Tesla Strategic Analysis - Report Example

of Westminster, Westminster Business School ID number Strategic Perspectives BKEY601 Both seminar leaders’ s; Title of the report Word count Table of Contents Executive Summary 5 Introduction 6 1. Tesla External Analysis 6 PESTLE 6 Political 6 Economic 6 Social 7 Technological 7 Legal 7 Environmental 8 Porter’s Five forces 8 Threat of new entrants: Low 8 Bargaining power of suppliers: Moderate 8 Bargaining power of buyers: Low 8 Competitive rivalry High 9 Threat of substitute products: Low 9 Industry (Industry Life Cycle) theory 10 Key success factors in the automotive industry 10 2. Tesla Internal Strategic Analysis 10 Financial Analysis of Tesla 11 Tesla’s Core Competencies 12 a. Patenting 12 b. Battery Pack Technology 12 c. Quality 13 Tesla Value Chain Analysis 13 Tesla Resource Based View 16 Tangible Resources 16 Physical and Technological 16 Intangible Resources 16 Human Resources 16 Innovation 17 Organizational Capabilities 17 Reputation 17 3. Tesla Stakeholder Issues and PR issues 18 4. Strategic Options and Recommendations 19 Business Levels Strategy 20 Corporate Level Strategy 20 Ansoff’s Product/Market Matrix 20 International level strategy 21 Cooperative strategy 22 Suggested Strategies for Future Evaluation 22 Two chosen strategies for implementation at Tesla 22 a. Focus differentiation strategy 23 b. Growth strategy involving market penetration and development 23 Implementation Techniques 24 Conclusion 24 References 26 Appendix 28 Executive Summary The report aims at providing strategic analysis for Tesla Inc., which specializes in the production of electric cars and its related products. The report provides a brief introduction followed by the internal and external analysis of Tesla using economic models and theory. Issues faced by the company and the strategic options for the company evident from the analysis of the internal and external environment are also detailed in the report. It is evident that the main strategic options undertaken by Tesla are focus differentiation strategy and growth in terms of market penetration and development. The need for diversification is also evident owing to the impending increased competition in the electric car business from established brands like Toyota and GM. Introduction Tesla Inc. is an American Automobile company founded by Elon Musk in 2003 with its headquarters in Palo Alto, California (Tesla, 2015). The report aims at providing a strategic analysis of Tesla to allow for the development of strategic recommendations for the company both in the domestic and international market. The report uses different economic models and theory in the analysis of the internal and external environment of the company and with the conclusions allow for the strategic options to the company to be analysed in the last two main sections of the report. Conclusions on the strategic options available for the company are made to allow the reader have a succinct understanding of the current and future strategic decisions and options relating to Tesla. 2. Tesla External Analysis Tesla external environment analysis makes use of PESTLE, and Porter’s five forces. PESTLE Political There has been positive response by governments towards the introduction, manufacture, and use of electric vehicles (Mangram, 2012). Evidence of this fact is consumer incentives and government subsidies for manufacturer’s production of electric vehicles. An example is the provision of rebates in Ontario worth between $4000 and $10,000 for the purchase of electric cars (Government of Ontario). Economic The growth of the economy after the recession and the high fuel prices that followed allowed for the success of Tesla in the economy and has not been affected by the recent fall in oil prices. The demand for electric luxury cars is high and with the quality, performance, and luxury of Tesla’s cars demand will be more than their production for quite a while. Social Global warming in the 20th century is among the biggest global concerns (“Ten Most Important, 2013). The main global warming reason is gas emissions causing environmental degradation (Baki et al., 2004). Consumers are more ready and willing to spend on environmental friendly vehicles in recent years providing ground and incentive for Tesla’s growth and development. Technological Introduction and presence of a high network of electric battery charging stations will propel the further sale and uptake of electric cars favouring Tesla. The importance of technological advancement has never been greater in ensuring success in operating in the automotive industry (Witcher & Chau, 2010). Utilization of big data from research and data analytics in determining the needs of the consumers and incorporating the conclusions in production and management is important for success in the automotive industry. Tesla has been excellent in leveraging on technological advancement through the use of internet sales and production of latest technology cars in the market. Legal Laws and regulations affect the performance of firms in the automotive industry including the passing of the ELV endorsement by the Automotive Recycling Law (Togawa, 2008, 108). Adherence to international and domestic laws makes for the success of any players in the automotive industry. Environmental Awareness on carbon footprint has increased over the years, and Tesla is favoured in