Tesla Motors In 2017-MLA

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Case Study of Tesla Motors 2016 Strategy Chance of Success in the Automotive Industry

Introduction

The automotive industry is unarguably a key contributor in the growth of the transport

sector thereby playing a crucial role in the development of economy. The transportation of

resources and goods depends on the products of the automotive industry. Several factors have

led to the growth of this industry over the years. First, the rapid growth of the human population

has triggered the need for more automotive products to satisfy the ever-growing market.

Secondly, environmental concerns raised by the massive use of automotive products producing

harmful emissions to the surroundings prompted the development of more environmental friendly

automotive products (Srinivisan, 10). Lastly, consumer tastes and preferences further demanded

for more diversification of the automotive products. These market demands meant that the already

existing automobile companies had more grounds to outcompete each other in the market in the

already intense competitive market. Tesla motors, a company specializing in electric cars is a

renowned in the automotive company that implemented a well-structured and coordinated

strategy in 2016 that enabled its survival in a market characterized by intense mounting

competition and low gasoline prices.

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Table of Content

Introduction .................................................................................................................................................. 1

The Automotive Industry ........................................................................................................................... 3

The Dominant Economic Characteristics of the Automotive Industry ............................................ 3

The automotive industry market and its growth ............................................................................. 3

The number of rivals and scope of competition ............................................................................. 3

Product innovation and Differentiation ............................................................................................ 4

The scope of demand and supply .................................................................................................... 4

Economies of scale ............................................................................................................................ 4

The Key Driving Factors of the Automotive Industry ........................................................................ 5

The Strengths of the Industry’s Competitive Forces and Key Success Factors .......................... 5

The Major Players of Automotive Industry and their Strategies ...................................................... 6

Tesla Motors Analysis ............................................................................................................................... 6

The Financial Analysis ........................................................................................................................... 6

Value Chain and Resource Based View Providing Tesla a Competitive Advantage .................. 7

Tesla SWOT Analysis ............................................................................................................................ 8

Competitive Strength Assessment of Tesla ....................................................................................... 9

Tesla’s Mission ....................................................................................................................................... 9

Tesla’s Generic Strategy ..................................................................................................................... 10

Strategic Issues and Strategic Recommendations ..................................................................... 10

Ten Part Implementation of Recommendations .......................................................................... 11

Appendix .................................................................................................................................................... 12

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The Automotive Industry

The automotive industry refers to all the undertakings that companies specializing in the

manufacture of vehicles and/or their components. The companies that are considered to be part

of the automotive industry majorly deal in the manufacturing of passenger automobiles, sport

utility vehicles, pickups, vans and the components of these vehicles such as their bodies and

engines (Eckerman, 1). Although the production of fuel, tires, and batteries are an integral part of

some automotive companies, such activities are not considered as part of the automotive industry.

The automotive industry company core activities revolve around designing, developing,

manufacturing, marketing and the sale of the automobiles and their parts.

The Dominant Economic Characteristics of the Automotive Industry

The automotive industry market and its growth

The market size and growth rate of the automobile industry can be deduced form the

statistics of auto motor sales recorded over the years that it is at its maturity stage (Wong, 4). The

numbers of car sales worldwide according to Statistics in the past four years are as in the table 1

shown in the appendix. The data shows that although there is an increase in the number of cars

sold over the span of four years, there is a slow market growth rate. The automotive industry

market is therefore in its maturity stage limiting the chances for new firm entries. This has dictated

the number of rivals in the market.

The number of rivals and scope of competition

The automotive industry requires high startup capital investment and is thus dominated by

few firms that command a great share in the market. The high cost involved in running these

companies makes the fragmentation of these companies impossible and discourages new entries

that may threaten existing companies. The high costs have prompted the merging and

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acquisitioning of some companies in the industry (Wong, 15). The competitors compete in a global

scope with the companies’ ability to operate globally termed as a success.

Product innovation and Differentiation

The automotive industry is not constantly flooded by new product innovations since the

already introduced new products remain relevant and competitive in the market for a relatively

longer time. However, the companies invest in research and development geared towards product

differentiation of the existing innovations to ensure they have a competitive advantage in the

market.

