Economics

Tesla: Business Model and Strategic Analysis

Tesla has stated that its mission is to accelerate the world to sustainable energy. The company started its innovation of the automobile industry as a niche differentiator, offering market-disrupting products in the form of luxury electric vehicles.

Abstract:

Tesla has stated that its mission is to accelerate the world to sustainable energy. The company started its innovation of the automobile industry as a niche differentiator, offering market-disrupting products in the form of luxury electric vehicles. Model S and Model X are examples of products that have disrupted the automobile industry through their environmentally friendly differentiation. Elon Musk and the company have since transitioned from a niche differentiator to a broad differentiator business strategy through the implementation of lithium battery products and the acquisition of the company SolarCity. Tesla’s investments in automation and research were a liability in early 2015, however, they became an asset in 2018–2019 due to their long term sustainable competitive advantage in terms of product quality. Their product differentiation comes in the form of customizable cars, regular software updates, solar panels, supercharging compatibility, and self-driving features. Built-in relationships with material suppliers have scored Tesla lithium deposits, decreasing the material costs of their highly automated assembly lines. Sales are an innovative factor in Tesla’s marketing division, offering online customizable orders. Marketing is organic, as Elon Musk’s twitter accounts for the majority of their earned media, with zero paid advertising. Their HR department prioritized productivity, and hence Tesla has an intense work culture and high-level TQM metrics. Tesla’s broad differentiation strategy is a long term play, with a focus on electric automobile automation, battery technology, and environmentally friendly products such as solar roof tiles.

Business Strategy Analysis

According to the About Tesla page, Tesla’s mission is to accelerate the world’s transition to sustainable energy. Throwing back to 2008, Tesla introduced its very first cutting-edge and high-performance electric sports car — Tesla Roadster. Elon Musk, the CEO of Tesla Motors and Co-Founder, stated that “Tesla Motors is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution”(Musk, 2006). The Roadster is based on the Lotus Elise chassis. It can travel 244 mi on a single charge with its lithium-ion battery pack, priced at $109,000. Tesla was first introduced into the automobile market by targeting high-tech car segments as a Niche Differentiator, with its sustainable competitive advantage to distinguish itself from the traditional automobile makers with sustainable, eco-friendly electric cars.

In the meanwhile, Musk also pointed out that “Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to high unit volume and lower prices with each successive model”(Musk, 2006). In other words, Tesla’s competitive strategy is a broad differentiation to target both segments by targeting premium buyers and low-price buyers in the automobile industry. Based on that generic strategy, Tesla differentiates itself among the competitors by increasing its research and developing investment every year to develop a highly innovative unique ecosystem for increasing returns to an economics scale.

In addition, Tesla provides a variety of products and services all over the world, including premium electric sedan Model S, Model 3, Model Y, an SUV version of Model Y. They have a range of 250 miles to 370 miles, plus come with different battery performance and customizable seats and storage. They also sell solar roof solutions, solar Panels powerpack, megapack batteries, and some other related products. Aligned with the broad differentiation strategy, SolarCity merged with Tesla, Inc. to better build up a clean-energy ecosystem. Musk said, “we believe quite that Solar city’s technology on the Silevo Front added to Panasonic’s cell technology will make it the most efficient and ultimately the cheapest solar cell in the world” (Pressman 2016). To capitalize on their competitive advantages, Tesla will reduce its material cost on batteries via Research and Development and Automation to drive down the market with a lower price as a niche turned broad differentiator.

Research and Development

In general, Tesla increased its investment in the Research and Development department. According to the article “How Does Tesla Spend Its Money” published in Forbes.com, Tesla kept investing more in the past two years. “Tesla’s R&D Expenses grew from $0.7 billion in 2015 to about $1.5 billion in 2018. We expect R&D spending to fall to about $1.4 billion over the next 2 years.” However, with huge investment in research and Development, Tesla still reports a loss up to 2015.

Tesla is playing the long game with Research and Development, focusing on Automation, Material Costs, and Software Updates. “We believe that an approach based on advanced AI for vision and planning, supported by efficient use of inference hardware is the only way to achieve a general solution to full self-driving.” Their huge spending in long term Research and Development distinguishes them from the market of motor vehicles. “one of the company’s strategic objectives is to increase investment in research and development (R&D) to develop new products that satisfy market demand for enhanced renewable energy solutions, such as batteries for various purposes’’, Christine Rowland claimed in an annalistic report about Tesla’s strategy on Panmore Institute. However, electric vehicles are being adopted by many other companies as well, and Tesla wants to sustain their competitive advantage by making their products hard to imitate. The heavy spending in Research and Development is aimed to develop more sophisticated technology for their products, increasing the barrier to entry in the electric vehicle and battery markets. The significantly higher amount of investment in R&D compared to other companies in the market granted Tesla the position of being the innovator and the leader of the market, which keeps Tesla in the niche position of having a sustainable competitive advantage in the market of (electric) motor vehicles.

