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Strategic management

Competitive Strategy (Vrije Universiteit Brussel)

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Case 2: Shell - NewMotion

1. The acquisition of NewMotion by Shell can be described as a diversification strategy.

Assess this strategy of Shell in terms of efficiency-based & managerial reasons, and in
terms of expected performance.

As a result of this takeover Shell gains economies of scope. They can use their existing gas
stations to install charging kits. So, Shell will be able to retain his customers who switch to
electric cars in the future. NewMotion can now also use the internal capital market. They said
that this investment will allow NewMotion to continue to develop and to further expand
across Europe. Shell is a big company who has a lot of money and they invest in
companies who don’t have the possibilities to finance the projects with their own
money. So, as a result of this merger NewMotion will make investments that otherwise
wouldn’t take place. They don’t need to lend the money on the financial market
or the banks which has an interest cost. Something important to notice is that there is
a chance that the internal coordination costs will increase because of bureaucratic
requirements and labour costs. So, this are the efficiency bases reasons.
Of course, there are also managerial reasons to diversify. This takeover is an answer to the
growing demand on electric vehicles. Shell invests in their future, they know that the time
period of traditional fossil fuel will end. Now they invest in a growing business unit and this
growth can benefit the managers by receiving a better image, more wage, etc. They show that
they make work for a better climate which is for many people nowadays very important. This
takeover is a good case for the future of the company. They invest in a firm specific skill
namely the charging kits. They take in account the future changes in the market of fossil fuel.
So, we can conclude that the expected performance of the diversified firm will be good
because the takeover takes into account the future challenges.

2. Besanko et al. mention two problematic justifications for diversification: diversifying

shareholders' portfolios and identifying undervalued firms. Do you think that the Shell –
NewMotion deal is problematic on these two points? Please explain.

Shell has the possibility to spread shares themselves across different companies, this ensures
that the shareholders don’t need Shell to diversify. Because of this, the acquisition of
NewMotion won’t be problematic especially in terms of reducing shareholder risk.
The main goal of this acquisition is to ensure that the company stays relevant in the future,
rather than reducing risk. They have planned to spend $1 billion a year on new energies
division like renewable power, electric cars accelerate etc. NewMotion is likely an undervalued
firm, it is one of the biggest vehicles charging companies in Europe.

3. Would you consider Shell to be a vertically integrated firm? Please explain. Yes, Shell is for
sure a vertically integrated firm. A firm is vertically integrated when they
have at least two stages of the production in their own hands. Shell does not only produce gas
and oil but they also distribute it and sell it at their own gas stations. Shell’s upstream
division like exploration and production business is combined with the downstream division like
refining and chemicals. These integrated oil majors work as followed; the downstream
business is supposed to provide a hedge when lower crude-oil prices hit profits in the upstream
division. To maintain stability when oil prices fluctuate it is important that Shell
keeps investing in both upstream and downstream division. It is also important to remain
“resilient” over the long term that Shell shifts away from focusing simply on producing as
much oil and gas as possible.

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Case 5: Tesla

1. Conduct a five forces analysis of the electric car industry. Evaluate and
summarize the findings in a table in which you provide a short description of
every 'force' and assess their impact level as either low, medium or high.

Internal Rivalry

Seller If we define the market based on the electrical vehicle market, we can
concentration assume that there will be a low seller concentration because of the
many competitors. The seller concentration depends on the definition
used to define a market.
Industry They mention that the electric vehicle market will grow from 2013 to
growth 2020 with 31.5%.
Excess There are indications that Tesla needs to invest and become more
capacity efficient to increase their output. So we can conclude that they don’t
have excess capacity.
Switching The switching costs are very low because of the oversupply of key raw
costs materials. The switching costs for customers are high because Tesla
would invest to install battery swap stations next to the existing
Supercharger locations.
Observability Tesla announced it would soon begin to add lower-priced vehicles
of prices
Exit barriers Exit barriers are present because Tesla has made a lot investments to
enter the market.
Entry

