History

Tesla Motors is a clean-tech automotive company founded by Martin Eberhard and Marc

Tarpenning in Silicon Valley in 2003. The initial idea for Tesla stemmed from Eberhard’s search

for an environmentally conscious vehicle and Tarpenning’s desire to “solve a real problem [oil,

in this case]” (Garthwaite). Dissuaded by the lack of variety and attractiveness of available

electric vehicles, Eberhard decided that it was time for the public to have a new perception of

what an electric vehicle should be and to convince the general public that they should own one.

With this idea in mind, the duo set out to look for funding for their EV (electric vehicle)

project at a time when the price of oil was at its all time low and when the state of California

gave up on its EV sale requirements for automakers (Kelly). Although odds were stacked against

them, Eberhard and Tarpenning were able to receive funding from a group of eco-conscious

Silicon Valley venture capitalists and were able to form a partnership with an individual who had

a similar idea in mind, Elon Musk. Together, and with the newfound capital, this new team

created Tesla Motors.

All three men’s focus was on creating EVs that people would want to buy: “No hybrids.

No hydrogen. No hype,” (Tesla). Because of their lack of automotive experience, Tesla teamed

up with British racecar manufacturer Lotus to develop what we now know as The Tesla

Roadster. Unlike previous EV makers, Tesla founders were committed to not compromising

performance in the creation of Tesla EVs. They believed that in order for the electric vehicle to

capture the attention of the public, performance and range issues had to be addressed.

For Tesla Motors, the culture of innovation was instilled and developed from the very

beginning. From its location in Silicon Valley, Tesla was able to recruit from a pool of young,

talented, and adventurous engineers who were attracted to Tesla’s ambitious vision. In addition,
much of Tesla’s successful development can be attributed to Elon Musk’s leadership and

experience in tech ventures1. Even stakeholders are initially motivated by Tesla’s aspiration to

bring green-tech vehicles to the masses. Financiers and early adopters came from idealistic

Californian royalty who wanted to believe in and support the future of EVs. Even today,

suppliers such as Panasonic choose to affiliate themselves with Tesla because they believe in

Tesla’s ability to popularize the electric car.

Since inception, Tesla’s culture and values have been internally and externally

reinforced. Tesla’s values have manifested itself in the current prestige of its reputation and

products. Tesla’s electric vehicles far outmatch any competitor in both performance and range –

the Model S has a 5.6s 0-60mph time and 300 mile range while the competition averages 9.5s

and 100 miles respectively. Its segment-leading EV technology is backed by a portfolio of

patents accumulated since 2004. Suppliers and buyers alike are clamoring for a chance to work

with Tesla to help realize its vision and to benefit from Tesla’s culture of creativity and

innovation. As a result, Tesla is able to dominate the EV segment.

Core Competitive Advantage

Tesla’s core competitive advantage is its segment-leading technology and its ability to

sustain that position through continual innovation. This includes not only the repertoire of

patents that Tesla has developed, but also the associated knowledge and expertise. This

competitive advantage will enable Tesla to dominate a market segment with huge growth

potential – the electric vehicle segment.

Tesla was able to develop this competitive advantage through the vision and efforts of its

leaders – namely Elon Musk. Musk was able to create a culture of innovation by getting Silicon

1
Elon Musk was the founder of successful tech startups PayPal and SpaceX
Valley’s finest excited about the prospect of popularizing the electric vehicle. In addition, he was

able to recruit and integrate talent from Detroit for their experience in auto manufacturing.

Throughout its four years of R&D, Tesla created an impressive array of advances in EV

powertrain technology that contribute to the Roadster’s phenomenal performance. The

powertrain consists of four components – battery pack, power electronics module, motor, and

control software – and Tesla has made numerous innovations in each of these areas.

The battery pack consists of 6,831 lithium-ion cells and contains 53 kilowatt-hours of

usable energy, twice as much as any other commercially available EV battery pack. The

flexibility of the battery pack allows Tesla engineers to continually test new battery-cell

technologies to find the best combination of value and performance. The power electronics

module (PEM) houses two other significant innovations. Inside the PEM are two distinct areas,

the power section and the control section. The control section uses a high-performance digital

signal processor which runs the most complicated and detailed software in the vehicle. In the

power section, Tesla engineers were able to combine the battery charger and motor controller

into the same unit by reconfiguring the hardware to accomplish both functions. This innovation

allows the vehicles to have a high-power charger onboard at no significant extra cost or weight.

