Running head: TESLA MOTORS 1

Abstract

In the global automobile manufacturing industry, Tesla Motors, suffered several years of

financial loss and by 2013, the company needed a change to improve their financial status. Tesla

Motors decided to introduce a new product line, Model S vehicles. These vehicles were powered

by electricity and this was the type of innovation that was needed to generate positive revenue in

order to remain profitable in the automobile manufacture industry. With the various strategies in

place and new leadership within the company, Tesla Motors has the competitive advantage to

sustain profitability. Although the company does experience some downfall, Tesla Motors has

the opportunity to fix those issues and remain profitable while doing so. With other competitors

such as General Motors and Ford, paying close attention to their strategic moves, Tesla Motors

has a chance to revolutionize the global automotive industry.

TESLA MOTORS 2

Tesla Motors’ Strategy to Revolutionize the Global Automotive Industry

Tesla Motors had several strategies which allowed them to have the competitive

advantage within the automobile industry. The company considered a differentiation approach

and realized that the industry was missing a specific automobile. After suffering from several

financial losses, Tesla Motors had to make a change; therefore, producing Model S vehicles.

These types of vehicles such as the Tesla Model S, were electric powered vehicles and had the

opportunity to generate a substantial amount of net income and turn their negative into positive

generated revenue. With the entrepreneurship of Elon Musk and the ideas he brought forth to the

company as being CEO, Tesla Motors will be on the right track in becoming profitable again.

Company History

Tesla Motors was founded in 2003 by “two Silicon Valley engineers, Martin Eberhard

and Marc Tarpenning” (Thompson, 2014). These two engineers thought it was necessary and the

perfect time to produce electric vehicles. “The company designs, manufacturers, and markets

high performance, technologically advanced electric cars and powertrain components” (Hoovers

Inc. 2018). Tesla was named after an electrical engineer and scientist, Nikola Tesla, who was

known for impressive inventions. The name suits the company well because they were able to

use technology as their driving force and create a vehicle that was suitable for the industry as

well as their consumers. “Tesla sells two models, which are the Model S and the Model X and

they are both considered the world’s top-selling electric cars” (Hoovers Inc. 2018).

Tesla Motors experienced some financial issues between 2008 and 2012, with losses

totaling “$943.5 million on combined revenues of just $861 million” (Thompson, 2014). 2013

was the year the company had to make strategic decisions and revise their strategies. Developing

a new product was amongst their new strategies; therefore, producing Model S vehicles to
TESLA MOTORS 3

customers. Their two new models as well as new management have proven to increase their

revenues and turn the company around in becoming profitable again.

Global Automobile Manufacturing Industry

The NAICS code for the automobile manufacturing industry is 336111. “Digitalization,

connectivity, evolving powertrain technologies, tougher regulations, and shifts in consumer

attitudes have created challenges as well as opportunities” (Hoovers Inc., 2018) within the

industry. One way of increasing growth in sales is to invest in emerging markets; however, due

to the decrease in demand, these investments became risky for the companies. To avoid such

risky investments, companies should be more aware of the economic conditions in other

countries. Three countries dominate the global auto industry, US, Western Europe, and Japan.

To increase market share growth, companies should use a more aggressive approach to expand

into emerging markets. In the automobile manufacturing industry, “demand is driven by several

factors: employment, wage growth, and interest rates” (Hoovers Inc., 2018).

To determine how competitive an industry really is, several analyses can be done to

analyze “a company’s industry structure and its corporate strategy” (Industry Handbook, 2018).

An example of an industry analysis is the concept of Porter’s Five Forces. “These forces analyze

everything in an industry from the intensity of competition to the profitability and attractiveness

of an industry. Porter’s five forces include the following: Threat of New Entrants, Power of

Suppliers, Power of Buyers, Availability of Substitutes, and Competitive Rivalry.