Heavy spending allows Tesla to keep updating its Neural Networks and AI algorithms, enhancing Tesla’s autopilot feature which differentiates itself from the current automobile market. Within the Diamond Strategy, the staging of software update packages lowers the perceived age of Tesla car models. Software iterations differentiate their products from the market by enabling a customizable UI interface for the end-user, plus adds the side benefit of self-parking and self-driving features. Automation and Customization research has been a vehicle for their entrance to the automobile arena, lowering the costs and increasing Tesla’s position as the leading electric car seller. Lithium batteries have also been an innovative area for Tesla. Software updates have caused an increase in battery performance, but battery hardware technology is arising from Tesla’s RnD spending, allowing for more range out of their niched, electric engines.

Production

In terms of production, Tesla manufactures all of its vehicles in Fremont, California. Most recently, they have built a sort of “tent” or factory within the Fremont headquarters in order to accommodate the production of 5,000 model 3 vehicles per week. Additionally, they produce their own key components of each car including the electric motor, the battery pack, and the charger. Aside from its Fremont headquarters, Tesla manufactures its lithium-ion batteries in a subassembly factory in Nevada. They also buy necessary manufacturing parts across the U.S., Europe, China, and varying locations. For instance, Tesla often purchases its lithium supply from China and Australia. Furthermore, lithium prices have been steadily increasing as electric vehicles become more popular. Tesla now has a slight competitive advantage over various companies due to their secured relationship with a Ganfeng lithium supplier. Tesla is guaranteed 20% of their needed supply of Lithium throughout 2020 and possibly for years to come.

Within the Five Forces frameworks, their production tactic of supply guarantees reduces the leverage of suppliers in addition to automation and in-house parts. Tesla minimizes the leverage of buyers by offering customizable automobiles via their production techniques. Within the SWOT analysis, Tesla replaces its previous supply chain weakness/threat (capacity limits) with a strength (automation) and sustainable competitive advantage.

Similarly, within the Strategy Diamond diagram, Tesla perfects the staging component by effectively and efficiently crafting their automation performance. For instance, Tesla’s automation systems are able to help make entire workflows, learning, and adaptation automated. Additionally, automated robots are implemented to assist in the assembly line, helping with things such as automated stamping, painting, welding, and even final assembly. However, while machines and robots can be beneficial to the production sector, Tesla also replaces robots that are slow and underperforming with human employees. Overall, automation is one of Tesla’s many strengths that sets them apart from other companies and aid them in being able to supply large quantities of custom vehicles that are necessary to keep up with the high demand.

Human Resources

Human resources are utilized to fulfill their strategies for production effectiveness and efficiency through hiring the people who carry the same vision of the company, having a fast-paced, long hour work environment, intense recruitment and training process and their continuous expansion worldwide to meet their business objectives.

According to Tesla’s career page, its main mission is “to accelerate the world’s transition to sustainable energy” by hiring the world’s best and brightest people that share the same passions in changing the world and are willing to work in their fast-paced and innovative culture. Pauline Meyer of Panmore Institute mentions that Tesla’s strategy is to keep innovating continuous solutions and support continuous improvements by maintaining human resource capabilities to increase growth in the global market of electric cars. By achieving these goals, Tesla instills an organizational culture that encourages its employees to keep being creative and innovative to improve their technological capabilities in which employees are rewarded and compensated.

The company demands long hours to achieve production efficiency. Elon Musk admits, “the Model 3 production ramp was only made possible due to “excruciating effort” and “hundred-hour workweeks by everyone.” According to Justin Alvarez, this intense work culture attracts young applicants because it provides a flat organizational structure that allows anyone regardless of any background the opportunity to be heard and express their creative ideas which not a lot of big companies exercise. Through their increasing ambitious innovation targets, the company expects to continue demanding long hours for the next years ahead.

The company also undergoes an intense recruitment process. According to ex-Tesla recruiter Marissa Peretz, the hiring process starts with background screening of each candidate’s background, accomplishments, and technical abilities, then asking them about the company’s cultural questions, the next step is onsite with interviews with Tesla’s employees and undergoing technical and engineering tests and finally is to get the approval of the CEO. Meyer says, Tesla’s HR management also provides a training program to orient employees about their organizational culture and how it is an important factor in their business strategies. By doing this, they take advantage of employees’ talents and skills to ensure product effectiveness.

The company aims to expand its market worldwide by establishing new offices and facilities upon which as part of its strategy of being a global leader in the automotive industry. In their career page, they state that they aim to solve the world’s problems by hiring talented individuals worldwide and building an inclusive environment. This is their strategy for production efficiency to push their company into the global market, by opening offices and hiring employees from around the world rather than just relying on their local bases.

