ManagementStrategyResearchPaper_TeslaMotors

Running head: BUS431: MANAGEMENT STRATEGY FINALASSESSMENT 1
BUS431: Management Strategy Final Assessment
Tesla Motor’s Strategy to Revolutionize the Global Automotive Industry
Irena Tsikaris
Baker College

BUS431: MANAGEMENT STRATEGY FINALASSESSMENT 2
BUS431: Management Strategy Final Assessment
Tesla Motor’s Strategy to Revolutionize the Global Automotive Industry
Tesla Motors was incorporated in July 2003; ever since it has resided on the joined efforts
of a bunch of entrepreneurs who shared the same belief – not only the production of electric
vehicles is feasible from an engineering standpoint, but can also be turned into a source of profit
(Thompson, Peteraf, Gamble, & Strickland III, 2016). The purpose of this paper is to provide an
insight in company’s current situation, and discuss the strategic management challenges it faces.
It contains a mission/vision, SWOT, five forces, and value chain analysis, also recommendations
for Tesla Motor’s future strategic steps.
Mission & Vision
The whole philosophy behind company’s existence, as given on their website, relies on
their conviction that electric cars can be proven to be better than gasoline-driven cars, because of
their instant torque, incredible power, and zero emissions. Their mission and vision are pretty
much given in the following two sentences: “Tesla’s mission is to accelerate the world’s
transition to sustainable energy… Tesla is not just an automaker, but also a technology and
design company with a focus on energy innovation” (Tesla Motors, 2016).
Tesla’s vehicles are produced at the factory in Fremont, California, previously home to
New United Motor Manufacturing Inc., a joint venture between Toyota and General Motors. The
Tesla Factory has brought back thousands of jobs to the area where they had been previously
lost. Their current capacity of production is 1,000 cars a week. The company is looking to
expand into other areas, including in Tilburg, the Netherlands, where it has an assembly facility,
and Lathrop, California, where it has a specialized production plant.

With lithium ion battery packs being a substantial production cost, Tesla is strategically
making efforts to reduce it. Together with its key strategic partners including Panasonic, the
company has begun the construction of so called - gigafactory in Nevada, that will facilitate the
production of a mass-market affordable vehicle, Model 3. It is expected that by 2020, the plant
will produce more lithium ion cells than all of the world’s combined output in 2013. According
to Tesla Motors (2016), “it will also produce battery packs intended for use in stationary storage,
helping to improve robustness of the electrical grid, reduce energy costs for businesses and
residences, and provide a backup supply of power” (para. 8).
Industry at a Glance
According to Oston (2016), Car & Automobile Manufacturing Industry in the US entails
cars and automobile chassis manufacturers. These operators, which are referred to as automakers,
typically produce cars, including electric cars, in assembly plants. The general prospect is that
renewed consumer spending and a shift toward green vehicles will boost sales. Main players in
the industry are Ford Motor Company, General Motors, Fiat Chrysler, Honda Motors, and 46%
of the market share belongs to other companies, including Tesla Motors with its 3.1%, as given
on the following chart, retrieved from IBISWorld database:
According to Oston (2016), the outlook of the industry is bright; over the five years to
2016, revenue is anticipated to grow substantially. As the economy rebounded, consumer
sentiment has improved and financing options have become more widely available, in addition to
the decline in the interest rates, which all together has made vehicles more affordable. Adverse

