The global automotive industry faces increasing competitive pressure to diversify into eco-friendly car models that meet sustainability demands/policies. The purpose of this report is to analyze Tesla’s strategic plan of technological leadership in the energy segment to strengthen its competitive position. The report begins with an overview of Tesla’s products/services, competitive strategy, and financial performance. The next section will involve an in-depth analysis of the automaker’s strategic/competitive position – internal and external environments – using SWOT analysis. Subsequently, Tesla’s overall strategy and recent strategic initiative will be analyzed and a conclusion based on the findings provided.
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Tesla is a vertically integrated American automaker producing electric vehicles (EVs) with the potential to replace gasoline-powered vehicles. The firm designs manufacture and sells electric vehicles through its subsidiaries in N. America, Asia, and Europe (Tesla, 2017). Its main electric cars include high-performance and stylish Model S sedan and Model X SUV installed with an autopilot functionality (Tesla, 2017). Tesla also launched a low-priced sedan model that will be released for mass consumption by the end of 2017. There are also plans to produce commercial electronic vehicles in the future. The EVs superior benefits include recharging flexibility, high-performance (autopilot software), and better energy efficiency than hybrid cars.
In the energy segment, Tesla provides energy storage systems (lithium-ion batteries) for residential and business premises. Examples include the small-capacity Powerwall 2 suitable for home use and the high-capacity (200kWh) Powerback system designed for industrial use (Tesla, 2017). It also offers proprietary solar energy systems and dual motor power trains to other automakers, namely, Daimler and Toyota (Stolze, 2015).
Strategy for Attaining Competitive Advantage
Firms can pursue any of the five generic competitive strategies – low-cost provider, broad differentiation, best-cost provider, focused low-cost provider, or focused differentiation (Thompson, Peteraf, Gamble, & Strickland, 2015). Tesla utilizes a focused differentiation strategy that entails targeting the high-end market (middle and upper-income clients) through high-performance EVs fitted with unparalleled autopilot systems. Tesla Model S car retails at a premium price compared to Nissan or Ford models.
A focused differentiation strategy is characterized by a narrow market niche with product features tailored to client needs/preferences (Thompson et al., 2015). Tesla is committed to providing EVs and energy storage systems and does not compete in other market segments. In the energy sector, Tesla’s innovative offerings include battery systems and solar energy systems. The basis for Tesla’s competitive advantage lies in a strong in-house R&D department (over $900m invested) that develops innovative designs and proprietary technologies (Tesla, 2017). Other companies cannot imitate Tesla’s innovations; hence, it has few competitors in this segment.
Financial Performance Overview
Financial performance indicators are important measures of a firm’s strategic goal attainment. Tesla has reported sustained revenue/profitability growth since 2012. Its revenue grew by 73% in the 2015/2016 period, up from 27% in the 2014/2015 fiscal year (Tesla, 2017). The energy generation and storage category was the fastest-growing segment in 2015/2016. Revenue from this segment increased by 1,153%, compared to 63% growth reported in the automotive segment over the same period (Tesla, 2017). Its profitability growth remained unchanged between 2015 and 2016 at 22.8% with the energy generation and storage segment accounting for only 1.7%, partly due to costly R&D investment (11.9% of revenue in 2016).
The financial ratios of Tesla indicate that the firm is in good financial health. Its working capital stands at $591m, implying that Tesla has the liquidity capacity to meet its operating expenses. With a current ratio of 1.88, Tesla can pay its debt obligations with its assets. Its return on investment (ROI) grew to 307.14% in 2016, up from -2.97% in 2015 fuelled by maturing investment gains in the energy segment (Tesla, 2017). In the US, Tesla’s market share grew to 30% in 2016 largely driven by competitive Model S and X luxury cars.
According to Akpoyomare, Adeosun, and Ganiyu (2012), a SWOT analysis gives a framework for evaluating a firm’s strategic direction. An assessment of Tesla’s internal and external environment is given in the following section.
A firm’s strengths lie in its internal capabilities/resources from which it derives its competitive gains (Thompson et al., 2015). Tesla’s primary strengths in the EV industry include:
- High-performance vehicles – Tesla provides quality products in terms of capabilities (autopilot systems) and stylish car designs.
- Proprietary technologies – Tesla has strong R&D capabilities, accounting for over 203 cutting-edge technology patents for its EV designs, solar batteries, and power train components (Mangram, 2012).
- First-mover advantage – Tesla was the first automaker to provide superior quality electric car (Model S) for racing.
- Strong capitalist relations – the firm can access capital markets and has strong partnerships with investors, e.g., Google, which promotes technology sharing.
- Innovative distribution network – it owns stores in strategic locations in N. America, Europe, and Asia to target high-end clients. Also, Tesla sells through an eCommerce platform, doing away with the franchise dealership (Stolze, 2015).
- A good brand reputation – Tesla is renowned for fuel-efficient EVs and innovative energy storage systems in the high-end segment.
The company’s major weaknesses (internal liabilities) in the EV industry include:
- Immature EV industry – the electric car market is in its infancy; hence, the demand is low.
