#6 Tesla Motors Case Study PDF

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Introduction 

Meet the most innovative car company in the world: Tesla Motors. The company is headquartered in Palo Alto, CA and is led by prominent serial entrepreneur and multi‐billionaire Elon Musk.  Tesla effectively created the world’s first all‐electric production sports car. Resembling the Lotus Elise, the Tesla Roadster is in many ways superior to its competitors (e.g. Porsche 911, Lamborghini Gallardo, etc.), especially given that it has twice the torque (295 ft‐lbs starting at zero RPM). In current production, the Models S is an electric luxury sedan with 442 ft‐lbs of torque and a comfortable 300+ mile range (packed to the brim with more mind‐blowing features than one could fathom). In the coming months, Tesla will produce an electric, all‐wheel‐drive, crossover branded as the Model X. This small SUV will outdo its gas‐guzzling competitors in speed, handling, and luxury, all while providing comfortable seating for seven adults. In the near future (circa 2017), Tesla will introduce an all‐electric economy car that will offer a style and range similar to the Model S, but will be priced around $35k. 

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Opportunity Space 

An Opportunity Space is an industry, market segment, or area where an entrepreneur can create new value by filling in a void caused by a market imperfection. The Innovation Process is how the entrepreneur creates a new solution to the market imperfection.  Elon Musk is an exceptionally talented and proven serial entrepreneur who has sequentially created three multibillion‐dollar companies: 1) Paypal, the ubiquitous online payment company, 2) SpaceX, the first privately held company to send cargo payloads via rocketship, and 3) Tesla, the first company to put an electric sports car into production. Musk has degrees in economics and physics; and was starting a PhD in applied physics and material sciences at Stanford when he decided to drop out and become an entrepreneur.   Unlike most of the traditional disruptive startups that strategically start downmarket and and moved upmarket, Tesla has taken a unique approach by starting upmarket

with a premium sports car and then subsequently moving downmarket to economy cars. Musk and his executive management team deliberately made this strategic choice because wooing electric economy car buyers would be much easier after its high end vehicles had received positive reviews from critics, car enthusiasts, and upscale buyers. This governance decision allowed Tesla to build a venerable automobile brand that would elicit a sporty, sleek, and technology‐driven image in the minds of all customers, particularly the highly profitable economy segment.  In other words, Tesla is expanding into the auto market from the top down, starting with the super‐premium (attracting the wealthy elite) and then applying the technology advancements and economies of scale to affordable cars that will be more accessible to upper‐middle class families. Musk states that his goal is not to steal total market share from incumbents, but to catalyze a paradigm shift in the auto industry by demonstrating how to effectively build and support a new era of cars with “zero emissions” and “zero compromises.”  Tesla Motors has obtained explosive traction in the auto industry because the Model S performs in so many categories at the top of the class. Although the Model S competes directly with the Audi A7, the BMW 650 Grand Coup, and the Mercedes CLS, it is also at the top of the food chain in many areas where those cars fall behind. Jake Fisher, Director of Auto Testing at Consumer Reports stated in an official review of the Model S: “This car performs better than anything we’ve ever tested before... not just the best electric car, but the best car.” That was evident in their score of 99 out of 100 points, the highest score ever given.  It operates fabulously in ice and snow and has been tested at temperatures as low as ‐10 degrees fahrenheit, as well as in hot and dry climates. Many have sold and performed well in Norway, Switzerland, and the Netherlands, and Model S easily makes the trip from LA to NY thanks to its extensive network of supercharging stations.  Embed video with image below.https://vimeo.com/40038939

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All luxury automakers have taken considerable notice of and are nervous about Tesla’s ultra fast growth. Model S outsold many models of Porsche, Jaguar, Land Rover, Audi, BMW, and Land Rover in California during the first half of 2013, and in the second half accomplishments were even more impressive. More recently, it has been the top selling car in Norway. Despite the company’s decision to continue a zero dollar advertising budget, demand for the vehicle is still outpacing production capacity, resulting in delivery wait times of over two months. Musk’s long‐term strategic goal is to create affordable mass‐market electric vehicles that will eventually cause a material reduction in oil consumption.   

