(Student’s Full Name)
Applying Analytical Concepts and Tools to the Complex Business Problems of Tesla Motors
I. Current Strategic Profile
According to the case study presented the mission of Tesla Motors, as articulated by the founder and CEO Elon Musk, is to “[b]uild [a] sports car, [u]se that money to build an affordable car, [u]se that money to build an even more affordable car”. One of the objectives of the company is to build an electric car that compete with or even out compete a gasoline car. Tesla Motors has done this by ensuring that these cars use energy efficiently, which is another one of its objectives. The other objective is to allow its cars to be powered by Lithium-Ion cells, as indicated by Van Den Steen, which do not pollute the environment. The corporate strategy which was alluded to by Musk suggests that Tesla intends to enter the market from the premium end to attract the attention of consumers who can afford well-made product and then gradually increase the volume of production, thus driving down the cost of the vehicle with it. Tesla was able to sell more electric cars than GM and Nissan in 2013. It even sold more of its Model S sports car than the Audi A8 and BMW 7 combined. On May 8, 2013, it obtained a net income of more than 10 million dollars on 560 million dollars in sales.
II. Identification and Analysis of Strategic Issues
Currently, Tesla leads the industry as it pertains to the segment of the market that produces electric cars. However, there are some challenges which are posed by the market which prevents the company from producing an electric car, made by Tesla, more cheaply. These challenges stem from the fact that much of Tesla’s innovations cause the company to rely on “custom-designed components” rather than “standard components” which are easily available.
The Tesla Model S, for instance, facilitates the wireless updating of the car by software through its “cellular connection”. In other words, this allows the driver to effortlessly customize the car’s behavior, “including suspension and steering behavior”. In order to simplify the dashboard, there is a 17-inch touch screen in the middle console which controls “almost all its functions” including air conditioning, lights, and entertainment system. The car doors of the Tesla Model S do not open with a traditional key but with a wireless fob. The car will then start after the driver buckles her seatbelt. In addition, the Tesla Model S has a unique feature that allows the brakes to light up based on how much the car slows down its speed. Therefore, this means that much of Tesla Model S’s components are “custom-designed” rather than “standard components” which are more easily available.
Tesla Motors also has some challenges has it regards the sale of its vehicles because the company’s choice selling vehicles through company-owned stores rather than through independent dealers puts it in direct conflict with state laws requiring that “car companies sell through independent car dealerships recognized by the dealership association”. Van Den Steen noted that Tesla was able to overcome this ‘business hurdle’ by selling online from other states. Nevertheless, the Texas State Legislature had enacted a law that does not allow Tesla Motors to do this and the North Carolina legislature nearly enacted a similar law.
Furthermore, as illustrated by Exhibit 2, the company has amassed significant debt that is worth over 70 million dollars. In addition, the company has not significantly reduced its operating costs so that it does not affect its bottom line. Currently, the loss incurred from operating costs is over 60 million dollars. It should also be noted that the although the sales of Tesla’s vehicles have increased when compared to previous years, the sales are still insufficient to make up for the shortfall in revenue; and, as pointed out earlier, there are certain legislations that further prevent Tesla from making the necessary number of sales so that it will positively impact its liquidity.
It should be noted that Tesla Motors may be experiencing difficulties selling it motor vehicles because although, as indicated by Van Den Steen, Tesla Model S, in particular, has received the highest rating that Consumer Reports had ever given to a car, the brand does not have the same level of recognition as well-established brands such as Toyota, Ford, and Nissan. Moreover, the company has limited operating history when compared to other established car manufacturers. In addition, it should be noted that Tesla’s founding members, Elon Musk and J.B. Straubel “did not have a background in the car industry”. This lack of experience and background in the industry meant that it would be difficult for Tesla to establish itself in the car industry since the founding team would have lacked the necessary connections and networks to be privy to trade secrets, networking with independent dealerships and so on.
