Analysis of the External Environment - Tesla - Assignment Example

REPORT ON TESLA Contents Contents 2 Introduction 5 Question Analysis of the external environment 5 Macro Environment Analysis – PESTEL 5 Political6 Economical 6 Social 7 Technological 7 Environmental 7 Legal 8 Micro Environment Analysis 8 Porter’s 5 Forces Model 8 The Threat from new entrants 8 The bargaining power of buyers 8 Threat of Substitution 9 The bargaining power of suppliers 9 The intensity of Rivalry 9 Q2. – Analysis of the internal environment 9 Financial overview of the company 9 Gross Profit margin 9 Operating Expense to revenue 10 Fixed assets to total assets 11 Resource based view of the company 11 Value chain of the company 12 Primary activities 12 Support activities 13 Q3. – Analysis of PR crises 14 Situational crisis communication theory 15 Question 4: – Strategic Analysis 17 Business Level Strategy 17 3. Strategies Suggested for future/Evaluation 18 Improving battery supply 18 Maintaining the brand loyalty 19 Infrastructure Development 19 Expanding the business globally 20 4. Implementation Modes/Techniques and Final Suggestions. 20 Conclusion 21 References 22 Appendix 25 Introduction Tesla motors is a company that is situated in California in America and Tesla has focused more on manufacturing high and premium brand cars. It has dedicated its 10 years in the manufacturing and production of high end cars. Tesla has launched two premium brands named as Tesla Roadster and Model S. Car business is considered as the main business of America since the people of America have craze and desire for new and high premium cars. America contributes more than 3% of its GDP from the production and manufacture of cars. More than 49% of US market share is being covered by the three largest car manufacturing company of US. The three main car manufacturing company of US are Nissan leaf, Tesla and Fisker. Tesla for undertaking new innovation in designing its cars has assembled a group of specialists from Silicon Valley for increasing its market share. Tesla Roadster was the first production car of Tesla and Tesla introduced its Model S which is considered as the high end electric car for competing with BMW and Audi. Tesla for marketing its Model S in the market have focused on features like comfort, handling and speed and it emphasized on the fact that it will save the cost from gas and will decrease the extent of repair or services. Tesla has sold off its power trains to other car manufacturing company and has also provided designs for power trains to other car manufacturing company. Question 1: Analysis of the external environment Macro Environment Analysis – PESTEL The PESTEL analysis is generally conducted in order to identify the various factors or variables that exist in the external environment and evaluating the various strategies adopted by the company and the opportunities and the risk that are associated with it. The main importance of PESTEL analysis is that the modification or changes in these variables can result in important transformation in the industry especially in case of long run. PESTEL analysis mainly emphasizes or focuses on the political, economical, social, technological, environmental and legal factors or variables in the environment (Figure 1). Political Tesla motor is engaged in the selling of cars in more than 17 countries of North America, Asia and Western Europe and therefore in order to function its operation Tesla motor is required to deal with the various political patterns that influences or affects its business pattern or its performance. The main political factors that is influencing or affecting the industry is manufacture or production of environment friendly cars in order to abide by the environmental protection laws for fulfilling its strict emission levels. The other significant factor is the loan program that is adopted by the US government for conducting research and development of new and innovative vehicle and technologies. In this situation many automobile industry might attempt in entering and capturing the market. Economical The economic factors mainly includes the economic growth in case of the alternative energy industries and increasing the cost of the cars by increasing the cost or price of its fuel in the short run. Therefore it has increased the demand for its premium and more efficient car as compared to its previous demand. The inflation rate and the recovery of the GDP in the developed countries during the period of recession from the period of 2008 to 2009 have influences and affected the purchasing power of the customer. Social The social factors are associated with the increase in the environmental concern and Tesla has emphasized on manufacturing its car that is eco friendly in nature since the customers are losing its faith in the cost of production of car and the use of the gasoline fuel in order to protect and safeguard the environment. The current situation reflects that the customers are focusing on electric vehicles for improving and developing the social status of the customers. The other aspect of the social change is that the elderly population with the possession of wealth and savings prefer to invest their money on premium electrical cars. Technological The advancement in the technology and rapid globalization have affected and influenced the automobile industry. The technological advancement that was carried out by Tesla for the last 10 years was for the introduction of electrical cars and this has resulted in improving various safety measures and providing more convenience in the car in the future. The technological advancement in the car industry has facilitated Tesla in increasing its efficiency and reducing its cost. Environmental For many years the manufacturer or the producers of the car have encountered competitive pressure for producing and manufacturing fuel efficient and eco friendly vehicle. The environmental factors have played a major role in the production process since the customers have