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Five Types of Value 

An organization’s performance is largely attributed to its effectiveness in managing resources. The Five Types of Value framework provides a useful indication of organizational performance and will be extensively used throughout the course:

 Value in Use 

The effectiveness of a product, service, or experience in fulfilling customer needs. This is measured by the customers' overall satisfaction.  “There’s no question that Tesla is trying to dismiss the image of electric cars as being frumpy little transport pods. And if [the Model S’s] cool features don’t do that, the performance here will... It’s just this instant surge of torque. It is fantastic, and its addictive... the performance is stunning.” ‐Tom Mutchler, Consumer Reports 

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As the first successful American auto manufacturer startup in 100 years, Tesla has won more than its fair share of awards for the Model S, including the coveted Motor Trend 2013 Car of the Year. At first glance of the Tesla Model S, you’ll wonder whether that S stands for sexy, sleek, or supernatural‐‐certainly all of the above. Its lustfully low‐slung body is no deception as the center of gravity is a mere 17 inches off the ground (similar to a Corvette, and much lower than any other sedan). Take a step forward and the key fob in your pocket will activate the door handles to slip out from their default retracted position in the exterior. That default position of the door handles contributes to the lowest drag coefficient (.24) of any production car on the market.  Sitting inside the car, the first thing you notice is the cavernously roomy space. The drivetrain is ridiculously small (for the enormous power it delivers) which contributes to a huge cargo space. This does not look like an “electric” car! Then, you notice an enormous 17” screen with a very intuitive two‐ finger touch interface (with reportedly excellent tactile response). That screen replaces all the buttons and knobs (for navigation, built in 3G internet browsing, rear camera display, and all the controls you could wish for), leaving the rest of the dash futuristically elegant. To turn the car on, you just need to sit down since it instantly senses your weight. Tap the brake pedal, push the accelerator, and off you go.

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Driving the model S is also beyond anything you’ve ever experienced in a car. Though silent, the motor instantly responds to the accelerator. Really, there’s no lag unlike all other gasoline‐fueled cars. That’s why you see it killing BMW M5s, Porsche 911s,

and Dodge Vipers out on the race track. Even at a hefty 4,600 pounds its 416 horsepower and 442 lb‐ft of torque take it from 0‐60 in as little as 4.0 seconds (says Motor Trend), and on up to a max speed of 134 MPH.  To further enhance the drive at high speeds, it lowers itself toward the road to improve handling and range, and in town, it rises up when for easy clearance or stopping (unless you tell it to do otherwise, via touch screen control). And any time you let off the accelerator the car initiates regenerative braking to recharge the battery (which can be guaranteed for 8 years). To charge that battery, you can plug into any 110 volt electrical outlet (the same you plug a hair dryer, or toaster into). For faster results, use a standard electric dryer circuit, or install a special charger at your house for a full charge in about four hours. Other (faster and free) options for charging will be discussed in the Value in Distribution section.  Note: Some of you may wonder if it makes sense for founder Elon Musk to be launching rockets for SpaceX and producing tens of thousands of electric (green) automobiles per year for Tesla. Just think of it this way: The Musk’s motivation for the rockets is to test the probability of colonizing Mars, in order to perpetuate the human race pending a catastrophic disaster on Earth. Further, 50,000 Model S cars on the road save the same amount of money every day that it costs to put just one rocket into space. In addition, 61% of that fuel for SpaceX rockets (the Falcon 9 for example) is liquid oxygen, which is perfectly harmless to the environment, as it technically doesn’t even burn.

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Value in Exchange 

The efficiency of a product, service, or experience in fulfilling customers’ needs. This equates to the benefits received from the purchase (and the overall satisfaction) minus the costs of money, time, and energy spent. 