Threat of New Entrants. Within the automobile manufacture industry, when it comes

to threat of new entrants, this force is a low threat for Tesla Motors. It is very difficult for new

companies to enter the industry and compete against Tesla Motors’ due to the high cost of brand

development. Also, in order for new companies to enter the industry, it would require a great
TESLA MOTORS 4

deal of investments, engineering knowledge, as well as have an advanced technology

background. “Also, large players like Tesla benefit from increasing economies of scale, which

new entrants can only achieve upon exceeding a production threshold” (Kissinger, 2017).

Power of Suppliers. The power of suppliers within the automobile industry is low due

to the abundance of suppliers that exists. Because prices for parts can be relatively high,

especially for electric vehicles, automakers usually look for suppliers with low labor costs

because they usually sell less expensive parts. This is why Tesla Motors has developed a supply

chain strategy because of the high costs as well as limited materials for their vehicles. Therefore,

automobile companies, such as Tesla Motors’, need to maintain very good relationships with

their suppliers due to their limitation.

Power of Buyers. The customers play a heavy role in the automotive manufacture

industry because they determine the sales revenue of the company. Although customers can

negotiate with the company for a lower price, they only offer discounts to corporations who

purchase numerous vehicles. To prevent their loyal customers to go purchase an electric vehicle

from another company, they focus on making durable and efficient vehicles.

Availability of Substitutes. The threat of substitutes within the automobile manufacture

industry is relatively strong. All the companies within the industry are in competition for their

customers. Although there are few companies who offer electric vehicles, overall there are other

companies that offer substitutes, such as hybrid cars, public transportation and hydrogen

vehicles. As for the electric vehicle substitutes, many new electric models (luxury as well as

economy) are making their debut, such as the Audi e-Tron and Jaguar iPace. The examples

listed represents substitutes to the Model X. So, when a company changes their price on a

specific vehicle, this will lead to an increase in demand for another company in the
TESLA MOTORS 5

industry. The hydrogen cars and hybrid cars have the power of the market share, which is the

biggest competitor for the electric cars in china. Although they have a vast range of high quality

substitutes from large automakers, the Tesla customers are very environmentally alert.

Competitive Rivalry. Rivalry in the global automobile industry is high. The playground

for automobile companies is no longer big; however, this does not stop the aggressiveness

between companies to produce innovative products. Companies such as Ford and General

Motors are companies to watch within this industry due to the likelihood of Tesla’s strategies

and the idea of advanced technology with electric cars. Companies, such as BMW, is the only

other automaker that has put an emphasis on luxury, such as the BMW i8.

High cost related to producing advanced technology vehicles and low switching costs for

customers when it comes to buying different models further enhance the rivalry. The rivalry in

the automobile industries also has influence by the structure of automobiles and the level of

substitutes. The biggest automobile companies are competing in different categories and Tesla

has provided the blueprint with their top electric vehicles to revolutionize the global automotive

industry.

Mission Statement

The mission statement is the purpose of the organization; therefore, Tesla Motors’

mission statement states the following: “To accelerate the world’s transition to sustainable

energy” (www.tesla.com/about). In just a few words, consumers interested in this company will

be able to know what Tesla Motors is all about which is saving energy and taking the world by

speed with their electric vehicles.

TESLA MOTORS 6

Objective and Goals

Elon Musk had a vision for Tesla Motors which was to “utilize the company’s proprietary

batteries and powertrain technology to put millions more electric cars on the road and

dramatically curtail global dependence on petroleum-based transportation” (Thompson, 2014).

Musk believed that he can take the company to a new level and give the consumers an

experience that they will not be able to find anywhere else.

Overall, Tesla Motors’ strategic objective was “to drive the world’s transition to electric

mobility by bringing a full range of increasingly affordable electric cars to market” (Thompson,

2014). Therefore, the company’s strategies should be aligned with their strategic objective and

goals in order to be a success within the industry. If the overall strategies prove to be successful,

Tesla Motors will increase their competitive advantage within the automobile manufacturer

industry and they will have the opportunity to make a name for themselves when it comes to

electric car manufacturing.

