The Business Situation: Tesla Case Study

Introduction & Company Background

The Tesla company was created in order to establish the production of efficient and affordable electric cars. In 2019, Tesla introduced an electric car aimed at the mass market. The purpose of this work is to analyze the business situation of Tesla, on the basis of which the issues of the company will be determined. Based on the analysis carried out, ways of development and overcoming the identified issues will be proposed. The core business of the company is the production of high-tech electric vehicles. In addition to the direct manufacturing of electric vehicles, the company has many projects but they are all related to its core business. It operates in the automotive industry in the electric car market.

Since Tesla is a leader in its market sector, its geographic markets are not limited. However, at the time of 2021, more than 90% of Tesla’s electric vehicles are concentrated in China, Europe and the USA. Tesla’s mission is to bring affordable electric cars to the mass market. Its vision is primarily technological, and the main value of the company is the preservation of ecology and the creation of an environmentally safe car.

Internal Analysis

Tesla’s threshold resources are the resources of the automotive industry. These are machine tools and forging equipment, rubber products, glass, various electrical equipment, light alloys, synthetic materials and electronics. Ordinary resources are enterprises of the automotive industry and offices of the company. The company’s threshold resources are also human resources: full-time employees of factories. Tesla’s ordinary capabilities are physical objects: these are real estate (factories), and the land on which they are built. It is also machinery for mechanical engineering, which enterprises are equipped with. Tesla’s ordinary capabilities also include the geography of its presence, distribution network, and lack of location benefits. The company’s human capabilities can also be regarded as threshold capabilities.

Distinctive resources include Tesla’s reputation: the Tesla brand is perceived in a more positive way than other cars. Tesla Motors does not have a marketing team, a marketing director (CMO) and an advertising agency (Thomas & Maine, 2019). However, they managed to get millions of fans thanks to their name. Image rights, expressed in close relationship with Elon Musk’s personality, and commercial expression, can also be considered a distinctive resource. The core resources are innovative technologies used in the production of Tesla electric cars. For example, Tesla engines are manufactured in a special way to increase energy density, but at the same time, not to sacrifice the reliability of the car (Thomas & Maine, 2019). To do this, Tesla uses a special asynchronous motor production technology in the S and X models.

Core capabilities of Tesla are knowledge and unique experience in the production of electric vehicles. Having become an industry revolutionary, Elon Musk created a new automotive start-up that would become a revolutionary product not only in the United States, but also within the global automotive industry (Thomas & Maine, 2019). Accordingly, the company has been on the market longer than others and has the greatest experience in the production of electric cars.

Company’s Business Strategy and Business Model

There are various types of classification of business strategies; Porter’s Generic Strategies model is used in this paper. According to Porter’s Generic Strategies model, Tesla adheres to a differentiation business strategy (Abdou, 2019). This competitive strategy best depicts what Tesla is doing now because it reflects the situation in which Tesla is at the moment by two parameters. The size of the market and the type of Tesla’s competitive advantage is best depicted by a differentiation business strategy. (Abdou, 2019). At the moment, the Tesla electric cars occupy the entire market niche, accumulating the needs of the target audience concerned about the impact of cars on the global climate. The chosen competitive strategy of product leadership (differentiation) means the creation of a unique product in the automotive industry. This fundamental direction was chosen in connection with the possibilities of the electronic car market, in which Tesla has no strong competitors. In addition to unhindered entry into the market, Tesla also has the advantage of the lack of quality analogs for this product.

Michael Porter also proposed a value creation chain that applies to the Tesla Business Model as well. The value creation chain follows from the activities of Tesla and the totality of its main functional parts (Abdou, 2019). Each of the company’s numerous components, including the production of electric cars, and related patents and initiatives, make a significant contribution to competitive advantage and create value. The value configuration of Tesla consists of basic activities, such as internal and external logistics for producing and selling electric cars. The second component of value configuration is technology development, human resource management and logistics.

The value capture of Tesla is formed according to the well-known marketing model 4P. In order to create and capture value, Tesla has developed a product that meets the needs of target consumers. The price meets the expectations of buyers, not exceeding the amount they are willing to pay for their environmental principles (Abdou, 2019). The set price for electric cars provides an incentive for the manufacturer to sell them.