Compare the Model S to alternatives. There are the economy‐class electric options like the Nissan Leaf and the Chevy Volt that are about half the price, but they also have less than half the range. Therefore, these cars fail to provide an accurate comparison. A

more accurate comparison is provided by cars that have similar features: the Audi A7, the BMW 650 Grand Coupe, and the Mercedes CLS. In these terms, the Model S falls right in line.  However, the Model S has two important and unique sources of value that no other luxury sedan has. First, it’s 100% electric and therefore comes with a smaller carbon footprint than a gas guzzler (a reduction of 50‐80%, depending on how your local power is produced). Even Tesla owners who live in such states as West Virginia, which derives 96% of its electricity from burning coal (which emits more carbon dioxide than most other fossil fuels including automobile fuel), will still come out ahead on a per‐charge bases because Tesla vehicles are roughly three times more efficient than gasoline cars. Second, because it is totally electric, the motor instantly responds to the acceleration pedal, giving a completely different acceleration sensation than possible in any gasoline car. Aside from numerous over‐the‐top luxury features, these two characteristics elevate Model S a head above the rest, resulting in strong consumer demand.

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The Model X is projected to be just as wildly popular as the Model S, if not more so. It will be similarly priced (which varies widely between $65k and $110k depending on the battery type and options). Finally, the future economy car (Model E) will be in

easy reach of the middle class at $35k or so and will be produced at a massive rate (around 400,000 Model Es per year by 2020). 

Value in Distribution 

Measured by the availability, accessibility, and convenience of a product, service, or experience. Value in Distribution paves the road for growth as it allows more customers to use the product more easily.  With nearly 600 Model S vehicles produced every week (up from 400 in 2013), Tesla is closing in on its wait list and transitioning to a very responsive “on demand” mass‐manufacturing process that fulfills specific orders of exact option combinations. Although people are already lining up by the tens of thousands for the Model X, just as they did more than a year in advance for the Model S, this large scale reservation pool demonstrates a healthy confidence that Tesla delivers on its promises. The present limiting factor in Tesla’s production capacity is the supply chain of highly specialized technical parts. Despite this limitation, Tesla plans to produce about 40,000 in 2014, and 500,000 vehicles in 2020 (source). To make that goal, the company plans on building a 5 billion dollar, 10 million square foot “Gigafactory” to build it’s own battery packs.

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The Model X will follow a similar pattern of production with 20,000 to 40,000 units per year, starting in the end of 2014 . Then, in 2016 or 2017, the smaller, less expensive

car that follows the Model X is planned for production at a grand scale (100,000 to 200,000 per year in the beginning). There will certainly be a wait list, but this model will be far more plentiful than its three older siblings (which are creating the capital to enable Model E’s large scale mass production).  The prevailing obstacle to electric cars, in general, is a phenomena known as “range anxiety,” meaning that people won’t buy a car in which they might become stranded. Tesla Motors generously crushed range anxiety for their customers by creating an ultra‐high‐quality car that needs very little maintenance and has an immense support network that provides drivers with the ultimate in convenience, thus adding more Value in Use. Each component of the strategy gives an added level of security to the daily driver.  To begin with, Tesla engineered a battery system with what the EPA measured as a 265 mile range, far longer than any other production car. The nearest competitor is a Toyota Rav4 EV with a 103‐mile range (not surprisingly, Tesla also engineered that car’s powertrain). Thus, with Model S trips of up to 423.5 miles in range, already Tesla drivers have less to worry about. 

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At home, owners of Tesla vehicles are able to plug in and charge while they sleep. While on the road, there are public charging stations here and there. However, Tesla is implementing its own exclusive network of special supercharging stations that charge 20 times faster than most public charging stations (up to 80% in 40 minutes). With the completion of this specially designed network in 2015, strategically located supercharging stations will allow 98% of the US population and parts of Canada, Europe, and Asia to recharge at no cost. In order to help drivers recharge themselves, Tesla stations are always located near amenities such as roadside diners, cafes, and shopping centers. Further, you can check on the status of your charge through a smartphone app while dining or shopping. 

