Case Analysis: Tesla

Contributers: Rachel Ayers, Jasmine Alanis, Lauren Catington, Kaitlin Luncher, Lisa Mosser

Executive Summary 

Tesla, earmarked by luxury and innovation, faces the challenges of maintaining production goals, and improving complicated supply chains. Additionally, Tesla is tasked with lowering the cost for the Model 3, while maintaining the vehicle’s and the brand’s high quality standards. Furthermore, sustaining customer demand for the Model S with the lower-priced Model 3 as an option poses an obstacle for the company, as well as developments in autonomous driving and the achievement of legality, especially considering deaths that have occurred from this technology. Lastly, Tesla faces maintenance of consumer demand for electric vehicles – one of the sole types of products Tesla is built on, especially when U.S. gas prices are low and tax incentives for electric vehicles are ending.

Regarding the external environment, the EV and autonomous vehicle industry is saturated with large amounts of regulation, since the technology is relatively new. Additionally, because of their high costs, Tesla’s products primarily appeal to individuals with high income who live in cities. Since Tesla is such a technologically innovative company, they struggle with attaining some of the technologies needed to develop their products. 

In reference to their industry, Tesla is influenced by strong bargaining power of their suppliers and low bargaining power of consumers. Fortunately, while there is a lot of competition in the automobile industry, Tesla is a first mover in the autonomous vehicle industry. Additionally, while substitutes are available, none are direct substitutes to automobiles. Tesla’s primary strengths surround their ability to innovate and create a product that is difficult to imitate. In contrast, they struggle with keeping costs low, navigating government regulations, and their lack of economies of scales. Tesla’s ability to innovate opens up opportunities to expand their manufacturing and service centers, and continue to be on the cusp of automobile innovation. Lastly, Tesla struggles with the eminent concern that the government will eliminate tax deductions for drivers of electric vehicles. 

Regarding internal conditions, Tesla has been known for its significant losses in income, and general challenges in profitability. Upward improvements have been evidenced, though, and are expected. Tesla’s competitive advantage is found in its unique and innovative products.

As a result of this analysis, four potential alternatives were developed: funding R&D for technology manufacturing companies, investing in R&D for autonomous driving and achieving acceptance of autonomous driving, creating a subsidiary luxury brand, and lobbying for electric vehicle incentives. 

Ultimately, the proposed plan of action is to invest in autonomous driving R&D and achieve legality of autonomous driving, while minimizing governmental pushback of autonomous vehicles. This plan involves investments and centralization of R&D, aggressive lobbying efforts, and widespread education of the benefits and safety of autonomous vehicles. 

Problem Statement 

The obstacles faced by Elon Musk and his company, Tesla, led to several challenges which include the following: improving “production runs and supply chains for Model 3,” “driving down the cost for Model 3, while improving quality,” “not [cannibalizing] its higher-priced Model S with the Model 3,” “achieving autonomous driving and legal approval,” “and keeping demand for electric vehicles in environment with low gas price in U.S. and phasing out of tax incentives” (Rothermel & King, 2017).

The first problem poses a challenge for the company due to Tesla’s production goal of 500,000 vehicles, putting strain on the company to up weekly production. In addition, one-third of these parts are sourced from outside of North America, “complicating the supply chain, and threatening production targets” (Rothermel & King, 2017). Additionally, car models such as the Model S “[appeal] to a somewhat larger market and thus allows for larger production runs to drive down unit costs.”

Regarding the second problem, Tesla also must undertake mass production of lithium-ion batteries to reduce unit costs. This is an issue because Tesla has historically been losing hundreds of millions of dollars (“the company is still losing a significant amount of money: $900 million in 2015 and $675 million in 2017”), (Rothermel & King, 2017) and these cost-reduction actions would shrink these losses and maximize profits.

The third problem surrounds Tesla’s challenge in introducing a more affordable and therefore attainable vehicle, that could potentially hinder sales of their more expensive vehicle offerings, such as that of the Model S. If a consumer is offered a lower price option, the more expensive option may become less appealing, and thus, the footing that the Model S has gained could be compromised. “Another manufacturing challenge facing Musk is how to maintain the high-quality standard cited in Consumer Reports’ glowing review of the Model S and its sterling reputation as Motor Trend’s 2013 Car of the Year” (Rothermel & King, 2017), which they wouldn’t be able to maintain if they lower their prices to be more affordable. 

The fourth problem is a problem for the company because one of the competitive advantages that Tesla has maintained is their innovation and how have captured the attention of the market by exciting people about the prospect of fully autonomous vehicles. Additionally, although Tesla can continue to innovate, they are very much at the liberty of the government. Consequently, without full governmental approval, Tesla cannot truly move forward with releasing the products that have been gaining traction and attention over time and have contributed to the essentially free advertising from excited customers. Tesla will need to have Federal and state regulations on their side in order to continue implementing autonomous driving technologies in their vehicles.

The fifth and final problem is challenging for the company is maintaining customer demand for EV vehicles even when prices are low and additional savings through a federal tax deduction are eliminated, and thus a major reason for buying this type of vehicle – the savings (not having to spend as much, or any money on gas, and a tax write-off)  – is no longer as appealing.

Ultimately, these problems challenge the way that Tesla currently functions with regards to the way that they produce, market, and sell their vehicles. Since Tesla is the first mover in this rapidly changing industry, they will need to be able to balance creating the best possible product with adjusting to changes in government policies and changing demands.  

Tesla’s Most Urgent Problems

Currently, one of Tesla’s major concerns is becoming more cost efficient and effective and gradually appealing to a wider audience. One of the most important problems to address is driving down model 3 costs because this is likely to increase demand and boost sales. If Tesla can figure out how to cut costs here, they can probably do so in other parts of production. However, by increasing costs in this area they will also need focus on ensuring that they are not “[cannibalizing] their higher-priced Model S with the Model 3.” (Rothermel & King, 2017) and losing out on profits that could be earned from the model 3.

EXTERNAL ANALYSIS

General Environmental Analysis 

Demographic 

Currently, the automobiles that Tesla is producing are very high cost, and as a result, primarily high-income individuals are able to purchase them. To meet the current supply, Tesla needs a high-income population that is interested in the cars they offer. In addition to level of income, as of now, most of Tesla’s product offerings are catered more towards people living in cities with widespread charging ports. Consequently, individuals who live in cities may feel more comfortable purchasing a car from Tesla because charging ports are easy to find. However, someone living in a rural area might be hesitant to purchase one since there are fewer charging ports in these geographic regions. Since their cars are not quite widespread yet, only certain parts of the world may feel confident purchasing a car from Tesla. 

