Tesla Case Analysis PDF

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Group Case Analysis on Tesla Motors for Management Strategy...

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Tesla Motors Case Analysis Questions to think about when reading case: 1. What is Tesla’s generic strategy?

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Focused Differentiation Strategy - They only have 3 models that are priced at a premium range from 70k-200k - Constantly add more features to their EV’s and invest heavily into R&D to improve their models - Good customer service. Tesla sells directly to their customers to better manage their relationship them - They have sales galleries to provide an experience to help solidify Tesla as a premium brand - They always asks for feedback from their customers Argument for Broad-focused Differentiation Strategy They have invested into making their vehicles more affordable Try to enter other segments such as Trucks and Semi trucks

Vision – “create the most compelling car company of the 21st century by driving the world's transition to electric vehicles”

Mission - “to accelerate the advent of sustainable transport by bringing compelling mass-market electric cars to market as soon as possible.” 2. What external factors/ forces are the most powerful for Tesla (do environmental scan) PESTEL ANALYSIS: Political: - Government proposed a tax credit and rebates for anyone purchasing plug-in electric cars - Tax credits for purchasing electric vehicles - Political stability in majority of major markets - Several countries entered into a paris agreement to combat climate change Economic: -Gasoline prices around the world had dropped (this entices people to keep their gas vehicles) -Tesla does not have as much capital as other automotive companies, Tesla is a relatively small company still -Higher priced vehicles making it hard for many consumers to afford Social: -Status with driving name brand cars such as Tesla, Audi, Range Rover, people wanting to show their wealth, etc. -Many people becoming more conscious of their carbon footprint and wanting to switch to electric vehicles -Many people like to use their cars for long road trips, backcountry, or places without access to charging station Technological: -Decreasing battery costs -High rate of technological change -Increasing automation -Increasing popularity of online mobile systems -Increasing AI technology Environmental: -Major trend to environmentally friendly options such as electric vehicles Legal -13 countries are looking to partially or completely transition to a EV only environment -Patent protections - Tesla gets ZEV, GHG and CAFE credits for producing EV’s which they can sell to Automobile manufacturers Ethical

o Mainly to do with the autopilot development program affecting the safety of people. In the regular world, there tends to be a tendency for shortcuts and "creative interpretations", in cases when the production team should be adhering to the strictest ethical behaviour. (Recently, also the lack of empathy towards autopilot accidents, including acceptable deaths and injury) o “For example, a CEO or a marketing department may not fully understand the technical issues, tradeoffs and limitations that break-or-make a product's safety and, thus, has a reduced connection to it.” PORTERS FORCES: Competitive Rivalry: HIGH-MODERATE -All major vehicle companies followed the trend of electric vehicles and began making their own - Tesla had yet to prove it could boost operating efficiency and lower costs enough to be both

competitive and attractively profitable in producing and marketing its vehicle models -Vehicle companies coming out with hybrids that are both more environmentally friendly and reliable for long distance driving as it has back up gas tank - More automobile manufacturers want to invest more into Electric Vehicle market Ex. Volkswagon claimed in 2018 they want to focus on Hybrids and Electrics Vehicles Bargaining Power of Suppliers: HIGH -Tesla’s supply chain relies on single source suppliers (had hundreds of suppliers) - Most supplier relationships are not long term -Tesla does not have strong relationships with suppliers making it harder -Vertically integrated (relies on suppliers for components instead of ready made products), company can by more independent, easy to substitute suppliers -TESLA is growing and expanding, will place larger orders and increase demand for necessary components -Low switching cost Threat of substitute products – HIGH -The transition from fossil fuel cars to electric cars are still at a moderate pace due to lack of infrastructure - High charging times may make owning a EV less convenient -Electric cars are sold at a premium price - Skytrain, bikes and trains are other carbon footprint reducing alternatives -UBER/Lyft are preferred in metropolitan areas (no purchasing cost, maintenance, parking) -CAR2GO- Shared car services might increase -Competitors are behind on the learning curve, but have begun their production

Bargaining power of Buyers - Middle income families are more price sensitive when purchasing cars

