accrued a hype among celebrities and innovative tech geeks. On the supply side, namely battery cell prices and production shortages, there may be more complex issues. Over the next 10 years next big hurdle for Musk and Tesla Motors will be broadening their market from rich, eco-friendly hipsters to upper middle-class families and the common man.

The European electric vehicle (or EV) market is rapidly growing. In 2017 EVs were less than 2% of new cars registered in Europe. By 2020 EVs that figure grew to 10% of the entire European automobile market (Hetzner, 2021). Tesla sales have had less of market share in the European market compared to its hold in the U.S and China markets. Many sales shortcomings are not necessarily due to the EVs themselves, instead government regulations and tax credit exemptions may alter sales in certain regions.  Despite shortcoming in the European market, with the rapid growth of the EV market in general, Tesla is strategically positioned to capitalize on the emergent EV market growth worldwide. The customer loyalty and name recognition of the Tesla Motors brand continues to flourish and betting against Musk, the world’s richest person, has proven to be a tumultuous path for the Tesla haters.

Gasoline prices have risen from $1.94/gallon in April of 2020 in the U.S. to $3.49/gallon in November of 2021 according to the U.S. Energy Information Administration (EIA, 2021). Such rapidly increasing gasoline and petroleum costs may greatly impact a consumer’s decision to purchase an electric vehicle versus sticking to gasoline-powered vehicles. Although Musk has gained a reputation for his unrealistic production goals, Tesla Motors achieved their goal of selling 500,000 cars by 2020 and in the year 2020 came just a few hundred automobiles short of producing 500,000 EVs in a single year (Carlier, 2021).

3. Can Tesla be clearly described as a “first mover”? Review the five conditions where first-mover advantages can be realized. Be sure to provide examples of such conditions at work at Tesla.

Tesla Motors, a pioneer in the EV market, may be clearly described as a first mover. The risks taken by Musk and Tesla Motors have led to an early EV market dominance in the U.S. for the company. From January to June 2020 Tesla made up nearly 80% of all new EVs registered in the U.S. and although that percentage dropped to 66.3% in the same months of 2021, it is still a majority of the booming EV market in the States.

The first condition in which first-mover advantages may arise is “when pioneering helps build a firm’s reputation and creates strong brand loyalty” (Thompson et al., 2016). Tesla Motors has an active and highly engaged customer base who are highly satisfied with their more sustainable EVs. According to a 2019 Bloomberg survey of 5000 Model 3 owners, “99.6 percent of respondents said the Model 3 is a pleasure to drive” (Randall et al., 2019). This brand loyalty and high customer satisfaction strategically positions Tesla Motors to benefit as more people seek eco-friendly electric vehicles. Tesla Motors’ entertaining ‘easter eggs,’ like cleverly written software games and even a Trans-Siberian Orchestra light performance, exhibits the company’s brilliantly fun tech and sophisticated software capabilities (Ryan, 2016). Although these displays may seem like gimmicks, they have only fueled the word-of-mouth hype for the American-made EVs.

The second condition when a first mover may come forth is “when a first mover’s customers will thereafter face significant switching costs” (Thompson et al., 2016). This switching cost may be applied to Tesla through the infrastructure created by the Supercharger network. Current electric vehicles are capable of traveling about 250 to 400 miles per charge. Charging stations are a necessary component to making the dream of electric cars possible. According to Alistair Charlton, Senior Contributor to Forbes, 10 Supercharger stations in the Netherlands opened to all EVs in November of 2021 and “it’s always been Tesla’s ambition to open the Supercharger network to Non-Tesla EVs, and by doing so, encourage more drivers to go electric.” Tesla drivers are already plugged into this expansive Supercharger network, but by downloading the Tesla charging app and paying a fee, any EV driver may get their EV battery charged. In order for a Non-Tesla EV to charge on this network the driver must pay an additional fee to access the established Tesla infrastructure.

The third condition when a first mover may emerge is “when property rights protections thwart rapid imitation of the initial move” (Thompson et al., 2016). Tesla Motors has many open source patents and few Intellectual Property concerns due to the greater aim of creating sustainable electrical vehicles by Musk. This corporate message and precedent reinforces the notion that Musk and Tesla Motors are trying to fulfill the dream of a more sustainable transportation method and change the world for the better. This laid-back freedom of thought approach also displays a confidence in the company’s capabilities and final product as a whole.

4. At the current time, Tesla has largely rejected creating any definitive strategic alliances, except for some single-source suppliers and purveyors of specialized services. Is such a “stand alone” orientation serve Tesla well, or not? Justify your response.

The lack of definitive strategic alliances for Tesla Motors may have stagnated initial production growth for the relative newcomer to the automotive industry. After falling short of production goals again in 2016 Forbes Senior Contributor and technology company writer Chuck Jones wrote, “this repeats the pattern of Tesla over promising and under delivering” (Jones, 2016). The notoriety of having lofty ambitions but consistently falling short of production goals may lead to a negative perception of the company by stockholders and the general public. Musk’s big promises may start to be taken with a grain of salt by the public; cum grano salis. However, the short-term growing pains and production shortcomings may lead to long-term lessons and an overall strategic advantage for the publicly traded company by providing realistic production growth models and allowing the company to grow in magnitudes of scale.