Economic 

The economic impacts that may affect Tesla would are current increases in disposable income, as well as current low interest rates (IBISWorld). Tesla vehicles are relatively expensive, the Model S has a base price of $73,500, the model X starts at $100,000, and the Model 3, has a starting price of $35,000 but does increase to $60,000 when fully loaded. A decrease in disposable income could price out consumers, even for their lower cost vehicle. An increase in disposable income gives consumers greater buyer power to purchase from Tesla competitors. High unemployment rates and an economic recession would both negatively and greatly impact Tesla for the same reasons as why a decrease in disposable income would hurt the company. An economic recession could also negatively affect the value of the company’s stock. New car sales impact the industry (IBISWorld)

Political/Legal External Analysis: 

With regard to political and legal environmental impacts, the government has played and continues to play and fundamental role in the progression of this industry. Currently, the government offers tax deductions for electric vehicle owners which may motivate people in the market for a new car to consider making an electric vehicle purchase. However, the government plans to phase out this incentive after reaching 250,000 electric vehicle owners in the United States. Additionally, because the autonomous vehicle industry is relatively new, regulations revolving around the industry are constantly changing and Tesla has to stay aware of these changes. 

In addition to policy changes, the car industry has been lucky enough to garner support from the government during tumultuous times. For example, when major car manufacturers like GM and Chrysler declared bankruptcy, the government intervened, funneling billions of dollars into the company to help it stay afloat. This level of support from the government works as an advantage for companies in a very competitive and risky industry like the automobile industry. 

Looking back on the government’s involvement during the early stages of electric vehicles, in the 1970s Congress implemented standards for passenger cars and lightweight cars known as “CAFE,” or Corporate Average Fuel Economy. The industry has seen these standards gradually increase over time to date. In the 1990s, the California Air Resource Board (CARB) mandated that “2% of the vehicle produced for sale in California had to have zero emissions by 1998, increasing to five percent in 2001 and 10 percent in 2003” (Rothermel & King, 2017). Regardless of the consumer demand for these automobiles, policies set in place generate some of the demand for fuel-efficient vehicles, in turn, making them a more prevalent part of society and potentially stimulating demand. This also companies that are not creating these types of cars to begin investing in doing so. Lastly, the Zero Emissions Vehicle mandate encouraged more research and development efforts with regards to the electric-car prototype. 

Ultimately, while the government seeks to regulate and control the industry for the safety of consumers, it also actively encourages innovation and development and seeks to propel the industry forward, in part because of the overall environmental benefits. 

Sociocultural External Analysis

“Green”, eco-friendly trends can be attributed to greater public awareness of global warming and alarming environmental impacts. Out of this awareness comes a sense of responsibility and call to action among consumers and manufacturers, thus, impacting this industry in an “EV revolution.” Additionally, “range anxiety,” a belief that the battery in an electric vehicle may run out when driving and the car will shut down, deters consumers from buying into electric vehicles (Rothermel & King, 2017). Society’s views on autonomous driving, and fears of this new technology and the lack of control, compounded with fatalities as a result of this autonomy, impact this industry. Trends in ride-sharing services, too, influence the industry.

Global 

While the United States has healthcare and pension costs they aren’t able to price their vehicles as low as they would like to, however foreign car manufacturers are not burdened with the same issue. Foreign companies are not required to pay for the same costs, and therefore are able to make and sell their vehicles at a lower price and this, in turn, would contribute to higher net profit margins and sales when compared to U.S. companies. Global gas prices, and their volatility, impact the industry (Form 10-K, 2017, p. 20).

Technological

Tesla’s technological advances have played a large roll in their success in the automotive industry. There are two basic types of electric cars on the market today. One is a battery electric vehicle which only uses the battery in the car to produce the energy needed to move the car. The other type is a plug-in hybrid vehicle which uses both an electric motor and an internal combustion engine, which is powered by gasoline. These vehicles contain a battery that holds electricity for the motor, which is able to be recharged when plugged in.

Elon Musk has said that these hybrid electric vehicles do not have advantages because they use factors from electric and gasoline-powered cars that cancel negate their advantages when combined.  In order to focus on battery electric vehicles, Tesla is currently planning to build a Gigafactory in order to produce lithium-ion batteries, which are currently the most expensive part of electric cars.

An up and coming form of technology Tesla is working on developing is autonomous driving technology, which allows cars to drive themselves. One part of Tesla’s plan is to allow people to opt in their autonomous vehicles into a ride-sharing program so that your car is used while you are not using it. This would give the cars a higher utilization rate, as well as cut down on the necessity for parking lots. Elon Musk expected an entirely-autonomous vehicle from Tesla at the end of 2017 (Rothermel & King, 2017).

Industry Analysis

Porter’s Five Forces Analysis

Competition/rivalry 

With regards to competition, this industry has many major players, and the competition is medium, with an increasing trend (IBISWorld). Today, Tesla faces competition from foreign carmakers, specifically in Germany, Japan, and Korea. These manufacturers were seen as being able to offer more vehicles with more quality, advanced engineering and are more fuel efficient. They are also able to sell their cars at a lower price due to not having to pay pensions or health care for employees, which would, in turn, increase profits. Fortunately for Tesla, the number of large electric vehicle manufacturers in is relatively low at the moment, which helps lessen some of the competition, but this sector of the industry is likely to grow as the costs of production decline (IBISWorld).

Threat of substitutes 

With regards to the threat of substitutes, there are several alternatives, but most lack the control and mobility of personal automobiles. Today, ridesharing has become a very popular alternative to owning and operating a personal vehicle. In large cities, the consumer may opt to ride when needed rather than manage the high costs associated with personal automobile ownership. In addition to ridesharing, consumers may substitute personal automobiles by taking a train, walking, biking, or riding scooters. The decision to opt to use a substitute is largely dependent on where the individual is located. For example, someone living in a rural area commuting into a suburban area might not substitute their personal automobile for any of the aforementioned substitutes, due to the lack of convenience. However, for individuals who might be more environmentally or cost-conscious, and have the ability to use other alternatives, the industry may see increased use of substitutes. With regards to long-distance travel, train and airplane are currently the only suitable substitutes. However, these substitutes are not utilized on a regular basis, and they are typically more costly in the long run. 