Economies of At the moment they don’t have economies of scale but they aim to
scale achieve it.
Experience- Even if Tesla is an entrant they are the only company that uses lithium
based batteries at the moment.
advantage of
incumbents
Government Tesla did get a loan of the government but everyone that produces
protection of electric vehicles gets a loan so, there isn’t an advantage.
incumbents
Expectations The incumbents don’t use a predatory pricing strategy, there are no
about Post persevering price wars and they don’t have excess capacity so we can
entry conclude that the post entry competition will be low.
Competition

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Substitute and complementary products

Availability of There are many substitutes like their competitors (BMW, Audi,
close substitutes Mercedes, Nissan...) not only the electric cars but also the cars that
and their price run-on fuel. The substituties are cheaper then Tesla.
value
characteristics
Availability of There are some compliments for the electric car for example the
close battery, the charging stations and the electricity. These compliment
compliments and products are cheaper compared to the main product (the car).
their price value
characteristics
Supplier power and buyer power

Competitiveness At the moment the competition in the market is low because

of the input there is an oversupply of lithium. This may change in the
market future because other devices like smartphone batteries will
also be using lithium.
The availability Tesla has the possibility to switch from lithium to cobalt to
of substitute produce their batteries.
inputs
Relationship- Tesla would invest to install battery swap stations next to the
Specific existing Supercharger locations.
investments by
the Industry and
its suppliers

Force Impact level

Internal rivalry Medium
Entry Low
Substitute and complementary Medium
products
Supplier power Low
Buyer power Medium

2. Describe the value chain activities of Tesla. Provide a short description for each
relevant activity, based solely on the case text.

In 2008 Tesla was a loss-making company

but from 2010 they changed their managing
strategy, this had let them to become a profit
of $11.2 million dollar in the first quarter of
2013.
Tesla has been a listed company since 2010.
The firm is established in Silicon Valley. With
the location of their facilities they certainly
have an advantage over their competitors

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because of the expertise and know-how that is located in the nearby area. In the
future they will keep investing in new plants. Human Capital is very important for
Tesla (Musk). For Tesla the quality is more important than the quantity, they only
want to hire the best engineers and the most qualified employees. the only
disadvantage is that Tesla employees have to work at least 50 hours a week.

The focus of the company is based on innovation that’s why they spend a lot of
time in developing new technologies, for example: apps to manage your car featuring’s,
wireless software updates for the vehicles to fix them instantly, reducing charging
time , Solar panels for the production, etc. Tesla has many strategic partners for the
implementation of their activities. First of all they have a strategic partnership with
Daimler for the knowledge exchange in engineering, supply chain and production. They
also have a partnership with Panasonic to secure the supply of battery sells. So they
buy the battery cells from Panasonic. So for their inbound logistics, tesla mainly uses
partnerships with other companies. The key operations of Tesla are the design and
engineering of battery packs, driving units, gearboxes and software. The revenue
streams of Tesla comes from the sales of Electric powertrain systems to other
automakers such as Toyota and BMW. Another revenue stream comes from the sales of
regulatory credits. And last but not least they receive revenues from the sales of their
own car namely model S. In the future they will also sale model X. So the outbound
logistics exists of more than one stream. To sell its cars Tesla aims to create an
experience for the customer via company-owned stores, etc. Tesla employs products
specialists rather than dealers. Tesla works without an inventory on site. Further orders
only may place over the internet. Customers can virtually design their car online. For
their marketing Tesla uses customer stories who shows the car in real-
life experiences.. Further is the customer feedback very important for the continuous
improvement and innovation of Tesla’s car. They make extensive use of social media.
Service is very important for Tesla. They don’t only want to fix things but try also to
make them better throughout the product lifecycle (updates, etc.). The cars have a
roadway assistant, a monitoring system, etc. Tesla Services centers are located in
such a way that the customer needs to travel less than 50 miles to reach a Service
center. An important service of Tesla is their worldwide charging infrastructure.

3. What is Tesla's generic strategy and should it, in line with your previous answers,
stick to it?

Tesla is a benefit leader; Tesla can ask a higher price compared to its competitors.
They have higher production costs compare to their competitors, but their product
also has greater benefit for the customer. Tesla invested a big amount of money to
differ their product from the many existing substitutes. They are not just selling a
car, they also sell an experience, something you can only get by riding their cars.

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