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Tesla enables access to their maintenance offerings in several ways. They make the cars so clean and efficient that breakdowns are extremely uncommon. These oilless cars don’t even require an annual check up, although h wner permission, Tesla runs periodic remote diagnostics on the cars (checking systems from top to bottom). Software updates are also provided remotely.  Another feature to the support network is a large fleet of Tesla Rangers. Essentially a specialized maintenance shop on wheels, the Tesla Rangers will soon travel to 100% of

the U.S. (including Hawaii) and parts of Canada. As a Tesla owner, you also have the option to have a valet come to any location and swap out your car for a loaner while work or hardware upgrades are completed.

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Tesla Motors has another trick up its sleeve to enhance Value in Distribution. True to silicon valley tech startup form, it skips the middleman in the sales process. Indeed, to maximize profits and decrease price points, Tesla doesn’t offer dealership franchises. Anyone can purchase a car online, in which case Tesla ships it directly factory to door. However many states (such as Texas and Virginia) limit car manufacturers from selling directly to consumers. But true to form, Tesla boldy navigates loopholes, pushes limits, and even leverages high profile showrooms and traveling expos where they can legally woo customers. 

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Value in Finance 

The financial performance of the organization. This is measured by examining the numbers, for example: revenue, cost structure, growth, cash balance, stock price, asset efficiency. Value in Finance demonstrates past growth.  With 2013 second‐quarter revenues of $552 million, operating profits of $26 million, $750 million in cash, stock prices sailing with a market cap of over $17 billion, and the highest gross profit margin in the auto industry, Tesla Motors has superior Value in Finance. Even the $30.5 million losses reported in the second quarter are down from the $105.6 million in the same quarter last year, and their $465 million government loan is now paid off, including interest (the first American car company to do so). Sales are also going quite well. The Model S sales in North America has exceeded expectations at over 13,000 (with 5,150 last quarter). The penetration in the US has found Tesla with 10% of the “large luxury sedan market.” Another source of income are California zero‐emissions credits. In the first two quarters Tesla sold well over $110 million worth of battery systems to other car manufacturers who were coming up short.  A counterexample of Tesla’s healthy financial performance is Fisker Automotive (who allegedly stole design ideas from Tesla). At first glance, the Fisker Karma may appear comparable to the Model S. However, in all electric mode, the range of this hybrid was only 32‐52 miles and the cabin (of what was supposed to be a luxury sports sedan) was actually rated as a subcompact. On the verge of bankruptcy, the company

completely shut down production in 2012 and currently has no income. The failed car company is now seeking new government loans and subsidies, investors, lenders, and buyers. Fisker’s Value in Finance is shot.

 Value in Fitness 

Measures organization’s ability to grow, adapt, evolve and continue to generate resources from its environment. Value in Fitness promises future growth.

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Many indicators project continued growth for Tesla Motors. Its skyrocketing stock, for example, exudes investors’ confidence in the company’s future growth. Another way that Tesla is showing its continued ability to grow, adapt, and evolve, is the Model X. The Model X has several revolutionary features that evidence something more than a “one hit wonder” force at work. The Falcon wing doors, for instance fold up, allowing adults to step in and out of third row seats in very tight parking spots (no climbing over the second row). And although a heavier car than the Model S, it still does 0 to 60 in under five seconds. It also has a more efficient projected turning radius than that of a Mini Cooper and all wheel drive to boot. It packs other almost too‐good‐to‐be‐true features such as the ability to seat seven adults comfortably. This unbelievable seating is combined with a second and third row that fold completely flat. Thus, the Model X shows off a rich Value in Fitness in every aspect. 

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At the “Model X Reveal” CEO Elon Musk hops in and out of the Model X third row seat, through the newly designed Falcon wing door. “Now ordinarily I’d move the [second row] seat [forward], but I didn’t want to wait for that,” he said in half a breath.  By utilizing a relatively new, off‐the‐shelf type of battery (very similar to the ones in your laptop), the company saved crucial time and money in the design and engineering of the Model S. In a similar way, the basic design platform of the entire powertrain (including battery, motors, wheels, and suspension) is the foundation of future models. The use of the same pl...