Threat of new entrants 

The threat of new entrants in this industry are moderate and steady (IBISWorld). Entering this industry requires large amounts of capital and advanced technology. As a result, it is incredibly difficult to enter the industry. Additionally, the risks involved are very high, which is another deterrent from entering. Also, the industry has a large number of regulations which are continuing to grow as technology develops and vehicles move closer to full automation. Lastly, brand recognition and loyalty play a major role in consumers’ decision to purchase a particular car. New entrants are likely to struggle with gaining customer loyalty and recognition (IBISWorld). 

Bargaining power of suppliers

A substantial amount of the supplies needed for Tesla’s automobiles are relatively advanced technologies that are only produced by a few companies. This is because of the fact that Tesla’s cars are advanced, and use software that is more intricate than their competitors. While this is a source of competitive advantage for the company, it also creates higher bargaining power for the suppliers. Lastly, according to Tesla, they are  “dependent on [their] suppliers, the majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our financial condition and operating results (Form 10-K, 2015,  p. 15).” Since many of the components that are needed to make their vehicles are only supplied by one company, these companies are likely to have very high bargaining power since Tesla cannot switch to a cheaper supplier. 

Bargaining power of buyers 

For Tesla’s buyers specifically, their bargaining power is moderate. Switching costs in this industry are low, since there are little to no costs associated with the direct act of switching to another manufacturer (IBISWorld). If customers are dissatisfied with the price or quality of their current vehicle, they can easily purchase from a different manufacturer the next time they are in the market for a car. Additionally, there are a multitude of similar products within the same industry.  However, the fact that automobile purchases are not a common or recurring purchase for customers means that customer demands and preferences have little influence on Tesla. Lastly, while there are many substitutes, it is unlikely that enough people would opt to use them and gain enough bargaining power. 

SWOT Analysis –

The chart below indicates Tesla’s internal strengths and weaknesses, as well as the external opportunities and threats. 

Figure 2:

Strengths (internal) Brand imageInnovative technology Many sources of capitalFree advertisingStrategic partnerships (e.g. Panasonic)Tesla Gigafactory 1 Technology is difficult to imitate  Weaknesses (internal) High costs of production Navigating strict and evolving  government regulationsLow sales relative to other car manufacturersHave not achieved economies of scale High battery costs High R&D costs 
Opportunities (external)  Evolving market Expansion (manufacturing and sales and service  locations) Develop new technologies Expand service centers   Threats (external) New entrants when production becomes cheaperGovernment removal of tax deduction and subsidiesOutsiders learning how to replicate or repair Tesla’s technology 

Human Resources

Tesla’s human resource department adds value to the company by encouraging high employee engagement. They also utilize an efficient strategic management through the top-down approach, creating clear division of labor and delegation from higher management. Tesla’s engaged team of employees have benefited the company with 15% increased profitability, an increase of 30% productivity, 12% increase of customer engagement, a decrease in turnover by 30%, a decrease of 62% in safety issues, and a decrease of 37% in employees calling out sick (“How Tesla Engages Its Employees,” 2015). Unfortunately, because of the high costs associated with production, Tesla struggles to sustain a high number of employees. Consequently, when budgets are cut, many employees are often laid off, and this is something that the human resources department needs to be prepared for. 

Culture

Tesla Inc.’s culture embodies the following: “1. Move Fast, 2. Do the Impossible, 3. Constantly Innovate, 4.Reason from ‘First Principles,’ 5. Think Like Owners, 6. We are ALL IN (“Tesla Inc.’s Organizational Culture and Its Characteristics,” 2019).”

Tesla’s innovative culture places pressure on the company to be a leader and technology, and thus, on increased research & development. Additionally, the culture of Tesla gives its employees a sense of pride and ownership in everything that they do, and encouraged them to think beyond complacency and look toward the bottom line and future of the organization. Additionally, it discourages complacency through the mission of doing the impossible, employees are motivated to look beyond traditional manufacturing and development restraints, and create technologies or processes that may have not existed before. This element of Tesla’s culture is a major contributing factor to their competitive advantage. In such a new industry, it is imperative that employees are able to stay one step ahead and continue to innovate and embrace change, and Tesla’s current culture ensures this. 

INTERNAL ANALYSIS 

Budget/financial analysis

Looking at Tesla’s financial documents, one of the biggest concerns is the significant losses that the company faces, which is reflected in their income. While this is concerning, it is also to be expected as Tesla is a relatively new company with very high cost of production and their products are not yet widespread in the market. Tesla currently faces the challenge of battling high costs of production while keeping prices low enough to be affordable and ultimately make a profit. Tesla’s competitive advantage comes from their unique and innovative product offerings, to it is imperative that Tesla finds ways to maintain this advantage while maintaining a price that is becoming more affordable to consumers.

Although Tesla’s sales maintain a positive upward trend, this does not necessarily demonstrate economic health for the company. While Tesla’s sales are increasing, this is not reflected positively in their net income over the five year time period (2012-2016). Due to the high cost of expenses and liabilities, Tesla actually faced a substantial loss of income during the time period.

The figure below (figure 2) demonstrates Tesla’s steady incline in net sales (in blue) which at first glance makes the company look extremely profitable until looking at their net income (in red) which has been on a steady decline with Tesla suffering a loss all five years. 

Chart
Chart

Over a five year time period, as Tesla’s sales increase, their financial records indicate that part of why their net income has continued to decline is because of the increasing cost of production and associated expenses. The figure above (figure 3) shows Tesla’s total cost of goods sold (blue) and their selling, general, and administrative expenses (red) over the five year period, both of which increased significantly during the period, as production increased. 

Beyond looking only at Tesla’s sales, income, and expenses, further analysis reveals even more about the financial health of the company from 2012-2016. With regards to Tesla’s profitability, this is the area in which they appear to struggle the most, but seem to be making gradual improvements. In 2012, Tesla’s net profit margin ratio was -0.95, essentially with every dollar in sales they were losing roughly .95 cents. Fortunately for Tesla, this has drastically improved, achieving a ratio of -.096 in 2016. While this still indicates a significant loss in profits, it implies that Tesla has been improving their ability to manage their cost of production with sales. Additionally, Tesla’s return on assets shows that even though they have many assets, these assets are not contributing to generating income. In 2012, for every dollar spent on assets Tesla lost about 35 cents. This trend improved over time, however,  and in 2016 Tesla only lost less than a cent per dollar spent on assets.

