Tesla Inc.: Strategic Management

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Introduction

Tesla Inc., traded on the NASDAQ New York Exchange as TSLA, was founded in 2003 and specializes in the development and production of electric vehicles as well as some energy products such as solar panels and batteries. It came into prominence in the late 2000s with the release of one of the first commercially available. mass-produced, non-concept electric vehicle sedans on the market. The company is also known for its co-founder and CEO Elon Musk who has funded and managed Tesla over the last decade into a strong automotive firm (Tesla, 2020).

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However, throughout the mid 2010’s Tesla faced numerous issues with its profitability, production, technology, and overall strategy, facing challenges that may have resulted in eventually downfall for the company until it took serious measures through strategic initiative to significantly improve the situation as of currently (Lopez, 2019). This report will examine the industry and internal environment from which many of Tesla’s issues stem and identify the strategic measures that were undertaken to begin addressing the company’s challenges.

Industry Analysis

In order to understand the strategic initiatives that Tesla underwent, it is critical to analyse the industry in the context of external and internal environments, many of which influenced the company’s problems and later strategic management. Tesla inherently created the market for fully electric vehicles and the industry is still relatively infantile in many aspects, leaving Tesla to navigate many challenges without precedent, but also with no serious competition until the past 2-3 years.

PESTLE Analysis

  1. Political – government support and subsidies for electric vehicles, political stability, and globalized trade which influences supply chains.
  2. Economic – economic stability which drives purchases for more expensive vehicles, decreased costs for renewable energy and components such as batteries, market shifts towards sustainability in all sectors, including automotive.
  3. Social – Social popularity and support for renewable energy products with public pressure on governments to incentivize such transitions.
  4. Technological – development of technologies improving performance and range of electric vehicles, increased automation of production, improved capabilities of self-driving software in vehicles.
  5. Legal – Energy consumption and emissions regulations, automotive regulation, patent protection.
  6. Environmental – Climate change, driving the demand for electric vehicles, expanding environmental programs, weather may affect the minor solar panel projects of Tesla’s business.

Porter’s Five Forces

Industry rivalry – Strong

While Tesla operates in a relatively niche sector of electric vehicles, it is forced to compete in the overall automotive industry as well as the energy solutions industry. The automotive industry is dominated by a small number of global conglomerates, which are aggressively competing, innovating, and promoting their product since a car purchase for most consumers is a major occurrence. Low switching costs for consumers to buy from other manufacturers, particularly when comparing Tesla to others strengthens the competitive force (McKinsey & Company, 2018).

Consumer bargaining power – Strong

Tesla as a company that directly relies on vehicle sales to operate and function. In fact, it is not until 2019 that Tesla was profitable, due to improved sales and delivery of vehicles to consumers. Tesla vehicles are expensive to purchase, insure, and maintain, which makes other companies’ eco-conscious cars (hybrids) more appealing from a cost perspective. Tesla directly relies on the loyalty and support of its base consumers that purchase Tesla vehicles for their innovation and low environmental impact.

Supplier bargaining power – Moderate

Tesla works with a large number of suppliers, most of which are small to medium in size to produce its vehicles. Most suppliers have little influence on the automotive industry and have low levels of forward integration with limited control on the distribution of their products. One aspect is that Tesla consistently struggles with spare parts supplies for its vehicles, which creates certain pressure on the company (Kissinger, 2019).

Threats of Substitutes – Weak

Tesla offers products which have been designed over many iterations with patented technology for virtually all aspects of its electric vehicles. This is difficult to replicate from both a practical and legal standpoint. While other electric vehicles are being offered on the market, most companies approach the technology in a unique manner, with each having its benefits and drawbacks.

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Threats of new entry – Moderate

The electric vehicle market is experiencing entry of new firms, both established car companies and start-ups with experimental designs or technology solutions. However, the sector requires tremendous capital expenditures to produce commercially viable vehicles, so only a few companies are able to realistically compete with Tesla in the context of electric vehicles (Ewing, 2020).