factors would be the rising prices of both steel and oil, raising upstream costs and probably
giving better chances to the relatively young electric cars segment. Financing costs for
consumers are also expected to climb, pushing more individuals to hold onto their current
vehicles or opt for public transportation. Still, demand for new vehicles is forecast to rise at an
average annual rate of 1.1% over the five years to 2021 to reach $134.1 billion.
Tesla Motors is operating in a niche in the market, but exists relatively shorter than its
competitors. However, the following chart retrieved from Business Insights: Global database
shows that its performances are catching up. The metrics used for the chart is sales per employee:
It is important to point out that Tesla’s manufacturing is strictly domestic, whereas other
companies operate internationally. Although the company’s market share is minimal at the
moment and the viability of electric vehicles has been heavily criticized due to the lack of current
EV infrastructure, according to Oston (2016), sales are expected to trend upward as recharging
stations become increasingly popular across the United States. Tesla is anticipated to generate
$3.9 billion in revenue from its US car and automobile operations in 2016.
Five Forces Analysis
The Five Forces Model of Competition is a key analytic tool to analyze the competitive
environment a company operates in. Thompson et al. (2016) point out that: “…competitive

pressures on companies within an industry come from five sources: (1) competition from rival
sellers, (2) competition from potential new entrants to the industry, (3) competition from
producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining
power” (p. 49). According to Stringham, Miller, & Clark (2015), if one looks at Porter’s five
forces analysis, industries like the automobile industry seem especially immune to the threat of
new entry and upstart competitors. “Numerous factors that Porter identifies, including economies
of scale, learning curves, access to distribution channels, patents, unrecoverable up-front R&D
expenditures, and other capital requirements can serve as barriers to entry, and all of them seem
to be present in the auto industry” (Stringham et al., 2015, p. 85).
The primary barrier to entry in the auto market is the high cost of entry. Going through
the case study in the textbook, a reader realizes that tremendous amounts of money were invested
in Tesla motors from various investors, both before and after the company became public, and
yet, significant amount of time that elapsed before the company could claim financial stability.
Moreover, the whole idea would not have been successful if it were not for a bunch of
enthusiasts willing to risk their money, and then – more money. Another important factor,
potentially against entry, is the gasoline industry and its lobbyists. Electric car industry is a threat
to the profitability of the conventional gas-powered auto industry, and there were various alleged
conspiracy theories against its presence in the mainstream.
In addition to the previously discussed external factors outlining the foundation and
development of Tesla Motors, there are various internal ones that need to be looked into. Some
of those are: the fixed costs of product development especially when introducing a new
technology, the undeveloped infrastructure of charging stations, and the dependence on lithium
batteries manufacturers. This rises price, and gives advantage to the incumbents in the industry.

SWOT Analysis
Developing a strategic vision incorporates considering the external and internal factors
that affect or will affect the business. A simple SWOT analysis is a very powerful tool for
developing a strategy, and a strategic vision as part of it; strengths and weaknesses are analyzed
as internal factors, and opportunities and threats – the external factors. One of the most
prominent strengths of Tesla Motors is the design of their products; according to Trejdify (2013),
“The Model S won the 2013 Motor Trend's Car of the Year award, which is a competition that
began in 1949, and the Model S might be the safest car ever according to crash tests” (para. 4).
They geographical location is another strength – they operate in California where the biggest
engineering and IT professionals are located. The management of the company is very
knowledgeable of the business; Elon Musk has owned some of the most valuable cars in the
world. They also have a well-established positive image among the celebrities, and even among
ordinary people they are known as a green company. (Trejdify, 2013)
Some of the other strengths, according to Sparks (2015) are: Tesla's $5 billion under-
construction Gigafactory is ahead of schedule, with the company planning to begin cell and pack
production next year, Tesla has rapidly expanded its Supercharger locations (worldwide
Superchargers increased fivefold in 2014 and are on pace to double in 2015), Tesla introduced an
entirely new business, Tesla Energy, after piloting energy storage solutions for a few hundred
SolarCity customers (para. 5). Tesla’s weaknesses are limited revenues and lack of profitability,
as well as relatively short operating history. During their short existence, they have burned a lot
of cash, and probably they will need to raise more funds due to the enormous costs of their
operations. The product they are selling is suspiciously received among some of the general
consumer population, partially due to the non-existing infrastructure of charging stations