Tesla’s current ratio in 2012 was 1.6, continued to increase over the five year period to 3.26.  Typically, it is advisable for a company’s current ratio to be greater than one. Tesla’s current ratio has been well over one during the five year time period, and has increased over time. In fact, their current ratio was several point higher than the industry standard in 2016. This ratio indicates that for every dollar Tesla owed in 2016,  they had $3.26 in current assets with which to pay it. Analysis of this ratio, however, assumes Tesla’s inventory can be converted to cash to pay off their bills. Similarly, in 2012, Tesla’s quick ratio was .82, below the advised ratio of “one,” but continued to increase, and achieved a quick ratio of 2.15 by 2016. In essence, with all of Tesla’s assets, leaving inventory alone, Tesla can easily pay off their debt. This is likely due to the fact that their business utilizes very advanced technologies that are worth a significant sum of money. Lastly, with regard to Tesla’s debt-to-assets ratio, it is evident that a significant amount of Tesla’s assets have been funded through debt. In 2012, a little over 88% of their assets were funded by debt, and during the five year period, this remained relatively steady. In 2016, however, this number dropped dramatically, with about half of the firm’s assets being funded by debt. This is potentially because of the significant increase in assets in 2016 specifically in cash and property, plant, and equipment. Ultimately, even though Tesla’s profit margins indicate a loss in profits and their return on assets don’t look promising, Tesla’s financial ratios show significant upward improvements during the five year period.

Figure 4: Financial Ratios 

 20122013201420152016
Net profit margin-0.96-.04-.09-.022-.10
Return on assets-.36-.03-.05-.11-.02
Current ratio1.704.073.992.913.26
Quick ratio.822.952.761.522.15
Debt-to-assets ratio (percent) 88.81%72.4%83.42%85.98%49.76%

Value Chain Analysis 

Primary Activities 

Inbound Logistics

Tesla currently manufacturers a significant amount of their products in the United States, with ⅓ of their materials for the Model 3 coming from outside the North America. Additionally, Tesla offshores some of their manufacturing in Shanghai (Ohnsman, 2019) In fact, “the Model 3 has over 10,000 parts, with one third coming from outside of North America, complicating the supply chain, and threatening production targets” (Rothermel & King, 2017). Since most of Tesla’s manufacturing happens in the United States, their manufacturing costs are higher than if they outsourced production or even offshored more of their plants. With regards to raw materials, Tesla uses “aluminum, steel, cobalt, lithium, nickel and copper…” and these prices vary quite a bit depending on “… market conditions and global demand” (Form 10-K, 2017,p. 9). Lastly, because Tesla has fewer suppliers, they work hard to maintain good relationships and build partnerships with these suppliers. 

Operations

With regard to their operations, all of Tesla’s manufacturing happens in the United States in Fremont, California. Additionally, Tesla’s employees maintain “advanced skills unique to Tesla’s production processes,” many of which are automated. This high level of technology has allowed them to increase productivity. Today, Tesla utilizes “intelligent automation.”  and works to achieve “the world’s most automated manufacturing systems” (“Tesla Factory, n.d.). These advanced processes give Tesla the advantage of mostly efficient and effective processes, means that Tesla will need to invest significant sums of money in developing and expanding these factories to get them operating efficiently. 

“A high ratio of flawed parts” has been evidenced, relating to poor quality control, and thus, “costly rework (“Tesla Manufacturing High Volume of Flawed Parts”, 2018). This issue in quality control is in direct conflict with the company’s focus on high quality products and their goal for maintaining this high quality standard

Outbound Logistics:

Tesla operates stores in the United States and in countries around the world. These stores act to educate potential customers about electric cars, and the showroom shows off a small portion of their cars available for purchase. Customers are able to purchase a car from Tesla’s website or in their showroom in one of their many stores. According to (Form 10-K, 2015, p. 9), customers who wish to purchase a car from Tesla must pay a $2,500 deposit to reserve their car. When the car has been built Tesla will then ship it to the customers preferred address and a Delivery Experience Specialist will help answer any questions about trading in the customer’s current car, financing of the new Tesla car, and installation of home charging equipment (Tesla: How Ordering Works, 2019). Unlike most auto companies, Tesla does not sell through other dealerships, especially because their cars are not very customizable and the company is currently focused on educating consumers and gaining acceptance of their products. 

Sales and Marketing

With regards to marketing, Tesla is unique in that they do not spend any money on advertising. Due to the unique nature of the company’s products, Tesla has developed a loyal following, and “several marketing professionals have created pro-bono Tesla ad campaigns and uploaded them on YouTube to show their enthusiasm for the company’s vision” (Rothermel & King, 2017). In reference to sales, Tesla sells their own automobiles and does not go through a dealership. Tesla’s goal in selling in their own shops only is to educate and familiarize customers with the technology involved. Consequently, one might have a very different experience at a Tesla store than they would at a traditional dealership. Lastly, unlike regular cars on the market, Tesla makes money off the technology in the car, not add-ons. Due to this, there is no need for a typical salesperson at a dealership and ultimately cuts out the middleman (“Reasons Why Tesla Insists”, 2016). 

Service

One challenge that Tesla faces relates to managing customer complaints about slow service time for booking repairs. Unique to the company, and by Tesla’s discretion, run-of-the mill repair shops do not have the ability to fix their vehicles, so customers are left with no choice but to go through Tesla. By 2018, Tesla operated “378 service centers around the world…around 300 of these outside of California” (Tesla Aims to Double Service Capacity, 2019). Since Tesla is relatively new, they are still ironing out some of their service related processes to minimize costs maximize customer service. CEO and founder Elon Musk addressed some of the service related issue and explained that “Where needed, our service centers are moving to two-shift operations in order to double service capacity quickly, and we are simplifying processes in order to increase service throughput” (Tesla Aims to Double Service Capacity, 2019).