this aspect owing to its dedication and leadership in reducing the carbon footprint in the automotive industry. The technological energy efficiency and zero tailpipe emission evident in Tesla’s strategic plans depict the environmental considerations at the company. The PESTLE analysis depicts the need for adherence to set regulations and government support for the automotive industry for success by players especially new players like Tesla. Reducing the carbon footprint, incorporation of latest technology, and understanding the needs of the consumers for safe, quality, and environmental friendly cars are important considerations in the automotive industry. Porter’s Five forces Threat of new entrants: Low Entering into the automotive industry is hard owing to the high capital requirement, the need for a well-developed brand name and reputation are main requirements that make entry hard. Economies of scale to existing producers, high research and development costs, and environmental requirements results in a low threat of entry. Bargaining power of suppliers: Moderate Many components of vehicles are delivered by different suppliers in global locations, but the lack of differentiation of the materials reduces the bargaining power of the suppliers since they have to have contracts with the few large car manufacturers. The need for high-quality products by manufacturers makes suppliers have some degree of bargaining power. Bargaining power of buyers: Low The automotive industry mostly makes use of dealerships for the sale of vehicles from manufacturers to the consumers resulting in dependence that reduce buyer bargaining power. Concentration by few large players also affects the bargaining power of buyers. Tesla sales directly to the consumers reducing the dependency that comes with dealerships. Competitive rivalry High Competition is very high in the automotive industry, and Tesla is faced with indirect competition from Toyota, Honda, GM, and Ford among others owing to their resources. These large firms have access to high resource amounts that they can easily breach the competitiveness of Tesla in the production of electric cars through research and development. Threat of substitute products: Low The automotive industry is faced with a low threat of substitutes in terms of trains and other forms of transport in cities that have risen over the years. However, for Tesla the competition is low owing to the high-performance capabilities of Model S and exclusive production of a high-performing car that is fully electric. Ford and Nissan have limited interest in entering the fully electric car business while BMW, Daimler-Benz will produce their own but it is expected that they will not match the performance Model S performance (Levin, Mohan, & Zhang, 2013, 12). Nissan Leaf and Ford Focus despite not fully electric have limited performance potential making the threat of substitute for Tesla low. From the Porter’s five forces, entry of new entrants is prohibited by high investment, brand, and reputation needs. The need for supplier contracts and focus on the performance of electric vehicles will put Tesla ahead of the competition in the highly competitive industry. Generally, Tesla is in a good position of emerging successful in the automotive industry according to the porter’s five forces. Industry (Industry Life Cycle) theory The automotive industry is at the maturity stage of the industry life cycle, and the survival of firms in the industry requires differentiation from the high competition at the maturity stage of the industry life cycle. The production of many models, new cars including electric vehicles, and new designs evidences the maturity stage of the automotive industry. The market is competitive for consumers another characteristic of the maturity stage. Key success factors in the automotive industry There are certain factors required for the effective competition by an automotive industry player including: 1. Product differentiation from the competition 2. Development of best quality product in the market 3. Provide high value for the consumers creating customer loyalty 4. Use of latest technology and constant innovation 5. Low production cost for augmented competitiveness 6. Manufacture durable and reliable products 7. Reliability and durability of products The external analysis depicts that Tesla is in a good position of succeeding in the industry because of the main factors favouring the success of the company including product differentiation, low entry and substitution threats, and ability to adapt to consumer needs. 2. Tesla Internal Strategic Analysis Internal strategic analysis of Tesla will entail the use of financial analysis; core competencies, resource-based view, and value chain models. Financial Analysis of Tesla The trend of the last four endings ending on December 31, 2014 financial statements will be used in the analysis of Tesla’s performance with statements available for review in the appendix section of the report. Tesla operates in the NASDAQ stock exchange under the symbol TSLA and from the results it has had a four-year continued revenue increases with $204 million in 2011, $413.3 million in 2012, $2,013.5 million, and 3,198.4 million in 2014. The trend shows a 55.5% revenue increase in the last one year for Tesla. According to the following table, the combined revenue growth for Tesla competitors is -1.42% showing that Tesla is performing better than the competition in terms of revenue generation efforts. Ford and GM recorded negative revenue growth rates in the same financial year as Tesla. http://csimarket.com/stocks/competitionNO3.php?code=TSLA Declining liquidity ratios at Tesla depict the fall in cash flow in the company with the current ratio having declined from 188% in 2013 to 152% in 2014 year end. The quick and cash ratios declined from 137% and 126% to 107% and 91% respectively. Gross margin for Tesla has been increasing in the last three years ending 2014 from 7%, 23%, to 28%. Pre-tax and after after-tax ROE increased from 11% to 31% and 32% respectively. Net income increased at Tesla in the last one year from 74,014 to 294,040 having fallen from a high of 396,213 in 2012. Tesla has not paid any dividend in the last three years. Tesla’s gross profits have been increasing for the last three years as shown in the table below: Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Gross Profit 61.6 30.1 456.3 881.7 N.B.: all figures are in million dollars Tesla’s Core Competencies a. Patenting Tesla has been in a position of achieving over 250 patents for the development of its cars and more patents pending allowing the company to utilize new technology in ensuring it meets consumer expectations, achieves the newest technology in the market, and compliance to environmental regulation on its cars. Having patents allows the company to avoid competition and makes use of its research and development to augment consumer value. b. Battery Pack Technology Tesla developed a low-cost battery pack that has not been delivered by any other electric car manufacturers and delivers superior performance with a 300 mile range. Currently, the company is building the largest factory that will allow for easy changing and supply battery packs producing more range for the cars, convenience for the consumers, and augmenting the competitiveness of Tesla in the electric car business. The superior battery technology provides Tesla with a competitive advantage. c. Quality Tesla insists on testing and retesting of its models before they are released to the market ensuring that product reviews meet the performance of the cars. Quality in terms of safety, performance, and reliability of the cars is evident in the success achieved by Model S winning the 2013 car of the years and consumer review of 99/100, the highest ever (Tesla Motors Team, November 2014). Tesla’s insistence on quality is one of the main competencies that have allowed the company to build a consumer base and achieve success in domestic and international market. Tesla Value Chain Analysis Primary Activities Strengths Weaknesses Inbound Logistics Internally managed manufacture Control of every aspect of the process Efficient production system Use of robots saving on labour costs (Lavrinc, 2013) Significant costs owing to single manufacturing plant Operations Rigorous testing of products for efficiency and quality Confidential processes for competitive advantage High costs owing to lack of economies of scale Inability to meet demand on time Outbound Logistics Finishing is done within the plant Single delivery of each product On demand manufacture Single delivery augment costs Marketing and sales Effective use of data analytics and big data Word of mouth advertising Online sale of products Issues developed with leadership Secondary Activities Strengths Weaknesses Service Unmatched quality in the automotive industry Low response time Different model from the norm Human Resource Management Attract many employees Insist on the best quality provision Culture of innovation and creativity High performance Attention to environmental concerns Competitive pay Procurement Outsource battery creation to Panasonic Owns latest machinery and robotics Insists on highest quality Outsourcing limits their ability to create the latest batteries but this will be overcome when the new factory is complete Research and development Very effective in developing new technology Creative teams aid in achieving technology development needs Attention to employee skills and capabilities allows for innovation Takes a lot of time Costly Tesla Resource-Based View The resource-based view analysis will analyse the tangible and intangible resources at Tesla that are critical to the company achieving its strategic goals in the future. Tangible Resources Physical and Technological A substantial amount of physical assets of Tesla is made up of property, plant, and equipment depicting the devotion of the company in achieving long-term profitability, sustainability, and growth. Electronic vehicles manufactured by Tesla need the best facilities and the best technology that has seen the business spending more on technological advanced facilities and equipment. A large network of showrooms in Europe, Australia, and North America and supercharger stations allow Tesla to make sales. With a 370 acre factory with spaces used amounting to 5.5 million square feet, the physical and technological resources are in place to enable Tesla achieve more success. Locating in Silicon Valley allows the business to access a creative and fast-paced culture. Other assets include NUMMI plant purchased from Toyota and General Motors and powertrain component stations. Intangible Resources Human Resources Tesla through the leadership of Elon Musk has been able to