Channel Strategy: Tesla Motors - Term Paper Example

? Channel Strategy: Tesla Motors Channel Strategy: Tesla Motors Tesla Motors, based in California, uses only direct channel distribution to market its products to its consumers, who are limited to a selected group of firms and individuals due to the nature and cost of these products. For instance, the firm produces electric vehicles powertrain components and sells them to vehicle makers for incorporation into hybrid or fully electric vehicles. In addition, Tesla Motors designs, manufactures and sells electric cars, and was the first car manufacturer to make a fully electric sports car, which it sold directly to its customers. Tesla Motors deals directly with its customers in a direct channel distribution strategy because of two main reasons which are; quality assurance and the limited number of customers with interest or can afford products from Tesla Motors. Vehicle manufacturers such as Daimler and Toyota buy the electric vehicle powertrain components directly. On the other hand, end users buy Tesla products directly from the company because the high cost of Tesla products limits the number of people who can afford the products to a few thousands. Figure 1: Direct Channel Marketing For Tesla Motors. The figure shows that Tesla Motors uses a direct market distribution approach, whereby the firm sells its products directly to its customers without the use of intermediaries (Keller, 2009). Channel Length Tesla Motors has a short distribution channel based on the factors mentioned above; it is easier to deal with other manufacturers directly since the products have a limited market mostly due to their high cost. This is well in order, according to Musk (2006), as the company plans to maximize profits for use in further development of less costly products that will be available for other market segments. In this vein, the company produced the first ever fully electric sports car for the high-end market, with the cost of the first Tesla Roadster ranging over 109 thousand US dollars. Offering after sale services for this relatively novel phenomenon of vehicle design is another factor that results in the short channel length for Tesla. Channel Width Despite the company’s plans to expand and include middle and low-end markets in the near future Tesla Motors’ market is currently narrow (Babej and Pollak, 2006). If all goes according to plan, Tesla Motors will use all the revenue from the car and component sales, and capital from investors for research and development for vehicles that will see its customer base expand (Lamb, Hair and McDaniel, 2008). Channel Intensity Tesla has not yet announced any plans to include any intermediates in its distribution chain, though it may have to do so if production volumes increase. Since the products are high end, Tesla aims at ensuring that customers receive the value for their money, by offering after sales services and keeping track of its products for quality checks. These quality checks are to enable the firm to make adjustments in its designs to ensure that future products always supersede previous ones in terms of effectiveness, efficiency and usability (Tesla Motors, 2012a). Intermediary Functions by Channel Participants Tesla Motors is the only player in the sale of its sports cars to end consumers. Since these customers are in limited geographical locations, Tesla does all the distribution work as it can easily reach and satisfy all of them. In addition, Tesla offers after sales services and guides customers on the use and maintenance of the sports cars. Since Tesla is the designer as well as the manufacturer of fully electric sports cars, it means that the technology is not common knowledge, and Tesla trained professionals have to be available to train customers on the use of these machines (O'Guinn, Allen and Semenik, 2008). On the other hand, Tesla Motors sells electric vehicle powertrain components to vehicle manufacturers, who then incorporate them in their products for sale to final customers. By so doing, vehicle manufacturers act like intermediates in a limited manner, such that they add value and usability of Tesla’s components to enable end users to use them. Tesla Motors’ customers for electric vehicle powertrain components act as intermediates by buying the components in bulk, giving the former economies of scale (Mohan, 2005). Factors and Their Impact on Channel Design Many market, producer and product factors influence the Tesla Motors distribution channel design by influencing product sales in various ways. For instance, the number of customers eliminates the necessity for market intermediates, while Tesla’s products have to be sold directly to customers due to their design. In addition, the channel strategy puts various factors into consideration including Tesla’s environment conservation strategy, competition and resource utilization, maximization and conservation. Customers Served Tesla Motors’ customers are few and belong to the social class of the rich, who can afford to pay a premium price for a vehicle that promises to help them save on the environment. This class of customers is knowledgeable on the workings of electric transmission, or they are technology and automobile enthusiasts who buy the latest technological advancements. Whichever the case, these customers are either informed or interested in acquiring the knowledge, and it makes sense for them to interact directly with the manufacturer to ensure that they get the latest information on developments in their field of choice. In addition, since Tesla Motors is a relatively new firm, it has to create a close relationship with its customers to retain existing customers, and attract new ones (Philip and Keller, 2006). Customers spending as much as over $109,000 on a sports car are people interested in having value for their money; Tesla does this by dealing with them directly in order to ensure that customers are