Issues & Challenges and Strategic Options for Growth

The first issue that Tesla faces is the price of cars, which is focused more on the manufacturer than on the consumer. For this reason, Tesla continues to show losses and lose investors’ funds. Tesla’s total debt is about $11 billion — this amount also includes the debt that the automaker acquired with the purchase of solar battery developer SolarCity (Endsley, 2017). Of these, the company is obliged to pay $1 billion during the year.

In addition, the company may soon lose state benefits for electric car manufacturers. Now the US government is returning $7,500 per car to buyers of electric cars (Endsley, 2017). The deduction applies only to the first 200 thousand cars produced by the manufacturer (Endsley, 2017). However, the end of the grace period will not affect sales of Model S and Model X cars. They are purchased by wealthy clients for whom a discount of $ 7,500 is not essential. For buyers of a mass-produced Model 3 car, this is a significant amount. Therefore, the company needs to establish mass production of the car as soon as possible in order to sell as many Model 3s as possible at a discount.

The second problem that Tesla faces is excessive automation of production. The latest technologies belong to core resources, but the human resource is attributed to basic capabilities. This means that more attention is paid to technological development than to the education of specialists. The automaker’s management is too concentrated on automating the production and assembly of cars, and this prevents the company from scaling the business (Wang & Peng, 2020). The company’s process is too complicated, risky and overly ambitious (Wang & Peng, 2020). Tesla spends twice as much money on assembling one car than any other manufacturer.

Instead of assemblers, the company has to hire engineers who monitor complex equipment, as well as spend money on its installation and configuration. Because of this, the company does not save money but spends it even more. Tesla is trying to automate not only the production of parts but also the final assembly of cars. In the report, analysts note that even the best Japanese automakers are trying to limit automation at their factories. Major concerns like Fiat and Volkswagen tried to automate the assembly, as did Tesla but failed (Wang & Peng, 2020). It is usually too expensive and negatively affects the quality.

Strategic Options

Existing Products New Products
Existing Markets It is worth expanding the market share by increasing the production of Tesla models aimed at the mass consumer. It is also necessary to increase the number of purchases of goods, making the price more customer-oriented. The company needs to increase the frequency of purchases of goods by the consumer. For example, this can be achieved through new discount programs. Instead of the discount, program provided by the state, Tesla can introduce its own loyalty programs — discount cards for regular customers, bonuses and gifts. Tesla should upgrade existing models of electric vehicles. They need to be given new properties and functions, for example, speed, capacity and frost resistance. The company also needs to expand its product range for mass buyer. This can be done by creating a new generation of models of cars for ordinary drivers.
New Products The new direction of the company’s activities should not be radically different from the existing ones but rather complements them. For the production of new models of electric cars, it will be possible to use existing marketing tools, production and sales channels. The new direction of Tesla’s activity will be associated with the subsequent stage of production and promotion of the company’s existing products (mass-market-oriented machines). The expansion of the company’s production output will be made for a type of product that is not used in the production chain of the main type of product. The main product is cars aimed at wealthy customers. However, the production of electric cars for the mass market will be using the technology used (equipment and labor). The diversification strategy will consist of simultaneous development and release of new models of electric cars. At the same time, Tesla will explore a new market: the mass market; this is the most expensive and riskiest strategy. However, the financial return in case of its successful implementation can be an order of magnitude higher and will allow achieving high profitability.

Evaluation of the Strategic Options for Growth and Implementation

Considering the SFA framework, four potential strategies for the development of Tesla can be identified. Increasing market penetration is the simplest and most obvious strategy for Tesla. They are already present on the market; their main goal is to increase sales. The second possible solution is a strategy in which the company will need to adapt its electric cars to new markets. To do this, it is necessary to identify new potential consumers of existing products, for example, drivers with average incomes. The third possible way of growth is the supply in the existing market of cars with characteristics updated in such a way as to improve their compliance with the market. This path is most preferable for Tesla as a company whose key competencies lie in the field of technology and technical development. The last of the possible strategies is the riskiest for Tesla, as it implies entering fundamentally new territory with a new product.

The most winning strategy for Tesla will be a combination of a new product and a new market. The new line of activity – the production of mass-market-oriented electric vehicles – promises to be much more profitable than the development of existing ones. The development of a new direction for the production of electric cars for an average-income buyer does not require serious investments. Production technologies and equipment will not have to be changed radically; it is enough just to reorient them (Gayathri & Kumari, 2019) slightly. A new market is a mass market in which the company has no work experience. Tesla wants to enter this market to expand the capabilities of its business. New consumers are a group of drivers who currently do not buy Tesla electric cars due to the cost being too high.