- Limited economies of scale advantages – Tesla’s small sales volume and costly R&D investment/production mean that it cannot produce for the mass market (Mangram, 2012).
- Limited brand recognition in the low-end market segment – the premium-priced luxury EVs may not be popular with the regular consumer (Stringham, Miller, & Clark, 2015).
- Limited capacity – rapid demand increases for sedans may affect supply because of the firm’s low production output (Stringham et al., 2015).
- Rising consumer concerns – potential customers harbor fears over the availability of charging stations for EVs in their regions.
Factors, external to the company, provide opportunities for Tesla to grow its market share. The main opportunities for Tesla in the EV market include:
- Significant entry barriers – EV production is a capital-intensive industry. It is also characterized by a high failure rate, e.g., Aptera (Mangram, 2012).
- Innovation in automobile battery technology – Tesla is a leader in producing high-density battery packs. Opportunities exist for upgrading the battery capacity and performance for Model S EVs.
- Increasing environmental awareness – consumers are moving towards eco-friendly or fuel-efficient cars (EVs) and products due to global warming/climate change concerns.
- High gasoline prices – regular spikes in oil prices are driving demand for alternative sources of power (solar batteries) upwards.
- Pro-green energy policies – most governments are committed to reducing per capita carbon emissions through EV subsidies and tax rebates (Stringham et al., 2015).
- Niche markets – EVs in the sports/luxury car market has few competitors; hence, Tesla can focus on this segment to grow.
- Availability of substitutes – multiple substitutes for luxury EVs exist, including hybrid cars, hydrogen-powered vehicles, and fuel-efficient cars – Ferrari.
- Increasing competition – the number of players (hybrid car automakers) in the EV industry is rising, posing a threat to Tesla’s market dominance.
- Fluctuations in oil prices – gasoline subsidies result in the easing of high oil prices, reducing demand for EVs.
- Economies of scale – the entry of larger MNCs (GM) with adequate capital to develop innovative battery technologies may erode Tesla’s competitive gains.
Evaluation of Company Strategy
The automaker’s overall strategy is to create a foundation for EV growth through luxury/premium car models/products and value chain ownership (Connett, 2015). The first aspect of Tesla’s overall strategy is an emphasis on high-end models. Its flagship car, the Roadster model, was premium priced ($109,000) to target the high-end segment. Further, the two other EV models – Model S and X lines – target the middle to upper-middle income clients. The second aspect of this strategy relates to proprietary rights. Tesla leverages proprietary electric power-train components, partnerships, and battery technologies to accelerate the growth of the EV industry. It sells its electric power-train parts to Toyota and Daimler (Stolze, 2015). The third aspect of the overall strategy is the distribution chain and charging infrastructure ownership, which helps minimize costs related to a franchise dealership.
Recent Strategic Initiative
Recent initiatives by Tesla indicate that the automaker’s strategy is to diversify into the energy sector. In 2015, Tesla entered into the stationary power market with its “at-home Powerwall and Powerback (210kWh)” (Tesla, 2017, para. 16). Also, the firm won a tender to build a Powerback station that could power over 2,500 households in the Mira Loma area (Tesla, 2017). In 2014, Tesla, in partnership with Panasonic, began building the Gigafactory plant in Nevada to produce and supply battery cells (Tesla, 2017). These initiatives indicate that Tesla is committed to producing energy storage systems/batteries for EVs and homes as a business strategy.
With the rising demand for zero-emission vehicles, investment in high-performance batteries will accelerate EV adoption rates. The establishment of the Gigafactory will improve Tesla’s capacity, reduce production costs, and find a solution for its battery shortage challenge. Thus, Tesla will begin to benefit from the economies of scale due to improved production efficiency. Further, through technology sharing and partnerships with Panasonic, Toyota, etc., Tesla has been able to leverage available industry expertise to grow. The strong relationships with technology firms suggest that Tesla is using a defensive strategy to ward off threats from new entrants.
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Vertical integration is also evident in Tesla’s ‘new energy’ strategy. The firm’s two segments, i.e., energy storage systems, and EV cars are vertically integrated. The aim is to control and secure the EV market for its output Tesla owns its distribution network, which helps reduce operational costs related to dealership commissions. Therefore, establishing a vertically integrated supply chain enhances production efficiency and market control. By producing energy storage components and batteries for its EVs and other automakers, Tesla has competitive advantages in the EV industry and is poised to revolutionize the energy sector.
This report has examined Tesla’s internal capabilities and liabilities through a SWOT analysis to illuminate its overall strategy in the EV market. Tesla’s competitive advantages lie in its in-house technology, focused differentiation strategy, and emphasis on renewable energy systems. The firm has revolutionized the auto-making industry through eco-friendly EVs and battery systems that have allowed it to diversify into the energy sector.
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Stolze, E. (2015). A billion dollar franchise fee? Tesla Motor’s battle for direct sales: State dealer franchise law and politics. Law Journal, 34(3), 293-309. Web.
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Thompson, A. A., Peteraf, M., Gamble, J., & Strickland, A. J. (2015). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases. New York, NY: McGraw-Hill Education.