protected from any manufacturer errors. In addition, Tesla gives the customers extensive warranties on various product parts, keeps a direct channel to ensure that product errors either result from misuse by customers or manufacturer’s errors and not errors introduced during transfer from one intermediary to another. Tesla Motors’ potential customers take test drives even though they may not make a purchase; no intermediary would want to risk giving such expensive merchandise for use unless the customer is buying. In addition, the prohibitive cost of these cars reduces the likelihood of any company buying them in bulk for fear of running into losses. Finally, these vehicles utilize relatively new technology that has not been tested and approved for general use. Intermediates only deal with products that they have an assurance of selling to avoid running into massive losses in case the said products do not realize a sustainable market (James, 2003). Product Characteristics Tesla Motors specializes in research and development of vehicles that use electric power exclusively from batteries, departing from the normal electric vehicles with low power and poor ergonomics and producing high power sports and utility vehicles. After production of the Tesla Roadster, the high power sports car, Tesla Motors aims at mass production of fully electric sedans for family use. As expected, these vehicles are expensive to produce, and though the cost of the latter is expected to be lower, it still will be beyond the reach of middle and low-income earners. Since products from Tesla are likely to remain as dream cars for most people, it is more economical that Tesla keeps the supply chain as short as possible to reduce distribution expenses, and prevent the likelihood of losing its few customers to other firms. With the limited number of customers who may be interested in Tesla’s products, and the high cost of these products, intermediaries get discouraged from getting involved in this market since the cost of maintaining even a few units in stock is prohibitively high. Some customers even may resist from buying the current brand of products from Tesla Motors, mainly because of the expected price drop that will see more people purchasing the vehicles as they become more affordable (Kevin, 2002). Competition Tesla fully electric sports cars face competition from other cheaper and reliable, even though not particularly efficient, substitute products. Many vehicle manufacturers have researched to find out ways of manufacturing vehicles that are more fuel efficient, coming up with electric hybrids or gasoline powered vehicles that have improved efficiency. Since people are used to fuel powered vehicles, and these vehicles are cheaper than the Roadster, then it is economical for a person to purchase such a vehicle. Spending on gas for a sports vehicle is an expensive affair, but not anybody who foots a bill of over $109,000 for a car has a problem with the cost of fuel. Therefore, Tesla’s products are at a disadvantage in the competition by virtue of their being a relatively new model of vehicle design (Parasuraman, Grewal and Krishnan, 2006). In addition, many other vehicle manufacturers produce cheaper electric vehicles, and all they need is to improve the physical appearance of vehicles and increase their power, and Tesla would face stiff competition. These other companies are well established in the industry and have more resources in comparison to Tesla; in terms of capital, labor and infrastructure for vehicle design, manufacture and assembly. Therefore, these companies have the capacity to produce cheaper cars than Tesla since they enjoy economies of scale that Tesla does not have (Laura, 2008). Product Life Cycle Like all other products of technological research, Tesla Motors’ fully electric vehicles quickly become outdated due to the development of newer, better and cheaper technologies. It is, therefore, essential that Tesla Motors ensure that all their products have been sold before releasing new ones to avoid having dead stock as customers await the arrival of the next generation of cars. In addition, unlike conventional vehicles, the durability of Tesla’s vehicles since they have been use only in the recent years; the company has to keep watch of the vehicles itself to ensure they achieve the predicted level of durability. Overseeing the vehicles in use at close range enables Tesla to identify areas of improvement in its products. Electric vehicles have many components like batteries that owners have to replace on a frequent basis; therefore, Tesla has to deal directly with customers since they are the only manufacturers of replacement parts for these vehicles. In additional, Tesla must deal directly with customers to advise and guide them on disposal and recycling of worn out parts. Finally, not many general vehicle mechanics are familiar with the working of fully electric vehicles, and Tesla has to employ and train specialists to maintain and repair products that are in the hands of customers (Kotler and Armstrong, 2010). Environmental Scan According to Tesla Motors’s website (2012b), the production processes in the production are monitored closely such that they abide by the best environmental standards set by the environmental protection bodies. To prevent increasing the environmental costs on its operations, Tesla has to monitor the production, marketing and distribution such that all these processes abide by laid down standards. A short distribution channel is suitable for any firm that is keen on keeping the effects on the environment at the lowest levels possible. Tesla Motors designs its product which use low amounts of power and as efficiently as possible, and keep emissions at their lowest. However, since most of power in the United States emanates from unsustainable sources like coal, it is impossible for Tesla to eliminate entirely the pollution factor; however, the high efficiency