(something they currently work on). Finally, the company has their current CEO on a time
sharing basis; the CEO Elon Musk is working as CEO and CTO of SpaceX and as the CEO of
Tesla Motors. That's a busy schedule and it would be difficult to find a new CEO. (Trejdify,
2013)
The opportunities for the company stem from the fact that the whole world is moving
towards green energy and reducing emissions, also the fossil fuels are set to be depleted in not so
distant future. As the world's leader in revenue for fully electric vehicles, Tesla is increasingly
looking like it has a chance of remaining the leader in this category for the long haul (Sparks,
2015). According to Trejdify (2013), Daimler and Toyota have decided to buy electric vehicle
technology from Tesla Motors, and more auto manufacturers may decide to do the same. Tesla
can use their battery technology in other areas, such as storing power from solar panels. Lastly,
on a long haul, Tesla can sell cars on other planets; Elon Musk is as mentioned before, also the
CEO of SpaceX, which is a company with the long-term goal to colonize Mars (Trejdify, 2013).
The biggest threat comes from the competition, as more and more companies release their
electric cars models. Also, their product is still highly priced, and this, together with the
phenomenon of decreased interest in cars in the newer generations, makes Tesla even less likely
to be customer’s choice. The batteries as a source of power have been under the spotlights for
some time now, and any incident, for example, a fire in one of the batteries, generally makes
front-page news and could scare-off potential buyers (Trejdify, 2013).
Value Chain Analysis
Product Design
Tesla Motors owns almost all of their value chain, from production and design to
distribution and marketing. According to Thompson et al. (2016), they have so far introduced

two models – the Tesla Roadster and the Model S, but two new models are in the pipeline.
Tesla’s Roadster, a two seat convertible that could accelerate from zero to sixty miles per hour in
3.7 seconds, had a maximum speed of about 120 miles per hour, could travel about 245 miles on
a single charge, and had a base price of $109,000 (p. C- 242). The characteristics of Model S are:
fully electric, four door, five passenger luxury sedan with an all-glass panoramic roof, no tailpipe
and zero emissions, a high-definition backup camera, keyless entry, xenon headlights, dual USB
ports, and numerous other features that were standard in most luxury vehicles, yet there are many
optional features the buyers can choose from (p. C-256). The Forthcoming Model X Crossover
SUV has high performance features of a SUV vehicle, and the Forthcoming Mass Market Tesla
Model 3 Vehicle is set to introduce a significant price reduction (the projection is set to $35,000),
provided the related production costs can be reduced accordingly.
Development and design is a significant portion of Tesla’s operations, and can be credited
for the constant improvements of their value chain. It has consumed a significant amount of
funds; $900 million since its foundation had been spent on R&D (Thompson et al., 2016, p. C-
256). By 2014, Tesla’s engineers had developed a powerful powertrain electric technology, and
not only that, but it has become their intellectual property. They have also worked on the other
components of the value chain, such as batteries, power electronics, induction motors, gearbox
and the control software. From today’s standpoint Tesla’s product design team possesses core
competencies in all the aspects of their production, including computer-aided design and crash
simulations; this expertise is expected to reduce the product development cost and time of new
models. (Thompson et al., 2016)

Manufacturing & Supply Chain Strategy
Tesla initially started with manufacturing the “gliders” (complete vehicle minus the
electric powertrain) in Lotus Cars, Ltd., in England. They would then ship the gliders to a Tesla
facility in Menlo Park, California, where the final assembly process took place. In May, 2010,
Tesla purchased a recently closed automobile plant in Fremont, California, and based their
production there. In December, 2012, Tesla opened a new 60,000-square foot facility in Tilburg,
Netherlands, to serve as a final assembly and distribution point for all the Model S vehicles sold
in Europe and Scandinavia. Tesla’s manufacturing strategy is to outsource a number of parts and
components to outside vendors; The Model S contains over 2,000 parts and components that
Tesla outsources to different vendors on a short term basis, making sure there are always
alternative sources. However, the company kept “in house” the production of the main
components for which it possesses both core competencies and intellectual property rights.
(Thompson et al., 2016)
Distribution Strategy
“Tesla sold its vehicles directly to buyers and also provided them with after-sale service
through a network of company-owned sales galleries and service centers” (Thompson et al.,
2016, p. C-260). They have decided on this strategy out of three main reasons: to create a
compelling customer buying experience, to achieve greater operating economies, and to capture
the profits that would otherwise had gone to the dealership. However, they faced the problem of
existing legislature in 48 states, forbidding the car manufacturers from directly selling to
customers and surpassing the dealerships; Tesla is still fighting the legal battle in some of the
states.

