Tesla’s business model Essay Examples

Tesla’s business model is very difficult to put into practice in the current general environment, because there are many factors that influence the development of technology and automotive industry upon which Tesla’s strategic decisions depend. The company introduced very innovative and costly cars and now it is important that in the key markets there will be a very strong upper middle class. If the global economy and the economies of the developed countries continue to grow, Tesla will have much many business opportunities. One more economic factor that is going to have a very positive impact on the popularization Tesla’s electric vehicles is the rising fuel costs. If the electric vehicles become cheaper and more advanced in terms of the durability of the lithium-ion batteries, they will successfully compete against the traditional vehicles.
Secondly, the legal regulations and environmental policies are gradually changing. Much more attention is given to the climate change – it is no doubt that the electric vehicles will become popular in the future. Tesla already cooperates with the U.S. Government and has already received $464 million from the U.S. Department of Energy. What is more, the social-cultural factors also contribute to the popularization of the environmentally-friendly vehicles, because many people realize that there are some global environmental problems caused by the human activity. In addition, the global population growth and emerging economies of China and India will increase the global demand for the vehicles.
In terms of the competitive environment, Tesla used to be the only company that was focused on the electric vehicles. Now there are many companies including Toyota, GM, Ford, Mitsubishi, Smart, and BMW that produce pure electric cars. At the moment their technical characteristics are significantly worse than Tesla’s, but it is expected that in the future production of the electric cars will be more in trend. Tesla does not have a developed distribution system and its geographical exposure is not so good. Therefore, there are many threats that Tesla can overcome only if some strategic decisions are taken. To sum up, the results of the Tesla’s SWOT analysis are presented below:
Tesla is very different from the other car companies. The company was founded in 2003 and its vision is to “create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles”. Therefore, the company relies on the advanced technology and would like to be associated with the other Silicon Valley high-tech companies like Apple or Google. The internal environment in Tesla is targeted at creating the conditions for the innovative work and needs the specialists that have extensive experience both in IT and automotive business. If to look at the Tesla’s management team, one will see that top managers used to work for such well-known companies as PayPal, Sun Microsystems, Google, Apple, Gap, BMW, GM, Mercedes-Benz, Jaguar, etc.
The corporate culture is startup-like and innovation driven. Tesla’s employees work in the open working environment so that there was better exchange of ideas. Led by Elon Musk, Tesla is trying to change the car industry which is an extremely ambitious task, because the people are not ready to switch to the electric vehicles yet. Therefore it is of great importance to create the organizational structure that will be effective in terms of R&D, marketing, sales, and service. At the moment the organizational structure looks like this: CEO-CTO-CFO-Chief Designer at the top-management level; Vice Presidents in Human Resources, Powertrain Operations, Manufacturing, Chief Engineering, Hardware, Sales, American Sales and Model S at the second management level. These managers with very diverse experience have to reach the company’s goals in three ways: increase sales of the existing models, find the new partners that would use Tesla’s technologies in particular the power train components, and promote the idea that the electric cars may be as useful as the traditional cars and their environmental footprint is not harmful.
How do the Porter’s five forces influence Tesla internal environment? Bargaining power of buyers is very low, because Tesla does not have mass production and its cars are exclusive. Threat of substitutes is rising and the company needs to focus not only on the R&D, but also on sales and marketing in order to respond to the competition. Threat of new entrants also makes the company vulnerable. The team was focused on creating an efficient electric vehicle, but now it will need to make sure that the company is differentiated from the competitors. The power of suppliers is very high and Tesla has to build a strong relationship with its suppliers in order to continue to produce high quality cars. Finally rivalry intensity among competitors is getting much stronger. In the USA there are many foreign and local companies that produce hybrid and electric vehicles. So, judging from the Porter’s five forces analysis, Tesla’s internal environment should be innovative and competitive with many ideas to offer in all areas of Tesla’s business activities. Some adjustments to the team and organizational structure might be made in order adjust the internal environment to the changes in the general environment.