become more conscious on the various environmental factors that influence the production. Legal The main legal constraint for Tesla was the franchise laws that were enacted in US which prevented Tesla from directly selling its car. The production of battery car is affected by the subsidies and the tax incentives for increasing the demand of the customers. The PESTEL analysis that is conducted will benefit Tesla for its expansion and success in the automobile industry in the future and therefore Tesla should adopt with the rapid development in technology and various political regulations in the industry it is operating. Micro Environment Analysis Porter’s 5 Forces Model The porter 5 force model is a strategic analysis for attracting its customers which will affect the performance and profitability of the company (Figure 2). The Threat from new entrants The threat from new entrant for Tesla is very high and it faced lot of challenges in entering into the electric automobile market due to its financial constraint which required huge investment in developing its distribution channels. On the other hand the established manufacturer did not encounter such constraints due to their ability of developing electric vehicles. The bargaining power of buyers The partnership of Tesla with Daimler and Toyota has increased the profit of the company providing them high power and Tesla also sells their car to individual customers and the various government incentives provides tax credit deduction to its potential customers which increases the demand for the electric cars making the bargaining power quiet low. Threat of Substitution The threat of substitutes is considerably low because there is only limited number of choices in substitution of car. The bargaining power of suppliers The bargaining power of the suppliers is very high since any problem in the delivery of the parts by the suppliers will affect the production function. Despite establishing close relationship with Panasonic and focusing on the improvement of new battery cell many suppliers prefer to use the components in their cars. The intensity of Rivalry The intensity of rivalry is very high. The main competitors of Tesla are Nissan leaf, Ford, Fiskar, Chevrolet and since the market is fast expanding therefore several new players have entered the market which includes Audi and Volkswagen. The companies are adopting various alternatives such as environment friendly cars, biodiesel and turbo diesel cars. This indicates that that the extent of rivalry and therefore the companies are required to introduce innovative and better cars. The 5 force porter’s model reflects that the automobile industry is very competitive with large number of competitors therefore Tesla is required to implement new strategies in order to compete with the large companies. Q2. – Analysis of the internal environment Financial overview of the company Gross Profit margin Particulars 2011 2012 Gross Profit 61595 30,067 Revenue 204242 413256 Gross Profit ratio 30.15% 7.27% After analyzing the gross profit ratio of the company for two subsequent years it is noted that there has been a great reduction in the gross profit ratio from 2011 to 2012. It is astonishing to note that although there has been increase in sales from 2011 to 2012 the gross profit has actually fallen from 2011 to 2012. This is because of the fact that the cost of goods sold has increased in greater proportion over the years from 2011 to 2012. The increase in the cost of revenue from 2011 to 2012 is to the tune of 168.96% where as there in increase in sales of about 102%. So to achieve an increase in the sales revenue of 102% the company has to spend an additional amount of 169% approx in cost of revenue. Operating Expense to revenue Particulars 2011 2012 Operating expense 313083 424350 Revenue 204242 413256 Operating expense to revenue 153.29 % 97.38 % If the operating expense that the company faces is expressed as a percentage of the revenue of the company then it is found that in 2011 the operating expense of the company was about 153% of the revenue of the company. However in 2012 the operating expense was about 98% of the revenue of the company. It was found that due to the fact that large portion of the company’s revenue was used up by the cost of revenue and the operating expenses the company experienced losses in operation and loss in profit. Fixed assets to total assets Particulars 2012 2013 Fixed asset 552229 595579 Total Asset 1114190 1887844 Fixed asset to total asset 49.56 31.54 The share of the fixed assets in the total assets of the company has decreased from 2012 to 2013.This is not a good sign for a manufacturing company. The company has too much of current assets and cash and cash equivalents. Instead of holding so much cash at hand the company should put some cash to use it owning fixed asset which can serve the company long term. Resource based view of the company The resource based view of the company serves as the basis for being the competitive advantage by applying a bundle of tangible and intangible options that are available at the firm’s disposal. The VRIN frame work is used to analyze the resources of the company. The VRIN framework stands for Valuable, Rare, inimitable and non substitutable (Warner, 2010). Valuable The resource that is valuable for the company is the human resource of the company. The company’s valuable resource is the human resource of the company. Another valuable resource of the company is the battery pack. The specially designed battery pack that is used by the company provides much greater energy density at far less weight. This contributes to the beautiful design of the cars. Rare The company has been able to use disadvantages in a unique way to convert them to the advantages of the company. The disadvantage of lack of qualified human resource is efficiently used in designing a benchmark electronic integration. In-imitable While the other resources may be imitated by research the resources that are difficult