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Tesla: Managerial Economics Case Study Case Study

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Updated: Jul 14th, 2021

Introduction

Tesla, a small but rapidly growing manufacturer of electric vehicles, has a history of significant financial losses. This year, however, has become crucial for the company as it has managed to enhance its profit largely. This report provides information about recent Tesla’s job cuts and their consequences. It reflects on Tesla’s position in the market of electric vehicles and presents the analysis of the company’s decision to reduce its workforce. The report concludes that the firm’s action was successful and contributed to significant profit maximization.

Tesla’s Job Cuts

Tesla made a news headline last year for cutting its workforce to maximize profit. The report by Boudette states that the company’s chief executive, Elon Musk, reduced the number of employees by 3,500 as a part of his restructuring strategy. Musk noted that he decided to take such an action to demonstrate that Tesla can be sustainably profitable and adhere to its mission to promote the world’s transition to clean energy (Boudette). Staffing cuts were a part of the company’s effort to transform from a niche car manufacturer to a mainstream producer.

Musk’s decision was considered newsworthy as the company was known for the high levels of losses while investing billions of dollars in creating its products (Boudette). The authorities of the organization reported that the problem might be associated with the excessive use of automated machinery and robots for tasks that workers could perform more effectively. Thus, it was evident that Tesla needed a strategy that will allow for profit maximization. According to Musk’s forecast, the decision to reduce the workforce would result in higher profit. Independent analysts agreed that such an action would allow for a decrease in costs and an increase in expenses, leading to profit maximization (Boudette).

Tesla’s Position in the Market

Tesla is the company that produces all-electric cars and clean energy storage products. The organization also develops energy solutions for homeowners and businesses; they include Solar Roof, Powerwall, and Powerpack (“About Tesla”). Tesla aims to make its factories the safest in the world by providing on-the-job training for its employees, as well as multi-day training programs. The organization operates in the price-insensitive segment of the electric car market, establishing high prices for its products and targeting the economically advantaged population. It is evident that Tesla strives to improve the quality of its performance on all levels, from management to manufacturing.

Market analysis shows that the organization can be considered a highly competitive company in its segment. The reason for it is that few companies produce electric vehicles and they are not competitive in the market, while Tesla is one of the most valuable car manufacturers in the US (DeBorg).

Moreover, currently, many automakers see electric vehicles as a science project rather than a profitable investment. The majority of customers prefers gasoline and diesel cars due to their lower cost and the accessibility of petroleum. Indeed, in some countries, owning an all-electric vehicle may be challenging due to the lack of charging options. However, Tesla has a target audience too; its products are popular among people wanting to own luxury cars. DeBorg notes that in the future decades, the market of electric vehicles will expand and transform from being primarily monopoly-based to competition-based. Nevertheless, currently, Tesla is the main manufacturer in the field of all-electric cars.

The report by Hernandez also shows that Tesla has the leading position in its market and is close to becoming a monopolist. The company’s investment into electric vehicles projects in the next five years may be estimated by about $32,5 billion, which is 40% more than other companies’ expenditure (Hernandez). In contrast, the investments of Tesla’s competitors, Daimler and Volkswagen, may reach around $12 billion for each organization. This data allows concluding that although Tesla has competitors, it can be considered the leader in the market.

Action Analysis

Tesla’s decision to reduce its workforce was a part of the company’s strategy to enhance its financial position during the period of major losses. The organization aimed to decrease the majority of its salaried employees drastically, concentrating on production-line workers (Bomey). The action appeared to be successful as Tesla’s showed an unexpectedly high level of profit in the third quarter of this year.

According to Kopecki, the company’s revenue increased by 70% from June and constituted more than $6,8 billion. Notably, analysts suppose that Tesla’s production rates will also improve. The organization has managed to decrease the number of work hours by around 30% while ensuring a shorter timeline of production (Kopecki). These facts prove that Tesla’s decision to cut its workforce was beneficial to the organization.

The action relates to the topic of profit maximization as it is a part of the company’s strategy to enhance its revenue. Musk noted that job cuts were necessary as Tesla’s rapid growth resulted in the duplication of several job functions and roles (Bomey). The company’s recent financial statements show that the action allowed for the profit of more than $310 billion (O’Kane). This case of profit maximization is the first one in Tesla’s history.

It is necessary to mention that such an improvement in profitability was not caused only by the reduction of the workforce. Tesla reports that the company managed to reduce the costs of raw materials as well to reach this goal too (O’Kane). However, it is possible to say that job cuts contributed to profit maximization significantly.

One of the possible issues that the company was considering when making the decision was the need for restructuring of its middle management forces. As mentioned above, many of the job functions within the firm were duplicated and unnecessary. The organization was founded fifteen years ago and has aimed to grow and develop rapidly, which means that many of the decisions regarding its productivity might be outdated.

Moreover, as Tesla is known for significant losses over the years, it may be possible to say that its profit maximization strategies were not successful in the past. These facts allow for a conclusion that the organization needed a significant change to improve its performance. Thus, the primary considerations that led to the action were the history of Tesla’s losses and the need for the elimination of its employees’ duplicated roles.

Another possible issue that the organization was considering is that its existing structure did not reflect its goal to become sustainably profitable. Supposedly, many of the employees were assigned the tasks that did not lead to significant improvement in Tesla’s performance. To ensure sustainability, the organization had to use its sources effectively, investing in the workforce that would have tangible value. Thus, it was a vital decision to decrease the number of middle management forces. It is evident that Tesla was able to relocate a significant part of its assets by discharging of 3,500 employees.

Finally, it is necessary to mention that the company has strived to accelerate the global transition to sustainable energy (Boudette). To achieve this goal, it would be vital for Tesla to promote its products and make them more affordable for the public. However, as the organization had not shown increases in profit before the decision, it could not invest in the enhancement of the production speed or the change in utilized materials. By cutting its workforce, Tesla maximized its profit and was able to invest in achieving its goal. Moreover, the dramatic increase in the firm’s revenue probably resulted in the enhanced support from its investors. I believe that the company considered this issue while deciding on job cuts.

The importance of the presented considerations is determined by the fact that Tesla is a rapidly growing company that aims to bring significant transformations in the car market. To ensure that this goal can be achieved, the organization had to implement changes in its structure. The issues that were considered when making the decision were vital as they affected Tesla’s ability to maximize its profit and relocate its financial sources.

Conclusion

Tesla’s decision to discharge of 9% of its employees has been successful as it allowed for the dramatic increase in profit. The analysis of the market shows that although the company has a history of significant losses, it remains the leader in the electric vehicles segment. Staffing cuts allowed Tesla to improve its performance, decrease the number of work hours, and ensured high revenue rates. The company’s action is an example of an effective strategy for profit maximization.

Works Cited

“About Tesla.” Tesla. Web.

Bomey, Nathan. “USA Today, 2018. Web.

Boudette, Neal. “The New York Times, 2018. Web.

DeBorg, Matthew. “Business Insider. 2018. Web.

Hernandez, Raul. “Business Insider, 2017. Web.

Kopecki, Dawn. “CNBC. 2018. Web.

O’Kane, Sean. “The Verge. 2018. Web.

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