3. What departments will be affected by these forces/ factors the most? R&D -In order to compete with rivals, Tesla will need to continue to work on technology and come out with more affordable pricing models. -Tesla has in-house team working on Solar Energy -Look to how to achieve economies of scale within production -Since their production process and products are very technology heavy, their R&D department has to work hard to keep up with the rate of new technology Financial: -Tesla spends a lot on their manufacturing process, if sales do not meet a certain level they could go into debt -Tesla needs to increase output to increase profit margins Human Resources: - Decide whether to keep employees or lay them off as automated manufacturing capabilities improve Manufacturing: -Supply chain efficiencies need to change at Tesla, makes it hard for Tesla to meet quotes due to lack of funding and their supply chain -Tesla makes their own batteries which makes the process of making vehicles Challenging and expensive Purchasing: -Tesla may lean towards building long term relationships to gain economies of scale when sourcing components from suppliers Marketing: -Tesla markets itself as a premium brand and was the first ones in the market for electric vehicles which gives them an advantage because when people think of electric car they think of Tesla

4. Strategic group map- find where they are compared to competitors

-Core Efficiency Rating (CER) is defined as kWh(battery size) / range(km) / weight(kg). This gives a metric that can be described as how much weight and distance you can extract from a -kWh of battery. The more you can extract then the lower the CER, which is good. Range (Km)

Competition of Best-Selling Plug-In Electric Vehicles in 2017 Tesla: Sales in 2017 for electric cars- 48,375

-price point: base point of $74,500, for 259 mile driving range, $94,000 for 335 mile range, $135,000 for 315 mile range Chevy - range of 200 miles for one charge and base price of $30,000 -Sales in 2017: 43,646 Toyota: Toyota Prius PHV/ Prime- 40 km with one charge (hybrid so then switches to gas), $28000 -Sales in 2017: 20,963 FORD: -Fusion Energi- 21 miles with one charge (hybrid so then switches to gas), $20,000 (roughly) -Sales in 2017: 17,772 BMW: -2013- all new i3 series electric car that had lightweight carbon fiber reinforced plastic body, driving range of 80-100 miles on a single charge, base price of 41,350 -I3 extended package- $45,200, 160-180 miles per charge -Sales in 2017: 6276 Nissan Leaf-125 miles per charge -$25,000-$30,000 base price in 2017 -Sales in 2017 11,230 Mercedez: -B-Class-4 door, 5 passenger, base price of $41,450- 115 miles per charge -Sales in 2017: not listed but didn’t make the top sales list

5. List Teslas strongest strategy, then choose the most effective / important strategy

Elon Musk: “Tesla 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 high unit volume and lower prices with each successive model” Tesla’s competitive strategy is a focused differentiation strategy, but starting to expand to a broader approach to compete with rivals by targeting both segments of buyers, targeting premium buyers and lower-price buyers (with their introduction of the Model 3). To differentiate themselves from other competitors in their industry they focus on research and development to create highly innovative vehicles that competitors can’t compete with. Ways tesla tries to differentiate from competitors

Autosteer/pilot, gigantic touch-screen tablet, falcon/gullwing doors, smart summon, google maps sync, Control through smartphone, wireless charger, every- angle camera Customer service: Sales galleries to build relationships and Tesla Service centers Try to strengthen their brand image as a top tier technology company ex. Using newest software, autopilot, investing into Spacex, etc. Other products: Production of transport vehicles, Solar roofs, energy storage, electric energy, tesla homes

6. Is this a winning strategy (based on the 3 winning strategy test- 1. exhibits good fit with situation, 2. results in competitive advantage, 3. promotes superior performance)