SWOT Analysis

Strengths Weaknesses Opportunities Threats
  • Brand recognition and sales lead in electric vehicles
  • Highly innovative and luxurious
  • Best performance and technological lead for electric vehicles in the industry
  • Significant issues with manufacturing
  • Lacking high volume production and vital components
  • Unable to meet demands on time
  • Brand name tied to Elon Musk
  • Expansion into new markets as costs go down
  • Producing new types of electric vehicles (pick-up truck)
  • Improving manufacturing and bringing production of battery components in-house
  • Product liability with legal challenges regarding its autopilot technologies
  • Most major car firms starting to develop or introduce their own electric vehicles
  • Continued production issues and solvency concerns in the long-term

Implemented Initiatives

In the past few years, Tesla has undertaken a number of strategic initiatives that influence its future. First, it began to diversify, becoming not only an automotive manufacturer, but taking advantage of its core technologies and creating a network of charging stations and clean-energy services including domestic solar panels. It is a rapid expansion approach that burns through capital.

However, it is taking advantage of multiple levels of the technology stack, going beyond products but also components and systems. As research demonstrates, many firms faced with a new technology fail to adapt, reluctant to give up existing capabilities. Tesla shifted its strategy to not just produce excellent cars that are some of the best but also deliver solutions to the electric vehicle market as well as a complete experience as Tesla unifies virtually all car-related services under its roof, ranging for customization and upgrades, to maintenance and charging with its branded electric charging stations at home and throughout cities (Furr, 2019).

While Tesla has been successful as a design and technology firm, it has struggled over the years as a manufacturer, especially with overwhelming demand for its vehicles and a backlog of pre-orders. Starting in 2016, it has chosen to ramp up its production, scaling at almost unprecedented levels, extremely rapidly. It did so by hiring best manufacturing experts at the company, building additional factories in addition to its main production facility such as a recently opened factory in China as well as a dedicated battery production factory in Berlin to focus on its own battery manufacturing and driving costs down (DeBord, 2016).

It has recently succeeded in meeting a significant mark of 5,000 vehicles produced per week and posted a profitable margin for the first time in years as a result of these changes. However, it came with significant management shakeups and extremely erratic leadership which saw the CEO Elon Musk personally oversee production ramp-ups. At the same time, the company now faces downstream process problems due to increased production volume: vehicle distribution logistics and customer experience management. Tesla which excels in analytically-driven engineering solutions and process optimization is focusing on improving logistics.

The customer experience problem remains the biggest challenge for Tesla as it is unable to provide the necessary luxurious experience from order to delivery which matches its superior engineering feats. Despite an extremely loyal and vocal fan base of Tesla and Musk, this is a component most threatening to its long-term growth as a company (Sherman, 2018).

Strategy

Based on the external and internal analysis of Tesla, it is evident that they struggle significantly with manufacturing capabilities and supply chains as well as technological limitations of electric batteries in competing with traditional vehicles. Tesla needed to identify its strategic capabilities in terms of organizational resources and capabilities and how those can provide a sustainable competitive advantage. Since the external environment that Tesla operates in is subject to rapid change as both a technology firm and an automotive company, the resource-based view (RBV) provides a secure basis for strategy and market focus. Using this RBV approach, strategic management suggest that each firm possess unique resources and capabilities, and the key to profitability is using a strategy which exploits these unique qualities.

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Appraising Tesla’s Resources
Tangible Intangible Human Resources
  • Capital reserves and valuable stock
  • Production facilities – 2 manufacturing for vehicles and a dedicated plant for batteries
  • Research and development facilities and experience in electric vehicle design
  • Patents on battery technology and vehicle software
  • Globally recognized and respected brand
  • Unique market share and loyal consumer base
  • Leading talent in engineering and manufacturing
  • Top managers with high qualifications
  • Elon Musk CEO one of the most successful managers in modern business

Organisational capabilities are the capacity of a firm to deploy resources for a desired outcome, or more commonly contribute to competitive advantage or survival in the market. In its strategic initiatives, Tesla evaluated its capabilities and capitalized on those which contributed to its competitive advantage and strategic objectives.

Capabilities Valuable Rare Imitability Organisational Support Competitive Implications
Manufacturing of electric vehicles Yes Yes Challenging Yes Temporary advantage
Vertical Distribution Channel Yes Yes Challenging Yes Advantages at some levels but can be costly
Charging Network Yes Yes Challenging Yes Significant advantage
Software technology – autopilot Yes Yes Challenging Yes Significant advantage

Examining Tesla’s capabilities, they have extremely valuable and relatively rare prospects which they have taken advantage of in their strategy initiatives. Tesla is the only manufacturer with a dedicated factory for electric vehicles, allowing it to improve the manufacturing process and make it cost-efficient, also the core of the company’s initiatives as the current integrated production process seeks to build on this foundation. Its vertical distribution channel eliminates dependence on dealerships and allows direct consumer relationships, providing education on Tesla’s brand and mission.