Tesla Motors outsources their lithium-ion battery cells in collaboration with Panasonic. The demand for these batteries outpaces the supply leading to a supply-chain bottleneck and raising costs for car in general. The supply shortage and high-cost of battery-cells may be a cause of concern not only for Tesla Motors but for any EV companies as whole in the West, according to Forbes Senior Contributor Neil Winton (Winton, 2021). The Texas-headquartered company is headed in the direction of more insourcing to be less reliant on outside influences. There are currently three active Gigafactories for Tesla EV production and four more Gigafactories that are in the production and planning phases (Brown, 2020).

5. Examine and describe the concept of outsourcing value-chain actions in within business operations. Such practices can have a strategic benefit in several ways. Of those strategies, identify one that can be applied to Tesla and provide an example of how that strategy is utilized at Tesla.

Outsourcing value-chains activities within business operations may be beneficial in scenarios when an activity can be performed better or more cost-effectively by outside specialists, when the activity is not crucial to the company’s ability to achieve sustainable competitive advantage, when the outsourcing improves organizational flexibility and speeds time to market, when it reduces the company’s risk exposure to changing technology and buyer preferences, or when it allows a company to concentrate on its core business (Thompson et al., 2016).

According to finance writer J.B. Maverick, “Tesla manufactures the basic electric components of the car- the electric motor, the battery pack and the charger- but other parts come from supplies spread across the US., Europe and Asia” (Maverick, 2021). A few examples are the windshield produced by AGC Automotive, the power seats manufactured by Fisher Dynamics, the brakes made by Brembo, and the power steering mechanism produced by ZF Lenksysteme. Outsourcing these value-chain actions allows Tesla Motors to focus on its core business functions like software implementation, battery cell production, customer experience, and design. Tesla Motors, as a relatively new player in the automobile industry, may need more time to build more strategic outsourcing alliances as the company continues to grow.

Reference Page 

Brown, M. (2020, July 8). Tesla has four more gigafactories planned: Here's what we know. Inverse. Retrieved December 6, 2021, from https://www.inverse.com/innovation/tesla-gigafactory-what-we-know. 

Carlier, M. (2021, October 4). Tesla deliveries by quarter 2021. Statista. Retrieved December 6, 2021, from https://www.statista.com/statistics/502208/tesla-quarterly-vehicle-deliveries/. 

EIA. (2021). Energy Information Administration. U.S. all grades all formulations retail gasoline prices (dollars per gallon). Retrieved December 6, 2021, from https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m. 

Hetzner, C. (2021, August 9). Ev sales are booming just about everywhere-except in the U.S. Fortune. Retrieved December 6, 2021, from https://fortune.com/2021/08/09/ev-sales-booming-europe-china-not-in-united-states/. 

Irle, R. (2021). Global EV sales for 2021 H1. The Electric Vehicle World Sales Database. Retrieved December 6, 2021, from https://www.ev-volumes.com/. 

Jones, C. (2016, April 5). Tesla overpromises and underdelivers, again. Forbes. Retrieved December 6, 2021, from https://www.forbes.com/sites/chuckjones/2016/04/05/tesla-over-promises-and-under-delivers-again/?sh=14e47d87a361. 

Levin, T. (2021, October 21). Electric cars are more popular than ever, but Tesla is losing market share to new competitors. Business Insider. Retrieved December 6, 2021, from https://www.businessinsider.com/tesla-market-share-drops-ford-gm-audi-2021-10. 

Maverick, J. B. (2021, June 23). Who are tesla's (TSLA) main suppliers? Investopedia. Retrieved December 6, 2021, from https://www.investopedia.com/ask/answers/052815/who-are-teslas-tsla-main-suppliers.asp. 

Randall, T., Halford, D., & Sam, C. (2019, October 19). 5,000 Tesla Owners Told Us What Elon Musk Got Right and Wrong. Bloomberg.com. Retrieved December 6, 2021, from https://www.bloomberg.com/graphics/2019-tesla-model-3-survey/. 

Ryan, K. J. (2017, April 14). 6 of Tesla's best (and nerdiest) easter eggs. Inc.com. Retrieved December 6, 2021, from https://www.inc.com/kevin-j-ryan/elon-musk-tesla-easter-eggs.html. 

Thompson, A. A., Peteraf, M. A., Gamble, J., & Strickland, A. J. (2016). Crafting and executing strategy: The Quest for Competitive Advantage: Concepts and readings. McGraw-Hill Education.

Winton, N. (2021, November 15). Lithium shortage may stall electric car revolution and embed China's lead: Report. Forbes. Retrieved December 6, 2021, from https://www.forbes.com/sites/neilwinton/2021/11/14/lithium-shortage-may-stall-electric-car-revolution-and-embed-chinas-lead-report/?sh=8ec222d46efd.