Tesla’s showrooms are generally located in the metropolitan areas, some of them in
prominent shopping malls, and others on other visible locations near highways or busy thorough-
fares. They incorporate the concept of gallery and service center on the same location. Often,
there are no more than several vehicles available in stock at the show room, and customers often
order a custom-equipped vehicle in their preferred color. As of February, 2014, the company had
70 service locations available, and was rapidly adding locations to make sure all the customers
can get a high-quality post-sale support for their vehicles. Many of the vehicles are equipped
with an on-board system that can communicate with a service center, allowing the technicians to
locate the problem without even seeing the vehicle.
Tesla offers a prepaid maintenance program that covers annual inspections and wear and
tear parts replacements excluding the tires and the battery. Building a Supercharger Network is a
part of Tesla’s plan to provide a convenient recharging opportunities for their customers, as the
time for recharge of 50% of the battery pack was reduced from 30 to 20 minutes. It is also free of
charge. The challenge remaining is the ability of the vehicle owners to travel to remote locations,
and Tesla is currently working on expanding their Supercharger network in USA, and on all the
continents where their vehicles are sold. (Thompson et al., 2016)
Marketing Strategy
As per Thompson et al. (2016), in 2014, Tesla’s principal marketing goals were: (1)
generate demand for company’s vehicles and drive sales leads to personnel in Tesla’s showrooms
and sales galleries, (2) build long-term brand awareness and manage company’s image and
reputation, (3) manage the existing customer base to create brand loyalty, and (4) maintain
feedback between vehicle owners and Tesla’s development team to make sure their suggestions

for improvement are acted upon. The company has managed to gain trust among affluent green-
minded individuals thus building a positive public image.
They have also enjoyed extensive media coverage that all together led to increased sales
without traditional advertising and at relatively low marketing cost. However, they did target a
small group of clientele through pay-per-click advertisements, and had also participated in auto
shows throughout the country. They have also offered innovative resale guarantee program, and
special financing options to their future customers. This, together with some incentives that the
government had offered, led to increased brand awareness and sales.
Current Situation & Challenges
The greatest challenge facing Tesla Motors nowadays is establishing their place as a
sustainable car manufacturer, claiming their (growing) portion of the automotive industry market
share pie. According to Thompson et al. (2016), “…in 2013, global sales of plug-in electric
vehicles were less than 1 percent of the global vehicle sales – plug-in vehicles included both
battery-only vehicles and so-called plug-in hybrid electric vehicles equipped with a gasoline or
diesel engine for use when the vehicle’s battery pack was depleted…” (p. C-269). The declining
trend in gasoline prices has not been providing a welcoming climate for new Tesla customers,
rather SUV and luxurious cars manufacturers have been gaining from it. However, a forecast
from HIS Automotive, a supplier of information to the automotive industry, predicted that the
global production of electric vehicles would increase 67 percent in 2014. According to the same
source, Europe would account for 40 percent of all production, followed by Asia at 30 percent,
and the United States with 27 percent (Thompson et al., 2016, p. C-269).
The safety of the lithium batteries is yet another challenge that Tesla faces in their efforts
to gain trust among wider consumer base. Three Model S vehicles were involved in traffic