Winning Strategy must fit 3 tests: ● Fit Test: How well does this strategy fit the company’s situation? ○ Tesla originally came into the market introducing the electric vehicle to the world, but not only was it an electric vehicle, but it was also highly innovative and perceived as a “luxury” vehicle. Tesla’s strategy had to evolve as other competitors began making electric vehicles, the issue here is that Tesla’s integrated and vertical supply chain make it hard to achieve large economies of scale compared to larger automobile companies that have been around for decades. On the other hand, Their marketing and R&D is there and when people think of electric cars, they think of Tesla. So in this case some departments of Tesla meet the fit test and other departments are struggling. ○ More consumers are becoming more sensitive about carbon footprint. ● Competitive Advantage Test: Is the strategy helping the company achieve a competitive advantage? Is this competitive advantage likely to be sustainable? ○ Tesla’s main competitive advantage is their research and design on their vehicles, their innovative battery system is better than any other car on the market. Allowing it to drive much farther than others (keep in note this is in 2018, now other competitors are sneaking up with battery power). ○ One of the first market players ○ Their R&D solidifies their image as a high performing technology company ○ Increases their perceived value to customers ● The performance Test: Is this strategy producing superior performance? ○ 2 types of performance indicators: (1) competitive strength and market standing and (2) profitability and financial strength

■ 1-Tesla has competitive strength and market standing as they are the leading electric vehicle company- they provide buyers with a superior value compared to rival sellers ● They have sold more electric cars than any other brand ■ 2-Tesla is struggling to be profitable as their costs are so high to create these vehicles and they have still yet to create high economies of scale. - Tesla only had 12% market share of EV market - EV global sales grew by 57% in 2017 but Teslas sales dropped by 6% So is Tesla a winning strategy? They do not pass all of the winning strategy tests- this is due to external factors that have created challenges for Tesla. 7. Financial Analysis

At the time of the case (up to Q1 2018)- Free cash flow and operating cash flow was in negative however, vehicle deliveries were starting to increase (more output = more profit) Automotive sales

2013

2014

2015

2016

2017

1,921.90

2,874.40

3,431.60

5,589.00

8,534.80

49.56%

19.38%

62.87%

52.71%

132.6

309.4

761.8

1,106.50

0.00%

133.33%

146.22%

45.25%

3,007.00

3,741.00

6,350.80

9,641.30

56.46%

24.41%

69.76%

51.81%

Automotive leasing

Total automotive revenue

1,921.90

Energy generation and storage

Services and other rev

Total Revenue

Total operating expenses

Total cost of revenues

Net Loss

91.60

3,935.40

517.5

1,557.20

74

4.2

14.5

181.4

1,116.30

0.00%

245.24%

1151.03%

515.38%

191.3

290.6

468

1,001.20

108.84%

51.91%

61.05%

113.93%

6,209.50

7,787.10

13,351.00

21,400.10

57.79%

25.41%

71.45%

60.29%

1,068.40

1,640.10

2,266.60

3854.6

106.45%

53.51%

38.20%

70.06%

2,316.70

3,122.50

5,400.90

9,536.30

48.77%

34.78%

72.97%

76.57%

294

888.7

773

2,240.60

297.30%

202.28%

-13.02%

189.86%

Summary of financial Analysis (Victor) ● - On a historical basis operating expenses were double revenue. However, despite this Tesla’s revenue only increased on average of 54% between 2013-2017 while expenses(includes R&D) increased by 67% ● - Net loss increased on average of 169% per year ● - Total costs of revenues increased on average 58% a year ● - Tesla in 2018 only had 12 percent of EV global market share ● - Sales of U.S EV’s in 2017 increased by 58 percent compared to Tesla’s decrease of 6%

8. Create Opportunity/ Problem Statement Link it to the generic strategy, mention porter's and pestel problems, and which department are involved (NO TACTICS(No solutions))

"is the direction tesla going (strategically speaking) making sense?" - steve

Final problem statement Tesla began as a leader in the EV market, combining the aspirations of a more environmentally friendly future and effective marketing initiatives to connect to potential customers and be able to provide a highly differentiated product. Their use of a focused differentiation strategy has relied heavily on their R&D department to create a highly innovative, environmentally friendly electric vehicle and their success was also benefited by tax credits provided by the government. With the increasing competitive rivalry from larger automobile companies introducing electric vehicles, it has put pressure on Tesla to introduce a lower priced model in order to maintain a sufficient competitive advantage. The issue for Tesla arises when they are trying to develop cheaper vehicles for a wider market, that they need to find different ways to cut their cost while still being able to provide the futuristic technology that they are well known for. Tesla’s main