Additionally, it should be noted that Tesla presently owns one factory in Fremont, California, as mentioned by the case study done by Van Den Steeb. Although Van Den Steen indicated that Toyota and General Motors (GM), which previously owned the factory, were able to produce 500, 000 cars annually at the height of its production, one factory is still insufficient to cope with increased consumer demand in the future.
In addition, as implied by the data presented in Van Den Steen’s case study, the type of Lithium-Ion batteries used by Tesla are in high demand, as they are used to manufacture a variety of electronics, including lap tops. Furthermore, Exhibit 4 in Van Den Steen’s case study reveals that demand for Lithium-Ion batteries will continue to increase, especially in the automotive and industrial industries in the year 2016. Therefore, this means that the demand for the Lithium-Ion batteries will possibly exceed supply, and lead to a shortage of the most important component of an electric car. Consequently, this could lead to customers not receiving their vehicles in a timely manner. Additionally, Tesla is allowing its company to be vulnerable when it depends solely on Panasonic to provide it with its Li-Ion batteries. However, building Li-Ion batteries from scratch is not an option if Tesla desires to produce its vehicles more cheaply. This is the case because, as noted by Van Den Steen, the battery is the most expensive component of an electric vehicle. The Nissan Leaf’s battery, which was built from scratch, was calculated to cost approximately US $15,000. Furthermore, the Nissan Leaf’s battery is equivalent in weight to an internal combustion engine that is in a traditional vehicle. If Tesla were to make its own Li-Ion batteries then it could make the vehicles heavier and more difficult to handle; and would, therefore, take way the advantage that it has over its other competitors by having a battery which doubles the energy storage per kilogram per battery.
In summary, the core strategic issues that are concerned with the mission and objectives of Tesla Motors include the following: alternatives to using “custom-designed” components so as to reduce operating costs; ways in which to increase sales without the use of e-commerce in jurisdictions which do not allow it and without the use of company owned stores; suitable cost-effective alternatives to using and relying the 18650 form factor Lithium-Ion batteries produced by Panasonic; ways in which awareness of the brand can be improved; the ways in which production capacity can be increased. Below is Exhibit 1, which provides a SWOT analysis, and displays and summarizes the analyses presented.
Exhibit 1
SWOT Analysis of Tesla Motors
Exhibit 2
Historical Financial Data
Consolidated Statements of Operations Data (in thousands, except share and per share data):
Tesla Motors, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Source: Tesla Motors, Inc. “Form 10 K-Annual Report.” 8 Dec. 2014. 26 Feb. 2014 <http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-14-69681&CIK=1318605>.
III. Formulation of Strategic Alternatives
There are several strategic alternatives that can be implemented by Tesla Motors in order to maintain a competitive advantage in the industry. Firstly, Tesla Motors can go the route of manufacturing hybrid vehicles that use both Li-Ion batteries and hydrogen cells. Under this alternative, its business level strategy will involve using cutting edge technologies that are eco-friendly. It could also go the route of manufacturing cars that are powered completely by hydrogen fuel cells. One of Tesla’s strengths is its research and development department which enables it to manufacture cars with high productivity battery systems and electric power trains. However, in order to maintain the competitive edge in the industry in research and development, the company needs to ensure that utilizes other technologies which do not rely totally on the use of Li-Ion batteries because, as mentioned previously, Li-Ion batteries will be in great demand for industrial and automotive markets.
Another strategic alternative which can be implemented by the company is to partner with another company to use part of its facilities for creating its cars (possibly through a lease agreement) instead of buying a new factory and relying totally on the facilities based in Fremont, California. Under this strategic alternative, its corporate level strategy will involve the company achieving its objective of reducing the cost of production while increasing the volume of vehicles being manufactured so as to increase sales and satisfy demand. Tesla has already partnered with companies such as Panasonic (which helps to create its Li-Ion batteries), Toyota (which helped Tesla through a $50 million capital injection), and Daimler (which Tesla had assisted by providing its design services for electric powertrains through a detail almost $300 million). Hence, it is possible for Tesla to forge another partnership with one of the above companies or another which has the capacity to facilitate the manufacturing of Tesla’s vehicles in a portion of the company’s manufacturing facilities. In addition, continued partnership with well-established brands, like Toyota, will provide more credibility to the company’s branding and image.