Strategies

Tesla Motors’ developed various strategies to produce financial growth within the

company. The strategies that were chosen will aid in the success of the company as well as fix

some of the financial issues they have experience in the past, which caused them to endure

financial losses. With the two new models of the company, Tesla Roadster and Model S, these

electric cars will set the tone for the company and give the consumers an opportunity to

experience something different. These two new products are what innovation and advanced

technology is all about and with Elon Musk’s strategic planning; the company has a chance to

change the automobile manufacturing industry for the better. The following strategies will be
TESLA MOTORS 7

the focus point of Tesla Motors: “Product Line, Technology and Product Development,

Manufacturing, Supply Chain, Distribution, and Marketing Strategy” (Thompson, 2014).

Product Line Strategy. One way to grow the company is to evolve the product line and

that was one of Tesla Motors’ main strategies. “The company’s strategic intent was to broaden

its customer base by offering not only a bigger model variety but also by introducing

substantially cheaper models” (Thompson, 2014). This could also be viewed as a competitive

strategy because if their top competitors are offering new models for a higher price, this would

give the company an opportunity to gain more customers by decreasing the price on a valuable

product.

The two newer models, Tesla Roadster and the Model S, was introduced as their new

product line and also gave their customers an opportunity of new choices that were available

within the company. The two models have become the face of the company and it was exactly

the products Tesla Motors needed to have that competitive advantage within the industry. Tesla

Motors’ also offered incentives to their customers to persuade them to purchase their product.

For example, “customers who purchased any of the three Model S versions were eligible for a

federal tax credit of $7,500” (Thompson, 2014). Other incentives included rebates for

purchasing electric vehicles in various states.

Technology and Product Development Strategy. When developing new products in a

company, expenses seem to increase, especially the research and development expenses. These

were one of the expenses that would continue to increase because a lot of research and

development is needed to “design, develop, test, and refine the components and systems needed

to produce top quality electric vehicles and, further, to design and develop prototypes of their

various models” (Thompson, 2014). Advanced technology can be expensive and when it comes
TESLA MOTORS 8

to producing quality electric vehicles, the company has to make sure that the product they are

selling to their customers are safety enhanced as well as a product they can increase revenue.

Some of the technology and product development that is included when producing a quality

electric vehicle are the following: “Battery Pack, Power Electronics, Induction Motors, Gearbox,

and Control Software” (Thompson, 2014).

Manufacturing Strategy. When it came to the manufacturing of the products, Elon

Musk knew that location for their distribution factories would play a key for their manufacturing.

Electric vehicles are very detailed, and the company had to make sure that their distribution

centers was located in an area where there are talented engineers nearby, so that they can reduce

costs. Tesla Motors’ had several distribution centers such as southern California and Tilburg,

Netherlands.

The goal of Elon Musk was to expand the company, so they had to make sure they had

distribution centers in various countries to take care of their global clientele. The key aspect of

the manufacturing strategy was to “source a number of parts and components from outside

suppliers but to design, develop, and manufacture in-house the key components” (Thompson,

2014). This strategy allowed for the company to cut down on production costs and to enable

Tesla “to achieve a gross margin of 28 percent in the fourth quarter of 2014” (Thompson, 2014).

Supply Chain Strategy. Tesla Motors’ strategy when it came to produce the parts for

their vehicles can become very expensive due to the designs of the vehicles. Some of the

vehicles, such as the Model S, “contains over 2,000 parts and the components needed for these

vehicles are sourced globally from over 300 direct suppliers” (Thompson, 2014). Due to the

high costs, the company chose to develop close relationships with the “suppliers of lithium-ion

battery cells and certain other key system parts” (Thompson, 2014). By establishing
TESLA MOTORS 9

relationships with the suppliers, the company can establish incentives to offer them in return for

low costs on their components.