The scope of demand and supply

The limited number of suppliers in the automotive market ensures supply does not exceed

the demand. However, in case of over production of these products, the prices are set to drop in

the market as dealers try to dispose of the excess goods. (Sturgeon, 8). The differentiated

products also reduce the chances of flooding the market with a similar product which may lead to

a drop-in price making the market fairly stable. The demand of a certain automotive product does

not automatically lead to the upscale of prices since the price tags are predetermined by the

manufacturer.

Economies of scale

Companies in the automotive industry can take advantage in all the stages of their

activities such as manufacturing, purchasing and shipping. The high cost of these activities is thus

cut back by ensuring they are done in bulk to ensure the proper utilization of the available

resources at a given time (Wong, 15). Companies that have the capacity to conduct large scale

production activities thus have an added advantage over the smaller companies based on their

ability to exploit the economies of scale better.

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The Key Driving Factors of the Automotive Industry

The automotive industry success is majorly dictated by three notable factors globally. First,

the ability of person to buy the automotive products and the number of such abled people in a

population dictates sales of any automobile firm. The purchasing capacity and power of a targeted

population is thus considered by automobile manufactures as a key decisive factor in the pricing

and manufacture of their products (Wong, 17).The availability and pricing of fuel that the

automobiles use also sets the direction of the sales of the automobile industry. An increase in the

prices of fuels directly leads to a high cost of maintaining and using a personal automobile. Lastly,

the availability of infrastructure such as roads, maintenance shop and fuel stations in a

geographical area dictates the push of the people in the area to purchase automobiles. The

infrastructure determines they type of automobile that is suitable for use in the area.

The Strengths of the Industry’s Competitive Forces and Key Success Factors

The competitive forces in the automobile industry when analyzed with the Porters Five

Forces Framework have several strengths that are an advantage in the market. First, the industry

has a very weak threat of new entrant’s competition. Secondly, the threat for substitute products

such as public transport for the automobiles in the market is very weak (Gnann et al, 172). Thirdly,

the bargaining power of the few suppliers is very allowing prices and conditions of sale are

determination by the brands without outside interference. Lastly, the competitive rivalry in the

automotive industry is reasonably strong since the renowned brands are few with high set exit

bars. The exit of a brand from the market is costly as the market is segmented into brand loyalty.

The key success factors automakers can exploit are towards expansion of their market share and

economical production. First, the company should create a desirable image for its brand. The

products should elicit positive reviews opinions to widen the market share and peoples trust in

the brand. A good distribution network is another important factor to ensure that the brand

products are available to all potential customers.

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The Major Players of Automotive Industry and their Strategies

A strategic group map of the automobile industry as seen in figure 1 in the appendix based

on their brand reputation and market share in the market shows that the major players are Ford,

Toyota and General Motors (GM). These companies have implemented different strategies to

earn their places as major players. GM and Ford strategy is creation of cheap affordable products

with average performance to suit all classes thus the big market share. Toyota uses a strategy

that involves creating average priced vehicles that deliver high performance all for affordable

prices to tap into the market share. The strategy differences between the major players identified

is evident in their target markets and geographical distribution. The GM and Ford are automobile

manufactures that have concentrated majorly in the United State market targeting all the social

classes using relatively medium-priced products. The Toyota Company on the other hand is

rooted on having a broader and international market oriented. Tesla Motors has a small market

share targeting the high social and economic classes as it is a luxury brand.

Tesla Motors Analysis

The Tesla Motors is an American based company that deals majorly deals in the

manufacture of electric cars apart from the production energy storage lithium batteries and

photovoltaic panels (Van den Steen, 2). The company currently known as Tesla was founded in

2003 and has posted impressive results since its formation.