Service—Warranties and Recall 

Tesla has experienced recalls of some of their products in May 2009, October 2010, and June 2013 (Form 10-K, 2015, p. 10). The October 2010 recall of the Tesla Roadster was due to the possibility of a fire sparking behind the right front headlight. The possibility of a car from Tesla being recalled can affect customer’s perception of the safety of Tesla’s brand. This could cause current customers to purchase a different luxury vehicle on the market and cause potential customers to look elsewhere on the market for a car. 

In the 2014 fiscal year Tesla SEC report, Tesla stated that their warranty programs may not be able to cover warranty claims in the future, which would affect the perception of the company. (Form 10-K, 2015, p. 18). Tesla’s reserved funds for warranties are characterized by the amount the company has put aside to repair the vehicle itself or replace parts of the vehicle, if it is covered under their warranty program. The future estimate amounts of warranty claims are affected by how many claims are made and how expensive each claim is. Having this knowledge that in the future Tesla may not have enough money in warranty reserves to cover warranty claims could affect current and potential customers perception of Tesla. 

Support activities

Human Resources

 Due to the rapid rate that Tesla is growing at “they use High Street Partners for hiring process to employ the talented workforce and preserving [their] culture” (“Strategic Management of Tesla,” 2015). Tesla also works to provide employees with incentives such as “company shares, motivating managers to adopt strategies that increase the share price of the organization” (“Strategic Management of Tesla,” 2015). This part of their HR processes goes hand in hand with the “think like owners” aspect of their organizational culture. By giving the workforce tangible ownership of the company, employees are able to directly see the success of the company. This methodology may help employees personally invest more in the organization, which is likely to be reflected in their strategic decision making and performance. 

General and administrative 

United States administrative functions are performed out of Fremont and Palo Alto, California. European administrative functions for the company are performed out of the Netherlands (Form 10-K, 2017, pg. 8, 30). This consists of “personnel and facilities costs related to [Tesla’s] stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as litigation settlements and fees for professional and contract services” (Form 10-K, 2017, p. 47). As the company grows, this general and administrative expense can expect to increase to provide the personnel and infrastructure to support this expansion.

Research and development

Tesla’s research and development is arguably one of the most important parts of their business, largely because of how fast the industry in changing, and how expensive and complex a lot of the technology is. This means that the department needs to stay several steps ahead, which can be difficult when some of the technologies have not yet been created. While this part of their value chain is imperative, it is also one that is a significant challenge for Tesla. Tesla explains that their “research and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology.”Tesla goes on to explain that that if they are unable to “source and integrate the latest technology into [their] vehicles,” they may not maintain their competitive position (Form 10-K, 2015, p. 31). Maintaining this advanced level of research and development requires a significant amount of capital, and a potential inability to raise the appropriate amount, could result in unfavorable effects on the company’s ability to innovate. 

Procurement  

With regard to Tesla’s procurement, they have developed a good relationships many key suppliers, opening up significant benefits on behalf of both parties. Most of the components used in Tesla’s vehicles are purchased from a single source even though they obtain some of their components from multiple sources. In addition, until 2015, Tesla was challenged with only being qualified to purchase on source of battery cells, even though there are several on the market (Form 10-K, 2015, p. 11). Since Tesla was founded, procurement has been a challenging part of the business since to some degree, Tesla has to create their own supply chain since there were no similar companies to model their after. 

Key Weaknesses in the Value Chain 

Since Tesla is the first mover in a very new industry, they are bound to have many challenges and weaknesses, especially throughout their value chain. For one, because they entered such a new, innovation driven industry, Tesla had to devote extra time to lay the groundwork and develop their own supply chain. Another weakness is that their research and development requires enormous amounts of capital, and because of current regulations and technology that has not yet been created, Tesla is sometimes left waiting before they can move forward with a product or technology. Also, because the technology is so hard to imitate, Tesla is currently the only company that can make repairs to Tesla vehicles. While this may be advantageous for the company to some degree, it also means that they need to have enough service technicians to make repairs, something that their customers have complained about. 

Core Competencies in the Value Chain 

With regards to core competencies in Tesla’s value chain, one of their main core competencies are their batteries. Tesla currently makes high functioning batteries “and battery charging technology, and then wraps the batteries in the cars.” Tesla has the advantage of being “better at doing this than any other company…” and has been successful “in an arena in which everyone else has failed” (“Tesla Is A Technology Company That Wraps Batteries In Cars”, 2013). Similarly, Tesla argues that their core competencies are “powertrain engineering, vehicle engineering and innovative manufacturing” (Form 10-K, 2015, p. 6). All of these competencies contribute to their competitive advantage because currently, their technology and programming not easily imitated by competitors. Additionally, Tesla does a good job of maintaining positive relationships with their suppliers, even forming partnerships with some. This is extremely important since some of the components they need are only sold or manufactured by one company, and weakening their relationship may reduce their ability to effectively build their products. Lastly, Tesla’s outstanding brand image has benefited them by providing the company with free advertising from very well know individuals around the world, allowing them to funnel some of these costs into other parts of the company. 

Opportunities in the Value Chain 

Many of the challenges in Tesla’s value chain are not the fault of the company, but are a result of the very new industry that they are in. With regards to their research and development and procurement, the areas of opportunity are small since Tesla is at the liberty of government regulations and available technologies. 

KEY DECISION CRITERIA

1. Technological innovation

One of the first key decision criterion for the organization is technological innovation. Today, one of Tesla’s major challenges is continuing to develop their product when the technology needed does not yet exist or government regulations keep them from obtaining the necessary technology. When making strategic decisions, Tesla Motors needs to consider whether or not the technology is available, how they can obtain it, and if it is unavailable, when they will be able to get it. 

2. Increase profits

Additionally, they need to consider ways to remain profitable, and increase profits, even when the technology they need is not yet available or cost effective.

3. “Product quality and safety” (Form 10-K, 2017, p. 12)

“Product quality and safety” is a significant factor in decision making, ensuring that Tesla’s products are compliant with safety standards, especially with further developments in autonomous driving.

4. Corporate Image

Corporate image also comes into play with these types of autonomous driving developments, given the controversy surrounding their usage. Any fatalities, injuries, or recalls faced by the company have the potential to tarnish company image (Form 10-K, 2017, p. 19). 