Recently, Tesla is experiencing a high turnover rate among its executives. According to AllianceBernstein, Tesla has an annual turnover rate of 44% during the past nine months which is dramatically higher than other companies according to analyst Sacconaghi. They are also experiencing a decline in external hires. According to Matousek, “Tesla has lost external hires and executives in particularly important roles, like chief accounting officer, general counsel, and head of global security, at abnormally high rates.” The high turnover rate is possible through the effects of the demanding work culture and the pressure to keep innovating. According to the data gathered by Fruhlinger, Tesla’s hiring got declines in spite of turnovers and layoffs and limited open positions are not being filled. They are also focusing on hires in their Fremont headquarters and main vehicle manufacturing operations.

Total Quality Management

Tesla’s products are known for their outstanding performance, sustainable energy, and unique design. However, balancing and improving productivity without sacrificing quality has been a huge challenge for Tesla in the past. Overpromising and under-delivering problems happened frequently in the early stages. Reliability has been a huge factor for customers purchasing decisions according to Consumer Reports 2015 Annual Auto Reliability Survey. Frequent worldwide recalls further confirmed the poor quality control. To improve productivity and quality, Tesla invested a lot of money on factories and automation. Instead of outsourcing from parts suppliers, Tesla directly participated more in manufacturers. Tesla owns several Giga factories worldwide, Shanghai Giga factory has 150K already and Tesla will deliver 500k+ cars in 2020. Instead of using different sizes of batteries, Tesla uniformed batteries size in the Model 3 and simplified processes. This shift increases the administrative cost but improves quality and productivity.

Marketing

Tesla uses the four P’s in their marketing strategies to achieve their corporate objectives in their business. Product. Tesla’s products. includes automobiles, electric vehicle components, batteries, energy storage, and solar panels. The company also adds new products gradually. They also offer solar panel installation services and batteries for home and industry. Tesla is focusing more on its electric vehicles as they seek expansion as a multinational and global company because of its growing demand and innovation.

Place. The locations where they display their products and services have been the same over the years. They are found mostly in company-owned stores, official company websites, company-owned service centers, and charging stations. They are also located in some mall locations for easy public access. This acts as a showroom and to also promote their products through car displays in these public areas. Tesla has its own service centers for repairing and maintaining their customer’s cars. This also adds to its sales strategy in terms of them only handling the services of their cars. Tesla utilizes its media presence and website to offer their online purchasing experience, allowing for the customization and delivery of their cars.

Promotion. Tesla’s promotion relies primarily on viral marketing but it also utilizes personal selling, public relations, sales promotion, and direct marketing. According to Daniel Kissinger of Panmore Institute, “the Tesla Model S for Kids is largely promoted through viral videos on social media, thereby also promoting the company’s product mix.” They leverage social media as a prime earned media tactic. CEO Elon Musk engages with his loyal 17.9 million followers on Twitter and shares tweets that are often casual by taking advantage of memes and personifying the company’s brand image. He is also open about the failures of the company which makes the company personable gains the interest of customers. Tesla uses public relations by building the customer’s perceptions acknowledgment by making its patents an open-source as a movement to support sustainable energy. They make use of sales personnel in their store locations for personal marketing and direct marketing to promote their components and batteries. According to Marketing Manage Anna Melton they also make use of referral campaigns as promotions. She says, “You can get exclusive benefits with a personal referral code. From charging points, Model S’s for kids to sporty alloys, extended warranties and even solar panels, it’s fair to say it certainly pays to refer your friend to Tesla.” Tesla does not invest too much in advertising because their promotional strong points are word of mouth due to their strong brand identity from its media presence, especially in social media.

Price. Tesla’s pricing supports their profits and customer’s perception. They make use of premium pricing primarily when the company was starting out as a niche differentiator. As they were transitioning to a Broad differentiator strategy, they made use of both premium pricing and customizable price points for their selection of cars. Premium pricing makes use of high price points upon which customers value high performing technologies that cannot be found in any other products out in the market. They also make use of market-oriented pricing where it makes us of lower pricing that is used with their newer car model 3 and their other products such as solar panels and their services. All of their transactions are only done online which is unique to other car companies and this is also a strategy to lower the selling cost.

Distribution Channels, Intermediaries, Relationships

Recently, their strategy is entering the global market. They are opening new locations, expanding their promotions and they are developing new unique products that will attract customers and generate sales. They are currently forming new relations with other companies to expand their business ventures. Tesla avoids the use of intermediaries as they prioritize the Direct-to-Consumer strategy to aim better service delivery and cost minimization. They have full control over their distribution channels which are their online website and company-owned stores to process their sales. B2B markets could be lucrative for Tesla in the future.

Conclusion:

Tesla started as a luxury car niche differentiator and is now driving down the market with a broad differentiator strategy. The company uses its earned media and online sales sites to stage its marketing campaign, while automation, supplier relations, and research differentiate their products. Their SolarCity acquisition was a significant move, allowing for their movement into other markets such as solar panels which are also eco-friendly. Effective HR and TQM tactics have provided the company with an innovative, hard-working culture that drives their performance in the respective markets and arenas. As economic success provides the company with positive cash flow and tremendous momentum, Tesla continues to pursue its mission: accelerate the world to sustainable energy.

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