The Financial Analysis

The table 2 shown in the appendix gives a summary of the financial revenues and income

margins for the years 2015 and 2016 for comparison and discussion. Comparing the revenues,

earnings, revenue growth, earning growth, net margins, return on assets and return on equity

data from the table shows a massive improvement of Tesla in its finance. According to the table

in summary, the gross margins of Tesla dropped from 23.06% in 2015 to 22.85% in 2016. The

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cash flow of 76.39% does not imply a significant change of reserves and accruals as the year-on-

year change is almost the same to the change in earnings. Although there is no-year-on year

improvement, the income of the company grew influenced majorly by the margins of operating

form -8.72% to 4.00%. Tesla strategic plan for the year 2016 saw its improvement in finances. It

is notable from the data and assessment provide that Tesla has dedicated its resources and

revenues towards the development of high quality products leading to the slow growth rate in its

revenue generation that continues to post negative finances in some aspects as seen in the table.

With the upcoming implementation of large scale production of their electric cars, Tesla will see

its profits rise immensely to remove the negative finances they face due to high cost of production

for less generated income when they start enjoying economies of scale.

Value Chain and Resource Based View Providing Tesla a Competitive Advantage

Tesla has dedicated its work towards adding value to their products to gain competitive

edge in the market. They have an elaborate and well-developed research and development

sector, motivated human resources and a good management administration network thus

acquired some competitive advantages. First, it has a temporary competitive advantage by

introducing its full auto pilot automobile. The installation of Tesla supercharges centers at many

areas making up their target markets has also given the company a competitive edge as people

embrace its technology. The targeted market is assured of Tesla services in their locale thus

giving them brand preference in the market. The following table shows a VRIO analysis of Tesla

highlighting these aspects and the advantages realized.

Resource/

Competency

Position in

Value Chain

Rare

Valuable

Substitute

availability

Exploitation

Ability

Advantage

Type

Dealerships

Distribution

(Tangible)

Yes

Competitive

parity

Vehicle parts

Technology,

Tangible,

development

Yes

Sustainable

competitive

advantage

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of automobile

systems

Autopilot

technology

Technology,

Tangible

Yes

Temporary

competitive

advantage

Supercharge

network

Services,

tangible

Yes

Temporary

competitive

advantage

Low fuel

Pricing trend

Intangible,

market

economy

Competitive

disadvantage

Vehicle

software

updates

Technology,

Tangible

Yes

Sustainable

competitive

advantage

High costs in

electric

automobile

markets

Intangible,

supply chain

management

Temporary

competitive

advantage

Tesla SWOT Analysis

Tesla strengths is that it has a high innovative capability cemented by being the first

automobile company to introduce the first electric automobile (Hardman et al, 1627). This helps

build the mentality of innovation and encouragement to its staff thus a strength enabling it to

produce high quality products. The company has renowned strong brand. The Tesla brand is

associated with unthinkable interesting innovations and ability to satisfy its customer’s new

products that offer renewable energy. The main weakness of the company is that it lacks

dealerships making the sales of its products hard. The company has also diverted most of its

resources in costly electric automobile technology and thus has high operation costs since it does

not enjoy economies of scales. Tesla has three main opportunities for its growth. First, expand

its operations to become global. Through global expansion, Tesla will increase its market share

translating into more sales. Secondly, the expansion and development of its supply chain

(Bohsnack et al, 298). Tesla needs to develop its supply to ensure that untapped markets

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recognize the brand to boost sales. Lastly, the diversification of the company products. The

company has room for more market share through the diversification of their products to boost

sales. Tesla faces threats to its market share in electric cars as more companies start their own

production of electric automobiles. The reducing fuel pricing is also threat as people are likely to

purchase the low consumption automobiles offsetting the advantage of having an electric one

which was competitive edge for Tesla.

Competitive Strength Assessment of Tesla

The following table shows CSA matrix data that compares Tesla to its rivals.

According to the data, Tesla shows the ability to compete with its rivals relatively good in

the market. Tesla only shortcoming s are of the financial strength, relative cost position and

marketing distribution success factors which when developed will make its equal to other brands.

Averagely, Tesla has a score of 6.3 that compares to the highest of Daumier AG 7.95 making the

company a fairly strong competitor in the market.