assemble the best-qualified personnel in the automotive industry. The human resource personnel are involved in the design, manufacture, and production of its vehicles. CEO Elon Musk has been exceptional at Tesla owing to his services in the development of the strategy, product development, and mapping a way forward for Tesla. Musk was in a position of guiding the firm through challenges with the attack on dealership platform for Tesla’s car who were against direct sales to the consumers. Musk aided in the development of the Tesla brand and image and is the main intangible asset at the company. Innovation Innovation has been the main anchor of Tesla’s mission with research, development, and technology allowing the firm to have a competitive advantage in the market. Innovation has enabled Tesla develop quality cars with high battery life and best performance driving the company to better performance. Safety, range, reliability, and acceleration of the battery pack depict the main benefits of innovation that has propelled Tesla to global success. Organizational Capabilities Tesla has an unmatched ability to develop creative outputs from intangible assets. Through research and development, the company has been in a position of accessing a lot of patents to manufacture its cars with the development of Model S having over 250 patents creating value for the consumer (Mackenzie, 2013). Control of intellectual property in the development of batteries for electric cars is also the other evidence for a strong ability of organizational capability aimed at customer value creation. Reputation The other intangible asset at Tesla is its reputation that is derived from the change it aims at bringing to the automotive industry and the success it has achieved so far with the three models it has managed to release. Having the highest product reviews and winning the 2013 car of the year, Model S gave Tesla the highest reputation an automotive marker wishes to achieve. Development of sustainable products, having Silicon Valley roots of innovation and creativity, and achieving the best results in all safety rating and overall provide Tesla with a high reputation (Tesla Motors, 2013). 3. Tesla Stakeholder Issues and PR issues The other stakeholder issue that faced Tesla is the fires that occurred in crashes by Model S owners prompting investigations on the safety of Tesla Model S vehicles (Gallucci, July 8, 2014). In 2013 and 2014, four fires on Model S vehicles were reported with the latest being a stolen car that caught fire after the suspect was chased by police and ended up hitting a pole and several cars (Gallucci, July 8, 2014). Tesla response was effective through accepting responsibility for the fires and taking correcting action and the CEO, Elon Musk speaking directly to the consumers to reassure them that they should not be worried about the safety of Tesla vehicles (Klayman & Woodall, November 7, 2013). Tesla made changes that returned consumer confidence and resulted in the completion of safety investigations by the Federal safety regulators augmenting the company’s image and succeeding in public relations with the stakeholders. These changes include the addition of deflector plates and titanium shields on the under-body reducing the chances of strikes on the under-body that could result in fires (Ivory, D. (March 28, 2014). Elon Musk provided a statement to the consumers on the changes to ensure a zero risk of fire and informed them of triple under-body shield on all cars manufactured after March 6, 2014 (Ivory, D. (March 28, 2014). The use of company-owned stores for sales with sales representatives paid by the company put Tesla in conflict with dealership lobby and resulted in prohibition in Texas to sell its cars without the use of dealers. Car manufacturers have always sold through independent dealers known to the dealership lobby, and many states had laws prohibiting direct sales by manufacturers. However, to reduce costs and conflict of interest, Tesla opted to sell directly through the sales representatives and online. The operations of the company were independent with the use of the sales network compared to the use of dealership allowing the company to focus on producing quality and new innovation and not be negatively affected by dealership contracts and problems. The effect has been banning of direct sales of Tesla vehicles in a number of states including Texas, Arizona, Virginia, Maryland, and New Jersey. However, that has not affected Tesla much since consumers from the states banning direct sales can purchase the vehicles online, and Tesla will deliver it to them though this may have a potential impact on Tesla’s future. The impact could be huge on Tesla sales if more states decide to ban direct sales and require the company to make use of dealers in selling its vehicles. Other issues that faced the company include the public controversy on Tesla’s Model S range and product delays. Model S range issues have been well ironed out with the rollout of supercharging stations to allow for convenience and accessibility of the users. Product delays in the production of its cars have been a major issue facing Tesla over the years (Handley, January 14, 2015). However, product delays have always been countered with clear communication on the need for more tests and ensure product quality, reliability, and safety of the consumers and with the success of Model S, delays are forgivable for Tesla. 