5. “Manufacturing efficiency” (Form 10-K, 2017, p. 12)

Another key criterion is “manufacturing efficiency.” Currently, the cost of manufacturing is very high and Tesla has yet to achieve economies of scale. When making strategic decisions, it is imperative that their decisions do not hinder their ability to manufacture as they are not yet fully efficient, and it would advantageous if new strategic choices can improve current manufacturing processes. 

ALTERNATIVES AND FEASIBILITY ANALYSIS

Alternative 1: Fund the R&D for technology companies that supply what Tesla needs 

Tesla currently does not enjoy economies of scale, and this would enable technology improvements in the warehouse to maximize efficiency. It also has the potential to speed up the process of creating new technologies necessary for the production of their automobiles. Additionally, this funding, while a significant upfront cost, would help strengthen relationships with suppliers and improve the procurement process. Essentially, this would entail Tesla seeking out companies that can manufacturer the technology and supplies they need, while setting up funding and support so that these companies can continue to innovate at a faster rate. Tesla may be able to use this funding to build partnerships to encourage companies to set up task forces dedicated to working on the technology Tesla needs. 

Alternative One Pros

If these companies agree, Tesla would have the benefit of being the first to know when new technologies are available, and Tesla would have access to them before anyone else. This plan also strengthens Tesla’s competitive advantage and creates even greater barriers to entry. It also helps to decrease supplier bargaining power, since they would be receiving additional funding from Tesla. Lastly, this plan may encourage similar manufacturers in the industry to improve their processes to compete against the new partner companies and be the first to create new technologies. Lastly, this plan is in line with Tesla’s technological innovation mission and mindset.

Alternative One Cons:

While this plan has its benefits, it also comes with cons, for example, this is most likely the most expensive plan, and there is also a lot of uncertainty regarding the payoff of the investment. Shareholders may not agree with the use of their funds in a manner that is such a gamble, given that their money is not sure to be returned to them. With this plan, Tesla would have to raise a significant amount of capital. Tesla also runs the risk of impeding on their partner’s operations and weakening their relationship with these major suppliers. Since there are already so few suppliers, it is imperative that Tesla maintains good relationships with them. Tesla’s employees may be hesitant to embrace this change because they payoff for Tesla is uncertain, and the manufacturing companies may reap more benefits than Tesla. Essentially,  Tesla may end up fueling the success of other companies at the expense of its own.

Alternative One Feasibility:

While this plan may allow Tesla quicker access to the necessary technology, it is difficult to predict the outcomes, and requires substantial amounts of capital which limits the feasibility of the plan. This plan is unlikely to evoke a competitive response from Tesla’s direct competitors, but the competitors of the manufacturing companies may experience increased competition, once these competitors become aware of the funding they are receiving from Tesla. Employees may struggle to embrace the idea of the company investing so much in something when the company cannot predict the results. With regards to their shareholders, they may be uncomfortable with Tesla utilizing their money for a project that does not guarantee results. This plan, however, does fit in with their culture, especially “think like an owner.” The owner of a highly innovative company is often faced with the dilemma of making a costly decision that could garner great benefits, even when they are unsure of the outcome. Ultimately, in the short-term, this plan may seem risky, but if implemented correctly, Tesla could gain long-term benefits and a significant grasp on the supply chain.

Alternative Two:Investments in autonomous driving R&D and achieving legality of autonomous driving, and minimizing governmental pushback

This plan focuses on research and development for autonomous driving, and a goal of improving public perception of this technology, ultimately resulting in consumer and regulatory acceptance. This improved perception would be achieved through widespread education of autonomous driving and its benefits in safety and ease, and Musk’s eventual goal of cars earning the consumer money while not in use, through autonomous Uber-like services. Government lobbying would be utilized as a strategy for gaining consumer and regulatory body support. 

Alternative Two Pros 

This plan spearheads public hesitancy to buy into this emerging technology, and attempts to educate the public. R&D in this plan enables the company to inch closer to Musk’s goal of “[developing] a self-driving capability that is 10 times safer than manual via massive fleet learning,” with this increased safety being crucial to customer buy-in (Rothermel & King, 2017). Increased sales could result from this R&D, and this revenue could be partly allocated toward manufacturing processes, and in turn, allowing the company to obtain economies of scale. 

Alternative Two Cons

One of the cons of this plan is the fact that there is not absolute certainty that their efforts pay off. Additionally, even if this alternative is effective, it is likely to take a very long time, since policy changes happen at a very slow rate. Additionally, as consumers become more comfortable with autonomous vehicles and there is widespread acceptance, this is likely to evoke a competitive response with more companies entering the market once consumer demand increases and cost of production declines. Similarly, as more customers “receive Tesla vehicles, the safety of the vehicle and the autopilot feature will come under more scrutiny as opportunities for accidents increase, especially with the high-profile death in 2016 of a Model S driver using the autopilot feature, as a glaring example. As Tesla and other companies deploy autonomous driving technologies, they will need to navigate changing Federal and state regulations” (Rothermel & King, 2017). Lastly, lobbying would require potential job restructuring, or the hiring of a lobbying firm. 

Alternative Two Feasibility

Research and development is a significant upfront cost, and would require substantial amounts of capital. Additional funding would be needed to create educational seminars or simulations to improve public perception. Competitive responses are likely to be evoked, given the amount of players in the autonomous driving game (Otto, Mobileye, Google). Google was the first mover to an autonomous driven car, and thus, Tesla lacks this advantage. This plan is in line entirely with Tesla’s mission of technological innovation, and stays in line with the innovative culture and values of the company, and their dedication to safety. Stockholders may be unwilling to have their funds invested in a technology that they do not agree with or do not believe the public will buy into, given the risks. Short-term implications are the significant cost of the R&D and education programs, and public unwillingness to have their mind changed regarding autonomous driving, due to publicized deaths involving the technology, and a fear of a loss of control. Long-term, availability of and purchases of autonomous-driving-capable vehicles may increase, and governmental acceptance of the technology may occur due to lobbying efforts. Additionally, public skepticism with autonomous driving may be reduced.

Alternative Three:Maintain Model S demand by creating a subsidiary luxury brand 

Tesla wants to be able to lower their prices to target a broader range of customers; however, in doing so, they run the risk of  losing their luxury brand status because the wealthier customers may not want to buy from a company that ‘everyone’ can afford.