Tesla’s Mission

The mission of Tesla motors is “To accelerate the world’s transition to sustainable

transportation.” This is a mission that the company has dedicated its resources towards with a

tremendous success over the years in the automobile industry. Tesla is first to manufacture a

fully powered electrical race automobile which sets it in the path of accelerating the world to a

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sustainable transportation through development of cars using renewable energy (Ebrhard & Marc,

6). Its tremendous development in the manufacturing and technological improvement in electrical

cars is set to further stamp the brands role in the automobile industry as outlined in its mission

(Hardman et al, 1629).

Tesla’s Generic Strategy

Tesla current generic strategy aims at broad differentiation. Having established its name

in the automobile industry, the company has now engaged in development activities aimed at

ensuring their products standout from the rivals. The new strategy is in line with their mission and

their increasing access to funds and development of revenue and income allows them to

implement the strategy. The move towards large scale production is set to benefit the company

with economies of scale is also an added advantage (Bohsnack et al, 289).

Strategic Issues and Strategic Recommendations

Although Tesla has a well laid out strategy that aims at boosting its sales and income, it

still has some few issues that are likely to affect its implementation and success:

Strategic Issue

Recommendation

High operating costs. Tesla is a growing company

and as a result does not operate in larges scale. It

therefore lacks economies of scale and the high

cost of developing the electric automobile

technology makes its costly to run its activities.

This has resulted in low profits since a large

percent if the revenue collected from product sales

and services goes to innovation and invention,

thereby limiting the ability of the company to grow

and expand its market share in the automobile

industry.

Tesla should first strategize in expanding its

ability to produce in large scale the already

developed cars. This involves upgrading their

existing factories to handle more product

manufacturing to enable the company have

economies of scale. Large scale production

will allow for cost of production cut backs

such as the reduction of raw materials as

they them in bulk. This will ensure more profit

realization that can be used to better the

production of the company and its

expansion.

The lack of dealerships. Tesla has not enrolled

any dealerships to its supply chain and sells its

products directly. As a result the company has a

limited market share and a production limitation as

it also diverts its resources towards supply and

marketing. This has resulted to low production and

sales as its resources are overwhelmed.

Tesla should ensure that it strikes multiple

trusted dealerships which will help handle its

products in the market. The dealerships will

remove the burden of marketing, distribution

and the use of resources to carry out these

activities form Tesla. This will translate into a

more productive company as it specializes in

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the production of its products while

makrteting and supply duties are carried out

by its trusted dealers.

Limited market share. Since Tesla deals in

luxurious automobiles at specific countries, the

company has a small established market. A few

people have access to its products and thus the

sales are limited. This has resulted in few sales as

the market awareness of their products is very low

due to poor marketing and supply chain

distribution. Major rivals in the industry have a

large market share and their continued dominance

outcompetes Tesla and its introduction to newer

markets.

Tesla should make its market presence

known globally instead of concentrating in

some continents to improve its market share.

The company should invest in affordable

electric automobiles targeting different

economic classes to allow for its

establishment as a peoples brand. This will

enable its market expansion to other

countries and continents allowing for a larger

market share translating to bigger profits.

Underdeveloped supply chain. The lack of

dealerships has resulted to a broken supply chain

with limited capabilities of reaching out to potential

clients. Tesla’s direct sales to the market are

therefore low as they do not have enough

resources to market and distribute their products

globally as seen in other automobile rivals. This

has resulted into a small market share located only

in a few countries and continents neglecting

distribution to the wide market available globally.

This has in turn limited its expansion abilities to a

large scale production firm leading to high costs of

production due to lack of economies of scale.

Tesla should establish supply chains first to

ensure that the products produced in the

future can be safely and effectively delivered

to customers. The supply chain needs to

ensure that the delivery of their products is

done lawfully and procedurally taking into

account the pricing and safety of the

products. A well-developed supply chain will

ensure the customers are not extorted or the

quality of goods compromised which may

tarnish the Tesla brand. A good supply chain

should also take care of the handlers to build

trust and supply efficiency for better sales.

Ten Part Implementation of Recommendations

a) Implementation of striking dealerships to handle sales.