Thirdly, in order to reduce its dependence on “custom-designed” components, Tesla could outsource some pre-made components to be integrated in the creation of their vehicles. Tesla could use pre-made components produced by other high-end vehicle companies so as to ensure that if specific parts need to be replaced, this could be easily done by accessing these parts off the shelf.
Finally, in order to counteract the legislations preventing Tesla from selling directly to consumers both through their company-owned stores and online, Tesla can advocate using social media and online video sharing sites (such as YouTube) to contact their local representatives in the states that prevent the sales of their vehicles offline through company stores and online. These online advocacy campaigns need to be aggressive and should ensure that customers living in these states are given the process by which to notify and place political pressure on their local state representatives so that legislation can be implemented so that customers and potential customers can purchase, service their vehicles, be provided pertinent information concerning Tesla’s vehicles and to educate consumers about the misconceptions of owning an electric vehicle. These online advocacy campaigns can be facilitated by the company’s website, blogs, social media accounts and video sharing sites accounts. The successful implementation of this strategic alternative will ensure that legislations be implemented which protect companies, such Tesla Motors, which cannot sell its vehicles through independent dealerships since car dealers will be unwilling to explain the advantages of using an electric car to a potential buyer while undermining the need for owning a car powered by fossil fuels. The novelty of Tesla’s products makes it a necessity that cars be sold directly to the consumer and not through dealerships.
Below is Exhibit 3 illustrating the use of Value Chain Analysis which assesses the strengths and weaknesses of Tesla’s functions and activities that add value in creating and marketing its products.
Exhibit 3
Diagram Illustrating Value Chain Analysis of Tesla Motors
IV. Strategic Recommendations
The first recommendation I propose is to suggest that Tesla Motors makes adequate investments in its Research and Development department so that it can develop hydrogen fuel cells which can be used as an alternative to the Li-Ion batteries. Hydrogen fuel cells powers vehicles in the same manner that Li-Ion batteries do but instead of relying on an internal power source that is charged, it relies on an external power sources such as hydrogen and oxygen. Tesla can further leverage its connections with Silicon Valley to find innovative ways to improve on the current models of hydrogen powered vehicles (with the help of its engineering and design team) in the same manner that it enlisted the assistance of Panasonic to make improvements to the Li-Ion batteries that are used in vehicles at a lower cost. After this is done then steps should be taken to patent this technology in the same manner that it had when it developed its electric powertrain.
Tesla Motors has the option of leasing an unused portion of manufacturer’s facility if it is financially unable to purchase such a facility. The company could partner with one of its existing partners, namely Daimler or Toyota, to accomplish this. This would increase the production capacity of Tesla which would then allow it to cope with an increased clientele.
Tesla could integrate the use of pre-made components created by luxury car manufacturers such as Jaguar and Mercedes. This would allow consumers to easily access parts if they need to be replaced or repaired. It will also reduce the cost of manufacturing for Tesla and positively impact the company’s bottomline.
In addition, the company could also implement an aggressive online advocacy campaign that enlist the assistance of fans and customers of the company to place politically pressure on their local representatives to put in place legislations that would facilitate the purchasing of Tesla’s vehicle’s online or through a company-owned store. This online advocacy campaign can take advantage of the company’s website, blog, social media accounts and video sharing sites. Additionally, the company could use other methods such as guest blogging at leading technology blogs, such Tech Crunch and Wired, to inform consumers as to the importance of ensuring that Tesla is available for purchase in their state. Tesla could also have a representative be guests on various podcasts (that pertain to technology subjects) at podcast directories. Tesla also has the options of using technology-based forums to inform the public of the ways that it can prevent legislation from restricting the purchase of vehicles online and through company owned stores.
Below are Exhibits 4 and 5 which illustrate the financial ratios and Tesla’s 7s Framework respectively.
Exhibit 4
Financial Ratios
Exhibit 5
Tesla Motors’ 7s Framework