to imitate are human resource and difficult to imitate is the battery design of the car (Oswald and Flouris, 2012). Non substitutable resource For the time being the non-substitutable resource of the company is the CEO of the company who is considered as the face of the company (Wilson, 2005). Value chain of the company As per figure 1 which defines various activities of the company and tries to understand the value created by different activities of the company which helps the company in creating competitive advantage for the company. The Value chain model by Michael Porter focuses on two types of activities (Harper, 2010). The two types of activities are the primary and the secondary activities. The primary activities include the inbound logistics, operations, marketing, outbound logistics, and sales and service and Firm infrastructure. The support activities are Human resource management, Procurement and Technology Development. Primary activities Inbound logistics In the inbound logistics department Tesla made use of the battery that it procured from Panasonic. In using the battery it paid careful consideration towards the safety of the vehicle. The company unlike other manufacturers of the EV used a slightly improved version of Li-ion battery that is commonly used in the laptops. The company additionally moved the manufacturing and testing facility which was initially based in Thailand to the company’s facilities in California. The company justified this move by stating that it felt it was better to have the engineering and manufacturing less than one roof. Operations The company focused on building the entire models of car in house. Many of the car’s components were designed as customized for the model rather than producing the components in mass. Even the plastic components of the car were produced through in house production system. Marketing and sales While it is the normal trend of the car manufacturers to sell the cars through independent dealerships the company focused on implementing a strategy in which the company sold its cars through own dealerships. The sales person of the company is recruited on the basis of salary rather than on commission. In advertising about the cars the advertisements focused on describing the models as elegant in design and the speed factor rather than focusing the advertisements on less emission or the green features. In their advertisements the Tesla aimed to market the product as a cool car to own rather than using its green features to sell the product. Support activities Human resource Most of the company’s staff and management did not have any experience in the automobile industry but many of them had a background in technology. Later on the company recruited personnel from the automobile industry. The company used the benefits of being in the Silicon Valley by the level of electronic integrations that the company used in the dashboard which has become a model for other companies. Technology development The Company developed the first model that is road star by taking help of the technology and design from lotus. For building the second car model that is model S, the company incorporated innovative design methodologies in which the company put the batteries in the bottom of the car that provided rigidity to the cars so that it could use a roof that had a roof which had a glass roof. Q3. – Analysis of PR crises Given the fact that the domain of public relations and the relationship building exercise has gained a lot of attention in recent year’s practitioners in this field are increasingly focused on the process of establishing an environment of mutual trust in between the organization and the changing multitude of shareholders. However it is to be noted that that at the same time there is a change that is occurring in the media landscape that has led to the degree of control that the organization can hope to maintain legitimately over the stakeholders. In this area of digitization and new era the news about a company or its internal compatibilities reaches to the media faster than the organization wants and before the organization actually indulges in the PR communication. The company which is thought of an alternative example to this general trend is Apple which is actually known to effectively use the strategy of less is more. The company that was founded by Steve jobs was known for the secretive approaches in which it revealed to the outside world facts only that it wanted to tell and in very small and brief communication approaches. The messages and the interactions between the organizers and the stakeholders have are rarely centralized. These messages are spread across multiple partners, communities or individuals that are spread across the globe. However the problem with the stakeholders receiving communication that are not directly communicated by the company management is that many a times the messages actually diminish the trust relationship that exists between the stakeholders and the management. Situational crisis communication theory The theory was first stated by W. Timothy Coombs in the field of crisis communication and crisis management. The crisis managers should aim at matching the crisis response strategies with the reputational threat that is posed by the crisis (Coombs, 2007). The company Tesla faced many PR problems since its inception. When the company was first formed it was quickly noted by the stakeholders of the company that none of the founders or original engineers had any experience in the car manufacturing sector. This acted as a negative pr publicity of the company which the company rectified later through the incorporation of several engineers in the field. When the company started manufacturing Tesla model S, the company started building and assembling the model in house. The Stake holders of the company thought that the company was incapable to do so and questioned about the company’s ability to be able to do the job successfully. This was obviously a negative PR