accidents from October-November 2013, resulting in a slowly developing fire that started at the
batter compartment and is very hard to extinguish, allowing it to spread to the other parts of the
vehicle. Due to the increased interest in this segment of the automotive industry, all three fires
received an extensive media coverage, raising significant safety concerns amongst the general
public. Another safety issue was raised when a car charging in the garage on one of the campuses
in California caught fire due to an installation issue on the wall-side rather than the vehicle side;
however, it was not well received among prospective buyers. Tesla tackled the issue by
redesigning their wall chargers, and replacing them free of charge for the existing vehicle owners
(Thompson et al., 2016, p. C-269).
Strategic Steps
The mastermind behind Tesla, Elon Musk has defined company’s strategy back in 2006
in the following way: “The strategy of 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
higher unit volume and lower prices with each successive model”. He has recently revisited it in
an interview for CBS, and reassured the public the company has never abandoned its strategic
goals:
Tesla's strategy has been the same from the beginning, which is to start out with an
expensive, relatively rare debut. That was the Roadster sports car, which began selling in
2009 with a base price that topped $100,000. The next step, which the company is
currently executing, is to make mid-priced cars that wouldn't be in such short supply.
That's the Model S sport sedan, which starts at around $70,000, and the Model X, the
sport-utility vehicle expected to go on sale late this year for around the same price. Those
steps have built enormous buzz around Tesla and given the company enough experience

to get funding for the all-important next step: A lower- priced, high-volume car.
(Peterson, 2014, para 4-6)
In my opinion, Tesla should continue to pursue the goal of becoming affordable and
accessible to the general population, same time working on improving their public image, and
increasing the green-vehicle awareness amongst the general population. They should continue to
work on their value chain, probably shifting the focus from the product design to improving and
expanding the charging network, and revisiting the battery safety issues. Tesla has built a unique
distribution and servicing network, and should persevere in their legal battle to continue to
distribute the vehicles through direct sales; that way they can preserve the image of exclusivity
of their products. They should further work on achieving excellence in their after-sale customer
support, thus gaining trust among the future drivers. The exclusive financing and buy-back
options will further contribute to this.
Conclusion
Entering an industry with one of the highest barriers to entry, Tesla’s founding team made
a bold business move that took years to show initial results. Finally stunning everyone with their
365 percent spike in the share price over 2013 (Peterson, 2014, para. 2), they showed other
players in the industry they should be taken seriously. A company with clearly defined strategic
goals, and systematically investing (financially and otherwise) towards their completion, Tesla is
yet to enjoy the fruits of their labor.

References
Musk, E. (2006). The Secret Tesla Motors Master Plan (just between you and me). Retrieved
from https://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-
you-and-me
Oston, M. (2016, March). IBISWorld Industry Report 33611a: Car & Automobile Manufacturing
in the US [pdf]. Retrieved from IBIS World Industry Market Research database.
Peterson, K. (2014). Elon Musk says Tesla is following his master plan. Retrieved from
http://www.cbsnews.com/news/elon-musk-says-tesla-is-following-his-master-plan/
Sparks, D. (2015). SWOT Analysis of Tesla Stock. Retrieved from
http://www.fool.com/investing/general/2015/05/13/swot-analysis-of-tesla-stock.aspx
Stringham, E. P., Miller, J. K., & Clark, J. R. (2015). Overcoming Barriers to Entry in an
Established Industry: TESLA MOTORS. California Management Review, 57(4), 85-103.
doi:10.1525/cmr.2015.57.4.85
Tesla Motors. (2016). About Tesla. Retrieved from https://www.teslamotors.com/about
Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. J. (2016). Crafting and
Executing Strategy (20th ed.). New York, NY: McGraw-Hill Education.
Trejdify. (2013). A SWOT analysis: Can Tesla Motors save the world? Retrieved from
http://blog.trejdify.com/2013/07/a-swot-analysis-can-tesla-motors-save.html

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