Distribution Strategy. It was important for Tesla Motors to own everything within their

company, including having an operated network of retail stores and service centers. Therefore,

the company provided the following as a way to establish their brand within the industry, while

introducing these new electric vehicles: Tesla Sales Galleries and Showrooms and Tesla Service

Centers. The company main focus was their customers and they wanted “to educate their

consumers directly, sell them cars directly and service their vehicles directly” (Thompson, 2014).

The company also offered several programs for their customers such as a “prepaid maintenance

program, providing recharging services to owners on long distance trips and a battery swap

service” (Thompson, 2014).

Marketing Strategy. “An important function of marketing is to drive growth in sales

and revenue for a company, which includes building the market share, innovating new products

and services, as well as international expansion” (Kotler, Keller, 2016). Tesla Motors had the

marketing advantage due to be the first company “to commercially produce a federally-

compliant, fully electric vehicle that achieved market-leading range on a single charge”

(Thompson, 2014). Because of this milestone, the company was able to create enough media

coverage to enhance their brand awareness.

From the media coverage of their vehicles, many people, including care enthusiasts, were

intrigued by these electric vehicles. Just by the media coverage alone, Tesla’s sales force

increased at no cost at all for the company. Overall, Tesla was able to keep marketing costs low

as well as spending little to no money on traditional advertising.

TESLA MOTORS 10

Another part of Tesla’s marketing strategy was developing strategic partnerships with

other companies such as the Panasonic partnership, Daimler partnership, and Toyota partnership.

By developing these various strategic partnerships, it increases Tesla’s brand awareness by

partnering with big name companies who are already established within the industry.

SWOT Analysis

Strengths Weaknesses

 Industry leading Battery pack gave 3 times  Model S price point is higher than well-

better than competition. established industry leading Luxury

 Commitment to R&D has given the Tesla the brands.

ability to meet goals.  Tesla uses new technology to build its

 Ability to manufacture all key components in- vehicles and this open the door for critics

house without need of third party and skeptics.

 Burning through a lot of cash in high

production cost and R&D.

Opportunities Threats

 Can capitalize on the platform of the model S  Potential setbacks in production can hurt

by using to produce future models economy of scales.

 Continue R&D can improve quality control  Current Gov. administration does not

processes, creating cuts in production cost support clean energy as much as the last

 Model 3 has the potential of establishing Tesla administration and has threaten to cut

as a true player in the Auto industry back in funding

 Existing legislation against automakers

involve in sales and maintenance of vehicles

can potentially disrupt Tesla business

model.
TESLA MOTORS 11

Analysis of Financial Data

Although the financial statements from years 2010 - 2012 show that Tesla had

incremental operating losses, mostly due to a lack of sales of the Tesla Roadster and a substantial

increase in R&D, Tesla was ramping up production of their first true financially focus product,

the Tesla Model S. It is important to mention that the Tesla Roadster (2008 - 2012) was more of

a R&D project, built to test components such as engines and powertrain and most importantly the

battery pack.

During fiscal year 2013, company revenues increased to $1,952,484 as a direct result of

the Model S going on sale. They also saw positive operating cash flow of $257,994 for the first

time. While the company closed the year with positive income, the also incurred an increase in

production cost to $1,543,878 as a direct result of the high cost of production as the company

decided to build all of the key components in-house with the hope that in the future as they sold

more cars, it would affect the economy of scales by using most of the key components, such as

the platform of the Model S, to build planned future models, thus cutting down in production

cost.

In terms of the company’s assets, the asset turnover ratio was done to determine how

efficiently they used their assets within the company. 2013 was the year Tesla made major

changes to their product line; therefore, their assets increased as well as their net revenue.

However, the asset turnover for 2013 was 0.8, which is under 1. This shows that the company is

still not efficiently using their assets with the company, but it is an increase from 2012, which

was 0.3. With the increase, this shows that their strategies have improved; however more work

is needed for them to improve overall.