image that was published to the stakeholders of the company without the will of the company to do so and the company’s response to the event was worse as it acknowledged its deficiency. Then in 2013 another crisis gripped the company. Three of the model S that the company had sold caught fire in 2013 within a period of some weeks. All the incidents were triggered by accidents in which the battery compartment was directly impacted. After the first accident took place, the company issued a statement in a company newsletter. Although the event of the first accident can be considered to be an isolated incident, the media coverage of the same turned the event into a crisis issue. Eventually the impact of the crisis was so profound that the Bloomberg listed it in the top 10 crisis that occurred in 2013 and the company’s stocks took a major hit (Wooley and Steverman, 2013). After the first accident that happened media highlights the company’s earlier reputation and the safety ratings of the car and puts the blame on the battery. As the company does not have a history of crisis so according to the SCCT model the company receives the benefit of doubt and is not severely scrutinized. The company’s response at this time was to provide moiré information to the public and to compensate the victim in certain manner. Another fact is to be noted that the company’s press release at this time also included an email conversation with the victim stakeholder in which the emphasis was on the fact that in the case of the accident the Model S performed in such a manner in which the victim did not receive any physical injury. After three accidents occur in a row TESLA is put at the receiving end of the accusations and TESLA became the company that already had a history in cases (Bigum, 2014.). The company’s response strategies in this case in the form of 2nd and third press release that was released by the company focused on denial response in the third and a press release in the second that was mainly written by the victim of the second accident and was focused on the protection of the reputation of the company. Question 4: – Strategic Analysis Business Level Strategy Tesla motor is not only engaged in the manufacturing or the production of electric train but it is also engaged in selling off its electric trains (Warner, 2010). Tesla motor have focused on the differentiation strategy since the customers of Tesla are mainly from the upper and the middle income groups since Tesla’s model S targets middle income group by fixing a lower price for the model around $ 57 000 dollar as compared to Tesla’s Roadster and thus Tesla focuses more on production and manufacture of very high performance cars which stores high energy and which is capable of acceleration ranging from zero to 60 mph and introducing creative electric cars (Tesla Motors, 2014). Tesla long term business strategy is designing model X that will provide the benefit of minivan by functioning as an electric car can. Tesla mainly focuses on its operation in the domestic market but it is simultaneously widening its operation in the global or the international market. The reason behind Tesla carrying out its operation both in the local as well as in the international market is that it is aiming towards the achievement of both local responsiveness and goal efficiency. Tesla motor have focused on the differentiation strategy by emphasizing on the small group of people who are very conscious about the environment and are attracted towards beautiful and stylish cars. Since it is very difficult to compete with other automobile manufacturers since a normal person would not buy electric power for short distance and low charging network .Tesla is not able to adopt with the hybrid and low cost strategies since it do not have capital, scale and production capacity for competing on the basis of cost and Tesla is surviving in the market only due to its uniqueness in the product design and advancement in the technologies (Figure 3). 2. Corporate Strategy The corporate level strategy that is introduced by Tesla is the market penetration strategy that is required to be adopted by Tesla and related constraint that is associated with it. Tesla is aiming and focusing on the influence and its impact on the current market situation and also on the features of its current and new products (Muller, 2013). Tesla not only manufactures and sells its electric power trains but also designs the electric power train for other automobile manufacturers. Tesla is manufacturing and also developing power trains for Toyota. Tesla has also moved its operation because it was of the opinion for carrying out its manufacturing and engineering in the same place. Tesla motor has also entered into partnership with other firms. The research and development department of Tesla motors together with Panasonic have cooperated for the development of efficient and effective batteries. Tesla motor also cooperates and develops relationship with Toyota and Daimer and Tesla and Toyota both have decided to co-operate each other for the improvement and development of various parts of the electric vehicles, engineering support and the production system (Hill, Jones, and Schilling, 2014). 