4. Strategic Options and Recommendations Internal and external environment analysis of Tesla and looking at the issues that have faced the company in recent years allowed for the realization of strategies and making of strategic recommendations for Tesla to incorporate in the business for future success. Business Level Strategy Tesla employs differentiation as the business level strategy with a focus on a given market segment. The business level strategy is a focus differentiation strategy owing to Tesla offering electric vehicles to provide an alternative to gasoline. Tesla aims at offering consumers a visible alternative allowing for reduced reliance on gas and oil for driving. Performance, style, and quality are not compromised in Tesla’s vehicles despite the differentiation of providing electric cars as evidenced by the success of Roadster and Model S cars from Tesla. Focus is also evident in the market chosen by Tesla, which is the higher income bracket who is in a position of purchasing its vehicles. Legal protection through patents and a huge expenditure and success in research and development are the main factors that have propelled Tesla to be successful in the focus differentiation strategy. Provision of charging stations and ensuring high customer satisfaction evident from customer reviews owing to value, style, and luxury provision in Tesla’s car meeting the needs of the target market depict the success of the focus differentiation strategy. Corporate Level Strategy Ansoff’s Product/Market Matrix The corporate level strategy at Tesla is growth with the main being market penetration evident from the manner in which Tesla aims at changing the future of the automotive industry and positioning itself as a leader in the electronic car market. Provision of the best cars in terms of reliability, functionality, and quality are the main avenues used by Tesla to penetrate the electronic car market. Providing batteries to other electric car makers and the development of charge stations in North America, Europe, and Asia are the other avenues Tesla uses to achieve its corporate level strategy of market penetration. From the Ansoff’s matrix, it is evident that Tesla is also pursuing a market development strategy apart from market penetration. The establishment of charge stations in Canada and Asia and the aim to establish more charging stations and showrooms in new markets evidences the market development strategy at Tesla. Success in America and Europe and the continued acceptance of electronic vehicles are the main drivers that make Tesla aim at meeting the demands of the new market effectively providing the required momentum for the pursue of a market development strategy in new international markets. International level strategy Tesla pursues a transnational strategy at the international level through ensuring local responsiveness and efficiency in meeting its goals of quality, reliability, and functionality of the car models produced. Tesla is aiming at meeting the needs of the international market through the establishment of charging stations in both international and domestic markets. Establishing Tesla office and showrooms in Canada evidences the transnational strategy being pursued by Tesla. Cooperative strategy Tesla has consistently shown the insistence it puts on partnerships and collaboration with established firms and enterprises for different business functions to achieve success in the electronic car market depicting a strategic alliance strategy. Karamitsios (2013) reports on the partnership between Panasonic and Tesla for the research and development of efficient batteries to allow for durability, better range, and quality. Strategic alliance strategy at Tesla is also evident with partnerships and collaborations made between Tesla and Toyota, Daimler-Benz, General Motors, among others with notable outcome being the purchase of the NUMMI factory by Tesla from GM and Toyota. Toyota and Tesla have partnered in the development, production, and creation of electronic car parts further evidencing the strategic alliance strategy at Tesla. Suggested Strategies for Future Evaluation The report suggests that Tesla continues with the current strategies of focus differentiation, strategic alliance strategy, growth mainly market penetration and market development, and transnational strategy. The other strategy for Tesla to pursue successfully is diversification through the development of new products and new markets to prevent overreliance on the electronic car market. The overreliance on the electronic market is risky owing to the high research and development resources by well-established gasoline companies including Toyota that could overtake Tesla or reduce its market share in the future that could result in its failure to meet its strategic objectives. Two chosen strategies for implementation at Tesla Use of SAF, suitability, acceptability, and feasibility are measures of evaluating the strategic options available for Tesla as suggested in the previous section of the report allowed for the choice of two strategies viable for the company (David, 2014, 5). d. Focus differentiation strategy Suitability: a focus differentiation strategy is suitable for Tesla since it allows the automaker to focus on a given market segment that has ability to pay to generate money to