Alternative Three Pros 

If Tesla is able to achieve lower Model 3 prices while maintaining demand for the Model S, they would be able to target a wider audience, while maintaining their luxury brand status. Due to the high costs of production, this plan allows them to maximize profits for both of their automobiles without sacrificing the profits of one. Despite the high costs associated with starting a subsidiary brand, the costs of production may be lower for this new brand, since they already have the technology and value chain resources as the parent company. Lastly, by utilizing this method, Tesla’s subsidiary brand would not be starting from scratch, as they would have all of the resources from the parent company. This approach would also allow Tesla to acquire a larger share of the market once automated vehicle acceptance increases. 

Alternative Three Cons 

The cons to this approach is the very high cost of capital involved in implementation. Tesla would need to raise enough capital to purchase all of the property, plant, and equipment required to add additional manufacturing plants and stores. 

Alternative Three Feasibility 

This plan would be a long term investment for Tesla because it would take years to formulate a new brand.  Regarding competitive response, this is unlikely to evoke a competitive response because a lot of partnerships between automotive companies are in place, such as Lexus’ ownership of Toyota. Additionally, it may create greater barriers to entry and deter others from entering the industry due to the fact that Tesla would have access to a larger segment of the market. Employees would be very likely to embrace this change because it increases the amount of job opportunities. Stockholders may have concerns with regards to the size of the investment and the chance of success. When a company starts a new venture like this, they run the risk of decreased profits temporarily, which may concern their shareholders. This plan has the benefit of aligning with Tesla’s vision and mission because they would be creating more options for a more diverse group of people, and making transportation sustainable and continuing to innovate. The culture and values of the parent company would be unlikely to experience many cultural changes. However, employees that move to the new brand may need to embrace organizational change. The short term implication of this plan would be that Tesla would have to funnel a large amount of capital to build this company. In the long term, the two brands would be selling varying types of vehicles, they would still be vying for the same market share. If one of their brand’s benefits, the other brand ultimately benefits as well. 

Alternative Four  Lobbying for EV incentives 

The United States federal government offers economic incentives to encourage the buying and use of electric vehicles. These incentives which are currently in place include a $7,500 federal tax deduction when purchasing battery electric vehicles. This tax deduction phases out once 250,000 vehicles have been sold from the manufacturer. This plan would include lobbying the federal government to keep incentives in place for the purchase of electric vehicles and possibly expand them further. 

Alternative Four Pros

If Tesla were to be successful in their lobbying, they may enjoy an increase in sales. All of Tesla’s vehicles that are solely electric vehicles would fall under this incentive umbrella, so potential customers would be more likely to purchase a vehicle from Tesla if they benefit from this purchase. 

Alternative Four Cons

An option for lobbying would be for Tesla to hire a lobbying firm that would take action and lobby to the United States federal government on Tesla’s behalf. This hiring of a lobbying firm would increase Tesla’s general and administrative costs. This firm that Tesla hires in the long run may not be successful in procuring the extension and expansion of the incentives that are currently in place. The decision to extend or expand these incentives is at the discretion of the United States federal government, so even though the lobbying firm may do well lobbying on behalf of Tesla, they may not be successful in the long term.

Alternative Four Feasibility 

Tesla would financially be able to afford the hiring of a lobbying firm, but it would increase their general and administrative costs. Other competitors in their industry that sell electric vehicles would be likely to do the same to increase their own sales through the incentives. Employees would welcome the change because this change would benefit the environment and be energy efficient which would benefit them and bring in money from people who also want to benefit the environment. Stockholders and stakeholders may not enjoy the idea of the company lobbying for these incentives, so they could potentially pull out their backing of Tesla. This fits in with their mission and mission because they create transportation that is not only reliable globally but is also fuel efficient. The current culture and values of Tesla would not need to change, because the lobbying would incentivize the purchase and use of electric vehicles, which Tesla proudly produces. The short term implication would be for Tesla to find a lobbying firm to lobby to the government on this behalf. The long term implication would be dealing with the possible increase in demand of the products if the lobbying is successful. 

RECOMMENDATIONS

After further analysis of the proposed plans, there are two that meet the majority of the decision criteria: Investments in autonomous driving R&D and achieving legality of autonomous driving/minimizing governmental pushback and lobbying for EV incentives (plans two and four). 

This potential eventual income generated from R&D successes in autonomous driving, and increased sales, would be partly allocated toward manufacturing processes, assisting in obtaining economies of scale and driving down manufacturing cost. If Tesla is able to lobby effectively and maintain tax incentives for electric vehicles, consumers may be more willing and motivated to purchase one, ultimately increasing their profits. 

Regarding the decision criterion of technological innovation, investments in the research and development for autonomous driving ensures that Tesla continues to innovate technologically. Not only would Tesla be innovating the technologies required for their products, they would also be innovating their manufacturing processes and achieving the decision criterion of maximizing manufacturing efficiency. 

Product quality and safety is made a priority through furthering R&D efforts. It is important that if they are going to follow through with autonomous driving they need to makes sure that passengers in the car are safe. The quality of the car is also highly important because if the car is bad quality it won’t be as safe of a car and wouldn’t last a long.

Tesla is one of the companies at the forefront of autonomous driving. If the image surrounding autonomous driving is restored in a positive direction, Tesla’s corporate image would be positively impacted. If Tesla is seen at the head of this movement, potential customers may view Tesla’s corporate image more favorably. As this autonomous driving technology becomes more available to consumers, Tesla would take on more liability and risk (Form 10-K, 2017, p. 19). If these risks become prominent and associated with Tesla, their corporate image would suffer.

The implementation of these recommendations will solve many of Tesla’s major problems, some of which have a more clear potential for success than others. With regards to production runs and supply chains for their Model 3, these plans have a chance of success by helping to create economies of scale and improving their current manufacturing through potential breakthrough in research and development. In reference to driving down the costs and improving quality of the Model 3, the potential for economies of scale will help drive down costs, and allow Tesla more room for improvement on their current product. In addressing the achievement of autonomous driving and gaining legal approval, lobbying can help gain government approval and through proper education of the benefits and safety of autonomous vehicles, government agencies and regulatory bodies may be more inclined to accept them and modify existing regulations. Lastly, the selected plans may aid in maintaining demand for EVs, a type of vehicle often overlooked when gas prices are low,  and additionally, seeks to regain and establish tax incentives for purchasing electric vehicles.