3. Strategies Suggested for future/Evaluation Improving battery supply Tesla motor future expansion and development may be encountered by constraint and hindrances and therefore the various strategies that are suggested for the future expansion and evaluation are Tesla is required to provide guarantee for supplying sufficient battery. Although Tesla have entered into partnership with Panasonic but its problem of shortage of battery have not been eliminated and therefore Tesla is required to establish its batteries factory for providing cells for its future generation cars. Tesla must be cooperative with the battery suppliers including Panasonic for obtaining resources (Rothaermel, 2015). Maintaining the brand loyalty Tesla has brand equity in the market and therefore it is required to maintain its brand equity and position in the future period. Tesla is being considered as the apple of the automobile industry for manufacturing high-tech, reliable and unique product for its customers and the branding is considered as important element of Tesla that distinguishes itself from the other automotive industry that exist in the market. In order to maintain its brand loyalty Tesla is required to focus continuously on the production and manufacturing of the unique and innovative products by attracting more of its consumers for purchasing the product and Tesla should also focus on it’s after sale service in order to meet or fulfil the expectations of its customers. Infrastructure Development Tesla is also required to emphasize on the improvement and development of infrastructure in order to capture the market and gaining its market share. The time duration that is required for charging due to lack of proper charging station will diminish the interest for the electric cars from the mind of the customers since the fuelling station are readily available to the people but the charging stations are not readily accessible to people and therefore it is difficult for the BEV to be charged when it is required. And in order to overcome the constraint Tesla is required to emphasize on the improvement and development of infrastructure of the charging stations. Apart from the charging stations there are various charging options that can be accessed by the customers easily such the availability of the plug-in in the restaurants, commercial establishments, parking space and the rapid development in the charging facilities is very advantageous. Expanding the business globally Tesla motor expansion strategy will bring huge success and achievement of its target revenue. Tesla by expanding its business both in the national as well as in the international market will facilitate in improving its reputation in the market. 4. Implementation Modes/Techniques and Final Suggestions. The techniques that are suggested for Tesla is to transfer its strategy from focus differentiation to differentiation by offering various advantages and benefits that are different from its competitors and also valuing its customers at same price which will facilitate the company in increasing the profitability and the market share in the market. Tesla, for achieving the differentiation strategy is advised to expand the models within the small premium vehicle in order to compete with its competitors. Tesla should establish its aim and objective for providing its car at an affordable price that is easily available for its different market segments and not only for its premium segments only. Tesla products are subjected to the advancement and development in the technology and therefore it is required to focus on maintaining innovation and uniqueness in designing new product for its customers. The differentiation strategy that is required to be adopted by Tesla is to focus on its cost structure by maintaining low cost in those segments that are not associated with low cost . Therefore in order to gain competitive advantage the company is required to focus on its new brand in order to develop its brand identity for improving its brand identity all over the world. Tesla has focused on the focus differentiation strategy by targeting on its upper income level customers focusing on high performance and introduction of creative vehicles for gaining competitive advantage over its competitors. Conclusion After analyzing the company it is found that the company’s financial performance is not quite good. The cost of revenue of the company is so high that the gross profit of the company is less for the consecutive years despite having good sales revenue. The net profit of the company is also negative for the consecutive years. In analyzing the assets of the company it is found that the percentage of the current assets to the total assets of the company quite high. In analyzing the PR of the company it is found that the company has made quite some mistakes in pr over the years. The value of the company is analyzed and it is found that the human resource of the company is the most valuable resource of the company. Tesla motor’s present analysis has been conducted for providing the future strategy of the company in order to sustain in the competitive environment. Tesla is considered as the innovative company with various unique ideas and adequate management strategy for the manufacture and production of car. Thus Tesla has modified the automobile industry and have provided alternative to its gasoline vehicle. References Bigum, M., 2014. The Sparkling Launch of the Tesla Model S. [online] Available at: < http://pure.au.dk/portal-asb-student/files/79413446/Thesis_report.pdf > [Accessed 6 April. 2015]. Coombs, W. T., 2007. Crisis management and communications. [online]Available at: < http://www.instituteforpr.org/topics/crisis-management-and-communications/ > [Accessed 28 July 2014] Harper, M., 2010. Inclusive Value Chains: A Pathway Out of Poverty. NY: World Scientific Hill, C., Jones, G. and Schilling, M., 2014.Strategic management: Theory & Cases: An Integrated Approach. 11th ed., Cengage Learning. Muller, J., 2013.The Real Reason Tesla Is Still Alive. [online] Available at: < http://www.forbes.com/sites/joannmuller/2013/05/11/the-real-reason-tesla-is-still-alive- and-other-green-car-companies-arent/ >. [Accessed 6 April. 2015]. Oswald, S. L., and Flouris, T. G., 2012. 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Wit, B. and Meyer, R., 2005.Strategy synthesis. 3rd ed. London: Thomson Learning. Wooley,S.and Steverman,B., 2013. The top 10 reputation crises of 2013. [online]. Available at: [Accessed 28 July 2014] Appendix Appendix 1 Figure 1 Porter Value chain (Porter, 2008. p. 60) Appendix 2 Figure 2: PESTEL Analysis (Thompson and Martin, 2005) Appendix 3 Figure 3: Porter 5 forces model (Porter, 2013) Appendix 4 Figure 4: Bowman strategic Clock (Scholes and Whittington, 2005) Read More