Clarify to the management board the impact of striking dealerships towards ensuring safe

and increased sales volumes and access to untapped markets in states barring self-sales and

the expected changes in the organization. Educate and convince the management board into

believing the role of dealerships towards the realization of the strategies and mission of the

company. Select the key and right metrics that will ensure the dealerships are up to take are in

line with the Human Resource department metrics. Align the dealerships performance with the

reward systems of the company to motivate different staff involved in securing dealerships.

Identify potential candidates for the potential dealerships deal. Identify the talent gap within the

staff and pick managers that are more suited to conducting result achieving business with the

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dealers. Develop the capabilities of the selected staff towards achieving and maintaining

dealership deals with maximum success. Align the management board with the changes expected

form the dealership deals to ensure they feel part of the process for support. Build a dealership

culture in the staff to ensure they support the strategy. Implement and monitor the process of the

dealership ensuring everything goes as planned and explained to the management board.

b) Implementation of creating brand awareness and marketing across the globe.

Explain and clarify the need for brand awareness and marketing globally and its impact

on the company. Convince the management board and staff to be part of the vision to advertise

and market the company globally. Identify and present the key metrics of the strategy to the

company that can be aligned to the global marketing. Engage and set the appraisal and reward

systems for the staff involved in making the global marketing a success to motivate the involved

employees. Engage advertising firms that are set to deliver quality advertising of the brand

globally. Identify the talent gaps in the involved staff in the global marketing strategy and pick

vision oriented leaders to carry out further implementation. Develop the capabilities of the

selected staff to ensure maximum a use of the global marketing potential using the available

resources. Align the board management and leaders with the outcomes resulting from the global

marketing. Build the culture that embraces global marketing in the workplace. Monitor the

progress of the global marketing strategy ensuring to make changes where required to make the

implementation successful.

Appendix

Year

Sales Globally in

Millions

2014

71.18

2015

72.61

2016

77.31

2017 (Expected at the end of the year)

78.59

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Table 1. Global Sales of automobiles.

2016

2015

Relevant Numbers Annual

Revenues

7000.13

4046.03

Revenue Growth

N/A

Earnings

-647.91

-888.66

Earnings Growth

24.05

-202.23

Net Margin

-9.64

-21.96

EPS

-4.68

-6.93

Return on Equity

-19.28

-88.84

Return on Assets

-4.39

-12.75

Table 2. Financial Records Tesla 2015-2016

Figure 1. Automobile Major Players

Strategic Group Map

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Works Cited

Bohnsack, R., Pinske, Jonatan Pinske, and Ans Kolk. “Business models for sustainable

technologies: Exploring business model evolution in the case of electric vehicles.”

Research Policy 43.2 (2): 284-300

Ebrhard, Martin, and Marc Tarpening. “The 21

Century Electric Car Tesla Motors.” Tesla

Motors (2006).

Eckerman, Erik. WORLD HISTORY OF THE AUTOMOBILE. 2001

Gnann, Till, et al. “What is the market potential of plug-in electric vehicles as commercial cars?

A case study from Germany.” Transportation Research Part D: Transport and

Environment 37 (2015): 171-187 (Gnann et al, 172)

Hardman, Scott, Eric Shiu, and Robert Steinberger-Wilckens. “Changing the fate of Fuel Cell

Vehicles: Can Lessons be learnt from Tesla Motors?” International journal of hydrogen

energy 40.4(2015): 1625-1638.

Mangram, Myles Ediwn, “The globalization of Tesla Motors” a strategic market plan analysis.”

Journal of Strategic Marketing 20.4 (2012): 289-312

Srinivisan, Suchita. Driven up the wall? Role of environmental regulation in innovation along the

automotive global value chain. No 52-2017. CIES. The Graduate Institute, 2017.

Strugeon, Timothy, and Johannes Van Biesebroeck. “Effects of the crisis on the automotive

industry in developing countries: a global value chain perspective.” 2010.

Van den Steen, Eric. Tesla Motors. Harvard Business School Publishing, 2015.

Wong, Wilson Kia Onn. Automotive Global Value Chain: The Rise of Mega Suppliers.

Routledge, 2017.

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Tesla Motors in 2017-MLA

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