TESLA MOTORS 12

Statement of Problems and Purpose of Analysis

Since the launch of the Model S, Tesla has continually proved the critics and skeptics

wrong by meeting all their self-imposed deadlines with very few snags. While the Model S

proved that Tesla can meet demands on limited numbers, the company feels that their

manufacturing lines have the ability to mass produce their most ambitious project yet, the Model

3. They feel confident that by the time the Model 3 is ready for production, they’ll be able to

handle production of 5000 vehicles a week. But there is an underlined issue with Tesla’s

projections. A further look at their factories capabilities, shows that only a handful of them will

be able to handle 1000 with other only being able to meet production of 500 vehicles a

week. It’s been long speculated that Tesla’s biggest fear has always been the not being able to

meet the production numbers necessary to meet economies of scale.

As of late, Tesla, as a way of taking the spotlight off the Model 3, has started to market

themselves as more than just an automaker; Elon Musk has repeatedly mentioned as much,

calling Tesla a “Sustainable energy company” and referencing their solar panels and home

energy storage systems. With companies such as General Motors, fully committed to their

electric cars production, and having the capabilities to easily meet production demands; Tesla, if

not able to fix their production issues, might very well go down in history as the company that

created the buzz about electric cars, instead of the one that capitalized on them.

Strategic Alternatives

Tesla has established itself in a very comfortable financial position, this perhaps is their

biggest asset. Their financial ability to manage a slow production while figuring out how to

ramp up production is by far their biggest leverage. This was proven successful in the past
TESLA MOTORS 13

when production of the Model S was delayed by nearly a year, yet, were able to meet demand

after figuring out and making improvements to their production process.

Recommended Strategic Alternative

Tesla’s biggest underlying issue is finding a production process that will give them the

ability to meet production demands to make them competitive with other automakers. Their

financial stability puts them in a privileged position in which they can perhaps outsource some of

the key components that up until now has almost exclusively been built in their own

factories. Outsourcing production of some components will give them the time and leverage

necessary to address their production process and bring their production timelines up to speed.

Implementation plan

Whatever strategy Tesla’s leadership decides to implement, it has to be with the

understanding that other automakers are in the process of introducing their own version of

electric vehicles that will perhaps give Tesla a run for their market shares. Tesla Motors has a

good management team, including Elon Musk as CEO. That was a good strategic move to make,

considering the company was in a financial strain. With his expertise in advanced technology

and the knowledge he has to advance the company financially, the recommended strategic

alternative, although time sensitive, needs to address Tesla’s production issues.

In conclusion, Tesla Motors had a setback financially in previous years. However, with

new management and the implementation of new strategies, while creating a new product line,

the company was able to supersede their challenges and make a name for them within the

industry. Maintaining the competitive advantage will be a task within itself, with Ford and

General Motors right behind them also developing electric vehicles; however, if they focus on
TESLA MOTORS 14

their productive issues, they can maintain their spot in the industry. Overall, Tesla Motors is a

company who has what it takes to revolutionize the global automotive industry.
TESLA MOTORS 15

References

Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model.

Strategic Change, 15(5), Pages 213 To 229

Hoover’s Inc. (2018). Automobile Manufacture Industry. Retrieved from Hoover’s database

Kotler, Philip; Keller, Kevin, Lane (2016). Marketing Management. Pearson Education

Kissinger, Daniel. (2017). Tesla Motors, Inc.’s Five Forces Analysis & Recommendations

(Porter’s Model).

Retrieved from http://panmore.com/tesla-motors-inc-five-forces--analysis-

recommendations-porters-model

Masters, B. (2017). Tesla risks being overtaken by the competition. The Financial Times.

Retrieved from http://www.ft.com/content/3d5a79c4-c468-11e7-b2bb-322b2cb39656

Tesla Motors (2018). Retrieved from www.tesla.com/about

The Industry Handbook (2008). Retrieved from

http://www.investopedia.com/features/industryhandbook/

Thompson, Arthur (2014). Tesla Motors’ Strategy to Revolutionize the Global Automotive

Industry. Crafting and Executing Strategy. Pages 660 To 688