This strategy will use the company’s strengths, such as intangible resources. Due to the image and brand of the company, it will be easy to penetrate the market. Forces in the field of production will also be involved, namely high technologies used in the construction of electric cars. Intangible strengths will be used to develop a new electric car model. Thus, the existing Tesla infrastructure products – knowledge bases, IT systems, as well as various technologies and intellectual property objects will be extremely useful. Strengths such as the latest production equipment will also be mobilized.

When implementing this strategy, first of all, such an opportunity as high profit will be realized. By occupying the largest segment of the market – the mass market segment – Tesla will have the opportunity to significantly increase profits. High profits, in turn, will open up such a new opportunity as the potential for growth. Tesla will have its own funds that can be invested in the company. By offering products that correspond to each stage of the family life cycle, Tesla retains consumers who trust it. By releasing new electric cars to a new market, Tesla will receive a large number of regular consumers. They, in turn, will provide the company with long-term profits. High profits will also stimulate innovation, providing an opportunity for the development and introduction of new products.

If obstacles arise when implementing a mass-market-oriented strategy, there are several ways to overcome them. While maintaining an unchanged technical base, it is possible to increase output by increasing the use of all types of resources (Anupam & Ganga, 2018). The proportions in which production resources are used can be changed. It is also possible to change the reorientation of production: for example, by changing its technical base, and scientific and technological progress. It will be necessary to conduct an analysis of production methods. New methods should be taken into account in the production function, while the methods that have become technically inefficient should be excluded from it. Advanced training of employees who repair and maintain equipment can also be used. The next way will be to revise the business plan taking into account the costs, payback time and benefits received. After that, it will be necessary to attract additional financial resources from other areas of production to production.

To implement the strategic option, it is necessary to attract marketing resources for wider advertising of a mass electric car. Additional involvement of labor resources will be needed to re-equip the production base. It will also be necessary to reorient monetary assets and shares in a new direction. First of all, the risks are related to the human factor or equipment. Tesla needs to enter the market before the state program to support car owners ends. Therefore, a breakdown may occur at the Tesla factories due to insufficient qualifications of employees or too hasty re-equipment of equipment. To avoid the risk, it is necessary to strengthen the diagnostics of new equipment and check the operation of the old one. Moreover, in order to eliminate the human factor, employees should be directed to professional development.

Conclusion

During the analysis, it was found out that Tesla electric cars are market leaders. The strengths and advantages of the organization were identified, thanks to which Tesla is a successful company. This is the presence of a strong brand (both personal and the company itself). It is also innovative – there are no large analogs of electric vehicles on the market. However, according to long-term prospects, in the coming years, more than half of all cars will be electronic. This means that there is growing competition from other automotive magnates who invest in the development of their own electric cars. Therefore, in order not to lose its strong position, Tesla should expand the market by starting to produce cars not only for a narrow circle of consumers but also focused on the mass market.

Reference List

Abdou, D. M. (2019) ‘An insight for the market driving forces: Case of Tesla Model- S’, International Journal of Business Ecosystem & Strategy, 1(2), pp. 25-30.

Anupam, M. and Ganga, B. (2018) ‘Financial statements analysis on Tesla’, Academy of Accounting and Financial Studies Journal, 22(6), pp. 1-9.

Endsley, M. R. (2017) ‘Autonomous driving systems: A preliminary naturalistic study of the Tesla Model-S’, Journal of Cognitive Engineering and Decision Making, 11(3), pp. 1131-1142.

Gayathri, S. and Kumari, D. A. (2019) ‘Electric vehicles: An introduction of the Tesla for strategy and leadership, International Journal of Recent Technology and Engineering, 8(2), pp. 1522-1524.

Thomas, V. J. and Maine, E. (2019) ‘Market entry strategies for electric vehicle start-ups in the automotive industry: Lessons from Tesla Motors’, Journal of Cleaner Production, 235(6), pp. 653-663.

Wang, J. and Peng, X. (2020) ‘A study of patent open-source strategies based on open innovation: The case of Tesla’, Open Journal of Social Sciences, 8(7), pp. 1-9.

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