of Tesla cars manages to keep their emission levels lower than even the most efficient of hybrids and pure gasoline vehicles. For instance, the Honda CNG, Honda FCX and Toyota Prius have carbon emissions of 45.0, 41.1, and 35.8 grams of CO2 per kilometer, respectively as compared to 12.6 grams per kilometer for the Tesla Roadster. These values for the Roadster and other Tesla vehicles are expected to improve, especially with the commitment of countries to switch to sustainable sources of energy. The federal government offers a federal tax credit of $75,000 for the purchase of each Tesla Roadster for personal use to encourage environmental conservation (Teslamotors.com, 2012c). According Musk (2006), there are other considerations that the firm makes in terms of environmental conservation, including the incorporation of renewable or non-polluting components into the products. For instance, the CEO of Tesla Motors claims that worn out lithium ion batteries are non-polluting and can be legally used as landfill. In addition, these batteries are built to last for a long time such that they will remain long enough to result in more benefits to the environment that outweigh the damage that results from their disposal. On the other hand, customers are encouraged not to dispose of the worn out batteries, as many recycling firms are ready to purchase them. Resource Consideration Tesla Motors is a relatively new firm as compared to its competitors, meaning that the firm has limited resources that it must use effectively for maximum profitability. For instance, the firm’s management has refrained from spending resources for advertisements, at least not in the traditional sense. Tesla Motors depends on the word of mouth spread by its customers, and the publicity it receives by producing these unique products. Many magazines and other media feature outstanding design and performance, and Tesla capitalizes on these publicity avenues by having products that fit into this criterion (Gay, Charlesworth and Esen, 2007; Alan, 2009). Producing high quality products enables Tesla to maximize profits by having a short distribution chain, minimizing on distribution costs and minimizing liability. The firm does this by handling all sales to final customers to ensure that no proceeds from its products get lost as distribution costs and profits for intermediates. Finally, Tesla Motors maximizes its resource utilization by ensuring that it produces only what it can sell; a strategy achieved by building vehicles only on order basis. This ensures that the firm does not have products with the likelihood of not being sold (McKinley, 2002). Discussion and Recommendation The Tesla Motors management has one main goal, to make fully electric vehicles available in the general market at prices that low-income earners can afford. All this is in line with the global shift from nonrenewable and polluting fuels to sustainable sources of energy. Tesla Motors aims at achieving this by first selling sports cars at premium prices to the high-end market. The proceeds from these sales will be reinvested in research and development of cheaper vehicles, and the cycle will repeat until affordable fully electric vehicles are available in the market. So far, Tesla Motors has succeeded in building the first and second-generation sports cars and is currently working on sedans for family use that are cheaper than the Roadsters, but are still beyond the reach of most people. The major cause for this success is the publicity generated by the production of the first Roadsters, capturing the curiosity of environmental enthusiasts, which drove the sales for the versions of Tesla Roadster. However, there is one possibility that Tesla has not considered the new markets in Asia or even Africa, with lots of millionaires with money to spare. If Tesla captures those markets, and sells several cars per country, then the time it will take to produce cheaper vehicles will be much shorter. References Alan, C. (2009). Internet marketing: A practical approach. Butterworth: Heinemann. Babej, M. E. & Pollak, T. (2006). If pigs had wings. Retrieved from http://www.forbes.com/2006/08/22/unsolicited-advice-advertising-meb_0823tesla.html Gay, R., Charlesworth, A., & Esen, R. (2007). Online marketing: A customer-led approach. New York, NY: Oxford University Press. James, D. L. (2003). The path to campaign, customer, and corporate profitability. Maidenhead: McGraw-Hill Professional. Keller, K. L. (2009). A framework for marketing management. Upper Saddle River, NJ: Pearson Prentice Hall. Kevin, L. K. (2002). Strategic brand management. Upper Saddle River, NJ: Prentice Hall. Kotler, P., & Armstrong, G. M. (2010). Principles of marketing. Upper Saddle River, NJ: Prentice Hall. Lamb, C. W., Hair, J. F., & McDaniel, C. (2008). Marketing. Belmont: Cengage Learning. Laura, P. (2008). Marketing metrics in action: Creating a performance-driven marketing organization. Chicago, IL: Racom Communications. McKinley, M. (2002). Marketing alignment: Breakthrough strategies for growth and profitability. Tucson, AZ: Wheatmark, Inc. Mohan, J. R. (2005). International marketing. New York, NY: Oxford University Press. Musk, E. (2006). The secret tesla motors master plan. Retrieved from http://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me O'Guinn, T., Allen, C., & Semenik, R. J. (2008). Advertising and integrated brand promotion. Belmont: Cengage Learning. Parasuraman, A., Grewal, D., and Krishnan, R. (2006). Marketing research. Belmont: Cengage Learning. Philip, K. P., & Keller, K. L. (2006). Marketing management. Upper Saddle river, NJ: Pearson Prentice Hall. Teslamotors.com. (2012a). Efficiency. Retrieved from http://www.teslamotors.com/goelectric/efficiency Teslamotors.com. (2012b). Environment. Retrieved from http://www.teslamotors.com/goelectric/environment Teslamotors.com. (2012c). Incentives. Retrieved from http://www.teslamotors.com/goelectric/incentives Read More