finance the high research and development needs of the company. The focus differentiation strategy is also suitable in that it allows the company to effectively differentiate itself from the competition through the production of high-performance quality and luxury electric cars. Acceptability: a focus differentiation strategy is acceptable to stakeholders especially investors, employees, government agencies, and the management. The reasons include the ability of the strategy to result in profitability as evidenced by the recent success and the high potential evident in the target market segment. The employees and management are poised to benefit from a successful company in environmental conservation, as well as profitability. Feasibility: owing to the extent of financial, human resource, competitive advantage in the electric car industry, and the research and development potential of Tesla, the focus differentiation strategy is feasible (Needle, 2004, 325). Achieving the strategy is a possibility and the profitability of the company is expected to turn positive within a few years of the continued implementation of the strategy as more customers demand for Tesla cars and the company gains more market in domestic and international locations. e. Growth strategy involving market penetration and development Suitability: market penetration and development strategies are suitable owing to the ability of the strategies to augment the reach and control of Tesla in both domestic and international market. Acceptability: having a greater market share augmenting profitability and revenue generation efforts of the company results in the acceptability of the growth strategies of market penetration and development at Tesla. Feasibility: market penetration and development are feasible strategies considering the increased presence of Tesla’s physical resources in the international market. The continued development of supercharging centres in local and international locations, setting up of showrooms, and the expansive use of social media and other online marketing platforms allows for the feasibility of market penetration and development growth strategies. Implementation Techniques There are varied techniques for implementing the above-mentioned strategies, but the following were considered appropriate to allow for the achievement of the best results for Tesla. Joint ventures and partnerships are the main avenues through which Tesla can easily implement strategies of market penetration and development. Joint ventures will allow Tesla to cooperate with international firms in augmenting the market reach in the international market and deepen the acceptability and easy entry in the market (Harrigan, 1985, 281). Alliances with established companies in the automotive industry for the development of parts, research and development will also allow for effective strategy implementation (Glover & Wasserman, 2003, 11-14). Going into partnerships with firms that specialize in the development of parts for electric vehicles to aid in ensuring development of better quality and suit the needs of Tesla will also aid in better strategy implementation (Le Marinel, 2005, 38). Conclusion Tesla’s strategic options mainly focus differentiation and growth in terms of market penetration and development are poised to allow the company achieve profitability and international success. The strategy currently employed at Tesla is in line with its mission and vision and will allow the company defend its position as a pioneer in the electric car business and augment its ability to increase sales. The need for the increased positioning as a leading supplier of electric car batteries and patenting of its research and development initiatives is high to allow Tesla pursue a differentiation strategy as a measure of fending off competition from Toyota, GM, and Daimler-Benz. Generally, maintaining the current strategies is important as they make use of the firm’s capabilities in developing market share and creating a feasible shift from gas and oil-dependent economy to electric cars. References Baki, M., Copus, S., Green, M., Highfill, D., Smith, J. & Whineland, M. (2004) Automotive Industry Analysis - GM, DaimlerChrysler, Toyota, Ford, Honda, Kansas State University. David, N. (2014). Developing strategic business models and competitive advantage in the digital sector. IGL Global. Gallucci, M. (July 8, 2014). Tesla Motors Shares Dip After Fiery Model S Crash. International Business Times. Glover, S. & Wasserman, C. (2003). Partnerships, Joint Ventures & Strategic Alliances, Volume 1. Law Journal Press. Government of Ontario. “Ontario Leading the Charge.” Retrieved on April 6, 2015 from http://news.ontario.ca/opo/en/2009/07/ontario-leading-the-charge.html Handley, P. (January 14, 2015). 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Japan’s Automotive Recycling System: Evaluation Three Years after Implementation. Institute of Developing Economies. Witcher, B. & Chau, V. (2010). Strategic management. Andover: Cengage. Appendix Financials Tesla Cash Flow Statement Retrieved from http://www.marketwatch.com/investing/stock/tsla/profile http://csimarket.com/stocks/compet_glance.php?code=TSLA http://www.thestreet.com/r/ratings/reports/analysis/TSLA.html http://financials.morningstar.com/ratios/r.html?t=TSLA http://www.bloomberg.com/research/stocks/financials/ratios.asp?ticker=TSLA Read More