Tesla Case - CASE STUDY PDF

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[Reading] Tesla Case Meet the most innovative car company in the world: Tesla Motors. The company is headquartered in Palo Alto, CA and is led by the prominent serial entrepreneur and multibillionaire Elon Musk. Tesla effectively created the world’s first all-electric sports car called the Roadster. 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 Model 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). Tesla has also produced an electric, all-wheel-drive, crossover SUV branded as the Model X. This SUV outcompetes its gasguzzling competitors in speed, handling, and luxury, all while providing comfortable seating for seven adults. Tesla has introduced an all-electric economy car that offers similar style, performance, and features found in the Model S, and is priced around $30k.

Opportunity Space Elon Musk is an exceptionally talented and proven serial entrepreneur who has successively created three multibillion-dollar companies: 1) Paypal, the ubiquitous online payment company, 2) SpaceX, the first privately held company to send via rocketship cargo payloads, and 3) Tesla, the first company to produce an electric sports car. 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 have strategically started downmarket and moved upmarket, Tesla has taken a unique approach by starting up-

market 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 sports car lines 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. 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 to affordable cars that will be more accessible to middle- and 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 it competes 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.

Therefore, it is easier to define what it isn’t the best at, rather than try to cover all the areas where it does beat the competition. The Model S doesn’t do the following: • Off road, truck, or huge tow capacity (can’t pull your yacht very far) • Extremely remote areas (Model S pushes 300-milesper-charge for normal driving) • Inexpensive (less than $65k after the $7,500 tax credit) It does operate fabulously in ice and snow and has been tested at temperatures as low as -10 degrees fahrenheit (watch the 2 minute video here (Links to an external site.) Links to an external site. ), as well as in hot and dry climates. Many have sold and performed well in Norway, Switzerland, and the Netherlands, and they routinely travel between LA and Las Vegas. Further, the powerful Model X (followed by the Tesla electric economy car), coupled with an expansive network of supercharging stations (that Tesla is currently installing across the country) will satisfy most of the shortcomings listed in the bullet points above. All luxury automakers have taken considerable notice of and are nervous about Tesla’s growth and success. Recently, news syndicates copiously published articles on an incredible Tesla milestone: the Model S outsold many models of Porsche, Jaguar, Land Rover, Audi, BMW, and Land Rover in California during the first half of 2013. Demand for the vehicle is outpacing production capacity,

consequently leading to 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.

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:

1. Value in Use

Measures the effectiveness of a product, service, or experience in fulfilling customer’s needs. This is measured by the customer’s overall satisfaction. “There’s no question that Tesla is trying to dismiss the image of electric cars as being frumpy little transport pods [referring to Nissan and Chevy electric cars]. 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

As the first successful American auto manufacturer startup in 100 years, Tesla has won more than its fair share of awards, including the coveted Motor Trend 2013

Car of the Year for the Model S. 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. This does not look like an electric car! Then, you see 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, you just need to sit down since it instantly senses your weight. Tap the brake pedal, push the accelerator, and off you go.

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 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, it actually lowers itself toward the road at high speeds to improve handling and range, and rises up when in town 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 has a life of 10 years). To charge that battery, you can plug into a standard electric dryer circuit, or in-

stall 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.

2. Value in Exchange Measures the efficiency of a product, service, or experience in fulfilling customer’s needs. This equates to the benefits received from the purchase (i.e. overall satisfaction) – cost (i.e. money, time, energy) spent to obtain the product, service or experience. Compare the Model S to alternatives. There are the lowclass 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. The Model X is projected to be just as wildly popular as the Model S, if not more so. It is similarly priced (which varies widely between $65k and 110k depending on the battery type and options). Finally, the economy car is in easy reach of the middle class at $30-40k and it is predicted to have an even longer range.

3. Value in Distribution Measures accessibility, availability, and growth of product, service, or experience. With nearly 500 Model S vehicles produced every week (up from 400 earlier this year), 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 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 20,000 Model S's in 2013 and 40,000 in 2014.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). There will certainly be a wait list, but this model will be far more plentiful than its three older siblings (that are creating the capital to enable its 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 actual ranges driven up to 423.5 miles, already Tesla drivers have less to worry about. At home, owners of Tesla vehicles are able to plug straight into a standard electric dryer outlet, or install a turbo charger that charges the car in about 4 hours. While on the road, there are public charging stations here and there. However, Tesla is implementing its own special network of exclusive 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 super-

charging 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.

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 it’s optional. With owner 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.

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, for a fee. However many states (such as Texas and Virginia) limit car manufacturers from selling directly to consumers. But true to form, Tesla boldly navigates loopholes, pushes limits, and even leverages high profile showrooms and traveling expos where sales are prohibited.

4. Value in Finance Measures the effectiveness of an organization’s financial performance. This is measured by examining the numbers: revenue, cost structure, growth, cash balance, stock price, asset efficiency, etc.

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, as Tesla Motors has done nearly everything right, Karma did almost everything wrong. On the verge of bankruptcy, the company completely shut down production in 2012 and currently has no income. Fisker is now seeking new government loans and subsidies, investors, lenders, and buyers. Fisker’s Value in Finance is shot.

5. Value in Fitness Measures organization’s ability to grow, evolve and continue to generate resources from its environment. 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 itself. The Model X has several revolutionary features that show evidence of 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 projected turning radius than that of a Mini Cooper and all wheel drive. 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.

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 seat, but I didn’t want to wait for that,” he said in half a breath Tesla never stops innovating. And with new battery swap stations, their cars won’t have to stop driving either, not for more than 90 seconds anyway (half the time it takes to fill a typical gas tank). The Tesla made, automated station simply removes the car’s battery pack, and replaces it with a new one. The driver potentially never has to so much as roll down the window. See the video here (Links to an external site.) Links to an external site.

And 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. Further, 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 platform has already significantly decreased the time and cost of the design of the Model X. An excellent counterexample of Tesla’s agility is the Israeli company Better Places. Their idea was to set up an infrastructure of charging stations for electric cars, projecting that there would be as many as 100,000 electric cars in Israel by 2010. Because of Israel’s compact geography (only about 260 miles long), and its high cost of gas (about twice as much as the U.S.), it seemed a perfect plan. They even tried battery swapping stations. However, there are currently only about 1,000 electric cars there now, so they missed the market projection by 99%. They also didn’t develop any new technology, which didn’t help their Value in Use. In contrast, Tesla makes its own technically advanced cars and its own exclusive charging infrastructure (also with impressive technological developments).

Resources

The means of production that are governed to generate performance and value creation. Knowledge Capital To begin with, how did CEO Elon Musk, with no automotive manufacturing experience, suddenly bring “the best car ever” to the hands of tens of thousands of people, and at a premium price? That doesn’t just happen. To answer the question, the man has two rare capabilities in gargantuan proportion. First, he is an entrepreneuring genius. Remember PayPal? He also co-founded that. He knows how to create...