If tax deductions are achieved via government lobbying, electric vehicles may become more appealing, and thus, consumers may consider their options, and explore higher-end alternatives such as the Model S. money back into the pockets of consumers may result in receptiveness to higher-priced vehicles. 

EXECUTION PLAN AND OBJECTIVES 

Selected Alternative:Investments in autonomous driving R&D and achieving legality of autonomous driving, and minimizing governmental pushback and lobbying for EV incentives 

  1. Financing 

In order to execute this plan, Tesla needs to ensure that they have the appropriate capital with which to do it. Unfortunately, in this industry, it is very difficult to find cheap alternatives or solutions. Investing in research and development can be cost an enormous amount of money, but is likely to garner positive results. Tesla Motors has a few options with how to go about financing their plan. First, Tesla has already proven to be successful in seeking out valuable investors, and may be able to do the same for this project initiative. Similarly, Tesla may be able to call on the support of investors or donors who are passionate about the autonomous vehicle field. To encourage donations, Tesla could consider naming workrooms, buildings, machines, and factories after their generous. donors. If these efforts are still not enough to bring in the necessary capital, Tesla may need to go about taking out a loan, cutting costs in other area, or selling of some of their assets if possible. 

2. Culture

Before implementing a strategic plan, Tesla needs to evaluate their culture and whether it will help or hinder their efforts. Fortunately, Tesla’s culture serves an advantage to them when they are going about implementing their plan. The employees at Tesla are driven to innovate, and most of them likely are already passionate about autonomous driving. Regarding this, their employees should buy in to company-wide efforts to further invest in and achieve legality of autonomous vehicles. While employees may have concerns about the costs associated, due to their culture, they are likely forward thinking and able to understand the long-term benefits of this plan. 

3.) Leadership

After evaluating Tesla’s culture, the company needs to ensure that their leadership is on board and understands the strategic plan. Although this plan does not directly affect the structure or operations of the company, it is still important for leadership to understand, and be able to communicate these changes with their direct reports. Similarly, upper level leaders should work to communicate this vision to the company and further engrain it in the culture. Lastly, through increased understanding and acceptance of this plan, leaders in all of their departments should motivate their employees to assist with this plan to some degree. 

4.) Human resources: 

With regard to Human resources, positions would need to be created or re-worked to lobby, or a third party lobbying firm would need to be hired (see cost estimate below). Additionally, positions would need to be reworked or created for public autonomous driving educators. Human resources would need to have an action plan for potential layoffs if R&D investments end up being a sunk-cost. Opportunities would be created for employees to share their innovative ideas and experience, in order to utilize all perspectives and backgrounds. Employees would be given one hour a day to generate ideas, without structure and with significant encouragement. A rewards system would be utilized to incentivize employees who participate in lobbying efforts and efforts to educate the public. Additionally, employees would be rewarded for their development of innovative and low-cost plans to educate the public. Employees who further R&D for EVs would also be rewarded. Rewards for employees who be free, unstructured time at work, for them to do what they please and work on the projects they choose, which may end up furthering the R&D as well. 

5.) Tesla Operations

With advances in autonomous driving and increased availability of this technology, increased consumers means increased risk and liability (Form 10-K, 2017, p. 19). The legal team needs to be prepared for potential increases in lawsuits or claims.

6.) Marketing

Free advertising has proved extremely successful for Tesla in the past, and minimizes marketing expenses. Tesla would work with content creators, and individuals who are passionate about EVs, Tesla products, and autonomous driving in order to create videos. Additionally, these videos could convey the benefits of electric vehicles, even when gas prices are low.

Estimated Costs of Implementation and Resource Allocation 

Hiring a lobbying firm that will campaign on behalf of a company is an added cost but a necessary expense. a costly endeavor. Top lobbying firms in Washington, D.C. charge $50,000 per month (“The Average Cost of Lobbying,” 2018). Total yearly lobbying spending in the U.S. reaches over $3 billion per year, with total spending in 2016 coming in at $3.16 billion (“Lobbying,” 2019). Some of the top lobbying clients in 2016 included the U.S. Chamber of Commerce, Blue Cross/Blue Shield, and Boeing (“Lobbying Spending Database,” 2016). The automotive industry in 2016 as a whole spent $62,806,402 on lobbying (“Lobbying Spending Database,” 2018). In 2016, Tesla spend $820,000 on lobbying from three different Washington, D.C. firms (“Lobbying Spending Database – Tesla Motors”, 2016). 

This action plan would involve Tesla increasing the amount of money they currently spend ($820,000) to have lobbying firms campaign on their behalf. In comparison, Daimler AG, which owns Mercedes Benz, spent $1.67 million on lobbying in 2016 (“Lobbying Spending Database – Daimler AG,” 2016). This plan would have Tesla increasing their money spent on lobbying to 2 million to outpace their competitors. By bringing their total spending on lobbying into the millions, Tesla should be able to successfully decrease regulations around autonomous driving and increase tax deduction benefits to consumers who drive electric vehicles. This would increase demand and therefore, consumption of Tesla vehicles.

At the end of 2015, Tesla had spent $717.9 million on R&D, and it can be expected that half of this amount would be allocated toward autonomous driving (Tesla’s R&D costs 2010-2018).

Appendices 

Figure 1:

Strengths (internal) Brand imageInnovative technology Many sources of capitalFree advertisingStrategic partnerships (e.g. Panasonic)Tesla Gigafactory 1 Technology is difficult to imitate  Weaknesses (internal) High costs of production Navigating strict and evolving  government regulationsLow sales relative to other car manufacturersHave not achieved economies of scale High battery costs High R&D costs 
Opportunities (external)  Evolving market Expansion (manufacturing and sales and service  locations) Develop new technologies Expand service centers   Threats (external) New entrants when production becomes cheaperGovernment removal of tax deduction and subsidiesOutsiders learning how to replicate or repair Tesla’s technology 

Figure 2: Financial Ratios 

 20122013201420152016
Net profit margin-0.96-.04-.09-.022-.10
Return on assets-.36-.03-.05-.11-.02
Current ratio1.704.073.992.913.26
Quick ratio.822.952.761.522.15
Debt-to-assets ratio (percent) 88.81%72.4%83.42%85.98%49.76%
Chart

Blue: sales, Red: net income 

Chart

Blue: COGS, Red: SGA Expenses 

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Appendix:

Strategic grouping for the industry: 

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