Tesla is also creating a charging network which allows to diversify its business model and expand the appeal of its vehicles since only Teslas can charge at these stations and it’s the only company with such an expansive charging network. Finally, the integrated software, including the autopilot that Tesla has developed is advanced, and ahead of most automotive competitors, allowing Tesla to continue capitalizing on its capabilities as an innovative technological company (Trefis Team, 2018). Most of these capabilities are unique to the industry and highly costly to imitate, placing Tesla at a significant advantage in a developing market.

As research demonstrates, many firms faced with a new technology fail to adapt, reluctant to give up existing capabilities that are perfected over decades and to fully integrate new ones. Innovation improvements are doomed to fail with innovation strategy to execute them (Pisano, 2015). Many traditional carmakers worked on electric vehicles at the same time as Tesla but failed, relying too heavily on traditional capabilities of a combustion engine.

Tesla build a new architecture, including integrating a single software system for the whole vehicle. Finally, what the company is attempting to do, gradually but successfully, is to eliminate the major bottleneck in electric vehicles, which is to reduce the cost of producing and improving capabilities of batteries, thus controlling the major profit pool in the future of the industry (Trefis Team, 2020). It can be argued that Tesla undertook strategic initiatives that focused both on turnaround with rapid results in production and profits, as well as long-term evolutionary stages focusing on the company’s long-term future beyond electric vehicles but also in energy and relatable technology.

Conclusion

As an innovative electric vehicle company trying to break into the automotive industry and revolutionize it with its technologies, it was struggling on a number of fronts ranging from profitability to production and logistics as well as management problems. Many of these issues stemmed from external environment along with some internal fallbacks. However, in the last few years Tesla implemented a number of strategic management initiatives to address the issues. It used a resource-based approach to find value and restructure its approach to creating a multi-level architecture around its technologies. Furthermore, the firm evaluated its strategic capabilities and from a VRIO approach found methods to capitalize on its competitive advantage.

While new issues arise as Tesla achieves this transition and rapid growth, for the most part the initiatives were successful. They addressed two key aspects of Tesla’s business model which were insufficient manufacturing as an automotive company and profitability since until recently, the company was heavily relying on continuously raising market capital which is unsustainable. Going forward for Tesla is would be to create internal change, in its human resource and management structure which is currently reliant on Elon Musk and his extreme vertical approach. Tesla has always been an innovative and unorthodox company, which sets it apart and helps it to innovate, a strategic management approach which has allowed it to succeed in a highly competitive and volatile industry.

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References

DeBord, M. (2016). ‘Elon Musk just made a totally mind-blowing change to Tesla’s strategy’, Business Insider. Web.

Ewing, J. (2020). ‘Tesla’s Success in Europe Catches Industry Off Guard’, The New York Times. Web.

Field, K. (2019) Tesla’s Vertical Integration Unlocks Hidden Flexibility & Innovation — #CleanTechnica Field Trip. Web.

Furr, N. (2019). ‘Opinion: Tesla’s strategy is incredibly risky — but it still makes lots of sense’, Market Watch. Web.

Kissinger, D. (2019) Tesla Inc. Five Forces Analysis (Porter’s Model) & Recommendations. Web.

Lopez, L. (2019). ‘2019 was supposed to be easy for Tesla, but now it’s a circus’, Business Insider. Web.

McKinsey & Company. (2018) The global electric-vehicle market is amped up and on the rise. Web.

Pisano, G. (2015). ‘You Need an Innovation Strategy’, Harvard Business Review. Web.

Sherman, L. (2018). ‘Tesla Survived Manufacturing Hell–Now Comes The Hard Part’, Forbes. Web.

Tesla. (2020) About us. Web.

Trefis Team. (2018). ‘Reviewing Tesla’s Competitive Advantages As Jaguar Launches Well-Reviewed I-Pace’, Forbes. Web.

Trefis Team. (2020). ‘A Closer Look At Tesla’s Supercharger Network’, Forbes. Web.

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BusinessEssay. 2022. "Tesla Inc.: Strategic Management." January 14, 2022. https://business-essay.com/tesla-inc-strategic-management/.

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