The motor is a custom designed three-phase induction motor with 87% average efficiency,

minimizing mass while providing high power and efficiency. Patented technology in the motor

includes a proprietary fabricated copper rotor design and optimized winding patterns that allow

for easy manufacture and reduced resistance and energy loss. The last section is the control

software, which includes algorithms designed by Tesla engineers that control traction, vehicle

stability, sustained acceleration and regenerative braking. In addition, the power-train and battery

pack have a modular design that will enable Tesla to incorporate future advances in technology.
 Not only does Tesla own the rights to these proprietary technologies, it also has the

extensive knowledge and expertise of its engineers. In combination with its Silicon Valley

culture of innovation and creativity, this puts Tesla in the best position to continually adapt and

innovate these technologies to maintain product differentiation.

Analysis
Value – Traditionally, mass appeal for EVs is hindered by public concern over the

performance and price (historically, the battery has been a debilitating factor) of EVs. Tesla’s

advanced power-train system addresses both these issues. In the short run, this means Tesla’s

vehicle is the only one that can compete with traditional vehicles on performance, and will

therefore have the greatest success in capturing market share of the growing EV segment. In

addition, this resource neutralizes the threat of alternative technologies being developed, as EVs

gain a first-mover advantage in the zero-emission vehicle segment. In the long run, it means that

Tesla can reasonably maintain its position as the best EV producer (….).

Rareness – Tesla holds numerous patents protecting their innovations. However, the

culture and organization that produced these technologies are also rare in the auto industry. No

other auto firm is located in Silicon Valley, is singularly focused on the EV, or has the

organizational flexibility to succeed in this tech-driven segment.

Imitability – Tesla’s core competitive advantage is difficult to imitate for three reasons.

First, Tesla’s technological superiority is substantial and would require massive amounts of

R&D to match. Second, Tesla has the historical advantage of being the first-mover into Silicon

Valley. It has captured the best and most eager talent available, and any other firm that tries to

imitate will always be labeled as a “carbon copy”. Third, under Musk’s leadership, Tesla has

developed socially complex resources that are difficult to imitate.

 Organization – Like any other Silicon Valley company, Tesla’s organization is very

idea-driven. The leaders recognize the importance of critical thinking and foster an atmosphere

that encourages risk-taking and innovation. Therefore, Tesla is very well-equipped to succeed in

an industry that is transitioning from being manufacturing-driven to tech-driven.

Our analysis has shown Tesla’s core competitive advantage to be valuable, rare, costly to

imitate, and efficiently exploitable by the organization – a sustained competitive advantage.

Generic Strategy Matrix Positioning

Tesla Motors currently targets a narrow market with a unique focus. At the moment, the

Roadster is the company’s only product available for purchase. Tesla focuses more on

performance and range compared to its competitors. This puts it in the differentiation focus

section of Porter’s Generic Strategy Matrix. With the introduction of the Model S, Tesla looks to

reposition to a broader market while maintaining its uniqueness.

This is a very appropriate position for Tesla given its core competitive advantage. It does

not have the scale, capital or manufacturing expertise to compete on a cost basis. However, Tesla

possesses the technological capabilities and technical expertise to compete on performance,

allowing it to surpass its competitors. Although Tesla has recruited Detroit talent, it cannot

recruit best practices refined throughout 50 years of experience.

Value Generation & Capture

Tesla’s strategy puts much emphasis on technological innovation. It uses lithium ion

technology which is believed to be cheaper and to have more storage capacity than nickel metal

hydride batteries. Currently, battery manufacturers charge Tesla about $20,000, representing a

significant portion of production cost. The company’s strategy to alleviate this cost is to produce

cars in higher volume, to capture a broader audience. Therefore, Tesla employs groups of
engineers to improve its battery technology by assembling lithium ion cells in more efficient

ways. However, Tesla’s effort is highly dependent on its battery manufacturers who are

supplying this technology. Fortunately, the production of battery cells has tripled in the last five

years, decreasing the cost of lithium ion batteries 8% annually.