Tesla’s business strategy is very straight-forward, but probably it will have to be revised, because the popularity of the electric vehicles is still not very high. Secondly, large car manufacturers have already started to invest their funds into the development of the new electric vehicles. Tesla started to sell its first electric vehicles – model Tesla Roadster - in 2008. These cars were very expensive and only the affluent customers could buy them. The next model that was launched by Tesla was a family-oriented sedan – Model S - which was also priced at the upper range of the luxury vehicle market. At the moment the company is focused on the early adopters, but there are sufficient capacities to produce more affordable cars as soon as the demand for the electric cars starts to quickly grow.
One more business segment in which Tesla operates is supply of the power train components to the other car manufacturers including Toyota and Daimler which are one of the key Tesla’s investors. Lithium-ion-battery packs are really advanced in comparison with the competitors’ products and last much longer. In order to produce the high quality power train components, Tesla cooperates with Japan-based Panasonic.
Since Tesla’s models are unique and need to be presented better to the public, the company decided to create an unusual distribution network. Tesla’s distribution network lets the managers to have the full control over sales and service operations. There is no large inventory and stores are relatively small, but very innovative in terms of design and use of high tech hardware and software for communication with the customers. As the result, everyone can come to the Tesla store and get familiar with the revolutionary technologies that will soon change the automotive industry. In addition, Tesla cars may be sold online which might be very controversial due to the many differences in the legal regulations of the U.S. states.
In terms of the Tesla’s strategic direction it is unclear how the company will develop further. It may continue to focus only on the upper range of the luxury vehicle market or try to invest more into selling cars at a cheaper price. This dilemma was caused by the increased competition in the electric vehicles segment. In addition, Tesla’s costs are very high and they should be adequately leveraged. In particular the company borrowed too much money, and now it has to start to sell more cars and components in order to improve the financial performance. So the strategic directions of the company should be revised. The company has become very popular and built a strong brand that is well known around the world. Now Tesla has to think of the ways how to shift from the start-up phase to the profitable mass production.
There are a number of alternatives that the company should consider. The simplest way is to stick to the current strategy and sell a limited number of models and components. However, the company needs to cut the operating costs in order to become profitable. In addition, the company should promote its products more in order to increase the demand for them. Selling approximately 100,000 cars a year will not be enough to cover all the costs. Consequently, the company might reconsider its business strategy and vision and focus more on the production of the power train components that have brought a competitive advantage to Tesla. Thus car sales should not be the key priority for Tesla. This strategy may seem odd, because Tesla has spent large resources on building a well-known car brand. However, taking into account the current competitive environment in the USA and the world it is not clear how exactly Tesla is going to compete against the large American, European and Japanese car manufacturers. Almost all well-known car manufacturers have been producing hybrid cars and now the focus is shifting to the production of the electric cars. In a few years time the companies will catch up with Tesla in terms of the technical characteristics. At the moment there is a big gap between Tesla and the others. For instance, Toyota RAV4 has a range of 100 miles, GM’s Chevy Volt – 35 miles, Ford’s Focus Electric – from 35 to 100 miles, Honda Fit – up to 100 miles, etc. However, these models are much more affordable, and the companies will be improving their characteristics in the short-term in order to compete for the customers. For example, Ford Motor Company declared that by 2020, one quarter of its fleet will be the electric vehicles.
On the contrary, if Tesla decides not to quit the car business, it will have to develop a very large distribution network and production facilities that will significantly increase the sales. The approach applied to the marketing and sales will need to be changed and it should look like the one that the traditional companies use. Thus the company will communicate not only with the early adopters, but with the wider audience of the customers that will realize all the benefits of the electric vehicles. In addition, driving an electric vehicle will become more convenient due to the development of the infrastructure required for servicing. In conclusion, Tesla may choose one of the three alternatives:
The second alternative is the most difficult one to turn into reality, but Tesla is an innovative company and its top managers that come from the IT industry may take a risk and try to pursue their ambitious business objectives not taking into account all the obstacles that exist in the automotive industry nowadays.