problem is their profit margins are small due to them struggling to achieve high economies of

scale. If Tesla struggles to increase their output levels, and costs are continually increasing, their cash flow will continue to be negative. Overall, their usage of differentiation was reliant on increasing perceived value and has drawn away their focus from primary activities related to cost effectiveness. This has since resulted in a misalignment with their internal situation and a weaker competitive advantage. To effectively align their strategy to their current situation, Tesla should focus on creating a better supply chain and manufacturing facility, so they are able to increase their deliveries of vehicles and ultimately increase their profit allowing them to have more capital to continue their innovative designs. (Tactic/solution - don’t include)

Tips: -

Goals - Does it include everything discussed? - Does it mention their generic strategy - Does it mention departments

Sam’s Findings:

1. Tesla’s generic strategy was a narrow differentiation strategy. 2. What external factors/ forces are the most powerful for Tesla (do environmental scan) Political: -Government proposed a tax credit for anyone purchasing plug-in electric cars Economic: -Gasoline prices around the world had dropped (this entices people to keep their gas vehicles) -Tesla does not have as much capital as other automotive companies, Tesla is a relatively small company still Social: -Status with driving name brand cars such as Tesla, Audi, Range Rover, people wanting to show their wealth, etc. -Many people becoming more conscious of their carbon footprint and wanting to switch to electric vehicles -Many people like to use their cars for long road trips, backcountry, or places without access to charging station

Environmental: -Major trend to environmentally friendly options such as electric vehicles Competitive Rivalry: -All major vehicle companies followed the trend of electric vehicles and began making their own - Tesla had yet to prove it could boost operating efficiency and lower costs enough to be

both competitive and attractively profitable in producing and marketing its vehicle models -Vehicle companies coming out with hybrids that are both more environmentally friendly and reliable for long distance driving as it has back up gas tank Threat of Suppliers: HIGH -Tesla’s supply chain relies on single source suppliers

-Tesla does not have strong relationships with suppliers making it harder -Vertically integrated (relies on suppliers for components instead of ready made products), company can by more independent, easy to substitute suppliers -TESLA is growing and expanding, will place larger orders and increase demand for necessary components -Low switching cost

3. What departments will be affected by these forces/ factors the most? R&D -In order to compete with rivals, Tesla will need to continue to work on technology and come out with more affordable pricing models. -Tesla has in-house team working on Solar Energy Financial: -Tesla spends a lot on their manufacturing process, if sales do not meet a certain level they could go into debt Manufacturing: -Supply chain efficiencies need to change at Tesla, makes it hard for Tesla to meet quotes due to lack of funding and their supply chain -Tesla makes their own batteries which makes the process of making vehicles Challenging 4. Strategic Group map 1: Based on price of the 2017 top selling electric vehicles

Strategic Group Map 2: Based on the top selling 2017 electric vehicles with prices compared to their miles per charge

Evidence supporting maps: (Steve always asks...lol)

Competition of Best-Selling Plug-In Electric Vehicles in 2017 Tesla: Sales in 2017 for electric cars- 48,375

-price point: base point of $74,500, for 259 mile driving range, $94,000 for 335 mile range, $135,000 for 315 mile range Chevy - range of 200 miles for one charge and base price of $30,000 -Sales in 2017: 43,646 Toyota: Toyota Prius PHV/ Prime- 40 km with one charge (hybrid so then switches to gas), $28000 -Sales in 2017: 20,963 FORD: -Fusion Energi- 21 miles with one charge (hybrid so then switches to gas), $20,000 (roughly) -Sales in 2017: 17,772 BMW: -2013- all new i3 series electric car that had lightweight carbon fiber reinforced plastic body, driving range of 80-100 miles on a single charge, base price of 41,350 -I3 extended package- $45,200, 160-180 miles per charge -Sales in 2017: 6276 Nissan Leaf-125 miles per charge -$25,000-$30,000 base price in 2017 -Sales in 2017 11,230 Mercedez: -B-Class-4 door, 5 passenger, ba...