To create additional value, Tesla partnered with Panasonic to develop economical and

efficient lithium ion batteries. Panasonic is currently the sole supplier of electric vehicle battery

packs for the Model S. Through this partnership, Tesla can take a more active role in the

development of its batteries. Value is created in Porter’s value chain through lowering costs of

inbound logistics by establishing a strong relationship with the supplier that will ease the flow of

materials and tracking costs. The partnership will also improve Tesla’s knowledge of battery

pack development. Engineers will find better ways to assemble batteries, which also reduces

service costs since there will be less need for battery replacements. However, by making

Panasonic its sole supplier of battery packs, Tesla faces the possibility of high switching cost.

Tesla establishes and manages its own distribution centers, which are primarily located in

major cities. By avoiding independent dealerships, Tesla has greater access to its customers. It is

able to communicate directly with customers and obtain instant feedback to understand their

needs. As a result, Tesla is able to react quicker to consumer demands and consistently offer the

most desirable features and specifications. Furthermore, Tesla has the technical capabilities to

develop these innovations more so than any other EV manufacturer today.

Ultimately, Tesla’s vehicles will include specs that customers value, thus increasing their

willingness to pay. Because the feedback system creates easy and open communication between

the firm and customers, it allows Tesla to align its R&D with customer service. As a result,

customers will appreciate Tesla’s efforts to incorporate their opinions into future vehicles.
SWOT Analysis
The main problems and challenges Tesla faces are its extremely high costs of production

compared to the customers’ willingness to pay and the likelihood that the EV segment will never

capture the market share that its founders envisioned. At the same time, there also exists a

number of promising opportunities for Tesla to exploit: many predict the electric vehicle to grow

in market share as much as 350% in the next five years 2 and auto companies are beginning to

show their willingness to become involved in EV production. Through our analysis, we have

learned that the firm has numerous methods to overcome these problems and challenges, and are

in prime position to exploit these opportunities to the fullest.

Tesla is fully aware of its high costs of production 3 and has numerous plans in addressing

the problem. By working with Panasonic to develop lower cost high capacity lithium ion

batteries, Tesla is looking to further improve on the lithium ion cell’s annual 8% decline in cost.

In addition, it is planning to offer lower range models, which come with substantial cost

decreases. Lastly, there is a steep learning curve for vehicle production that Tesla is looking to

take advantage of once it begins mass-production of the Model S.

In terms of the direction of the auto industry, Tesla has already done everything in its

power to ensure the success of the EV. Tesla has already made strides in shedding the image of

the EV as costly and inadequate. The EV has captured more attention and interest than it ever has

in the past and is on the path to becoming the green-tech car of the future. That being said, our

analysis shows that Tesla’s internal resources have the potential to become sustainable

competitive advantages that will allow it to profitably exploit this explosive market growth.

2
Frost & Sullivan report
3
$20k of which is attributed to the battery in the Roadster
 Tesla’s most valuable resources are its patents and its people – along with the technical

expertise and innovative culture they bring. Our analysis has shown that these resources are both

rare and costly to imitate 4. Furthermore, Tesla has the flexible, enabling organizational structure

to fully exploit these resources. This has enabled Tesla to successfully position itself as a “star”

that competes on uniqueness competency – a very coveted overall strategic position, since Tesla

will not only be able to capture a significant share of this high-growth market, but also do so

profitably as it competes on uniqueness rather than cost.

BYA!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Strategic Recommendation
Based on our findings, we recommend that Tesla Motors shift its focus from promoting

its EVs to its core competency, its powertrain division. Tesla’s main value added to society lies

in its expertise and innovations in the electric vehicle powertrain system, not its auto

manufacturing capabilities. Since Tesla has already created so much buzz and interest in the

electric car amongst major auto makers5, we believe the next step in popularizing the electric

vehicle is to put more effort in disseminating our expertise in EV powertrain technology to these

more capable automakers6. This would be an effective strategy because it allows Tesla to focus

on its strengths (valuable patents, expertise in EV powertrain technology, and culture) and

exploit opportunities (growing EV segment) while invalidating weaknesses (low scale

production and no auto manufacturing experience) and mitigating threats (can’t think of any

examples right now). By adjusting its strategy to highlight its powertrain technology, Tesla can

ultimately make a bigger impact in shaping the clean-tech future of the automotive industry.

4
See VRIO analysis in appendix
5
Nissan, GM, Ford, and Renault plan to release EVs by 2011. Toyota and Daimler are currently partnering with
Tesla to produce EVs of their own.
6
Similar to Tesla’s current partnerships with Daimler and Toyota