Sustainable Business Strategy of Tesla

Table of Contents

Introduction. 3

Task 1. 4

1. a) Competition pressures. 4

Porters five forces. 4

1. b) Growth opportunities. 6
2. c) Current emerging threats. 6

Task 2. 7

Task 3. 8

1. a) Value chain analysis and financial analysis. 8

Value chain analysis. 8

Economic analysis of Tesla. 10

1. b) VRIO analysis. 11
2. c) Generic strategy and strategic group of the company. 13

Generic system of Tesla. 13

Strategic Group of Tesla. 14

Task 4. 15

1. a) Recommend a set of new strategic options (at least TWO) for the organization from 2018–2023 15
2. b) Evaluation of Strategic direction through SAF Framework. 16

Reference. 18

Appendix 1: TOWS Framework. 20

Introduction

The main aim of this report is to develop strategic options and sustainable business strategies for the US-based automobile industry Tesla UK. At first, Porter’s Five Forces will help to analyze the competitive pressure of this company in the UK automobile industry. Apart from that, this report determines opportunities and threats. Additionally, the report demonstrates the ethical dilemmas, which make an impact on this company’s strategies. Apart from that, VRIO analysis facilitates finding the core competencies of Tesla. Value chain analysis helps to analyze Tesla’s activities.

Additionally, strategic group mapping facilitates in determining the position of Tesla in this competitive market. After that, the report recommends two strategic directions in the last part. The SAF framework will define the suitability and effectiveness of the strategic direction.

Task 1

a) Competition pressures

Porters five forces

Porter’s five forces is a tool to analyze the competitive environment of a company. This model measures the business sustainability of Tesla in respect of competitive factors. Five factors for Tesla are described below.

The threat of new entrant: Low

The automobile industry is a capital intensive industry. The new entrant has to spend a considerable amount on building the infrastructure and brand image. If the product is not unique, the acceptability of the latest automobiles in the market is low. Tesla provides electric cars which is a new concept in the market. Since it is a non-polluting car, Tesla will also get priorities from the UK government regarding documentation (Kathiravan et al., 2019). Therefore the threat of new entrants is low.

The power of suppliers: Low

The power of suppliers is low in the UK automotive industry because of suppliers’ large base and their small size. The number of electric car makers in the UK is few. Apart from Tesla, there are Nissan Renault, Mitsubishi, and others in the market. Since there are few buyers, the suppliers have less chance to bargain. The car manufacturers control the suppliers’ market due to their financial strength.

The power of customers: Moderate

The customer can switch over to other products since switching cost is low. The dealer manufacturer transactions have to be considered here. If the dealers do not take the car from the factory, the inventories will be piled up. Tesla does not keep any intermediaries between customers and manufacturers. Customers also have few options to change for a new electric car. Therefore the power of customers is moderate.

Figure: Porters five forces

Source: (Wen et al., 2020)

The threat of substitutes: Medium

Car is treated the best medium of personalized transport till now. To reduce the congestion in the city during peak hours, the UK government has taken specific steps. According to Wen et al., (2020), the government allocates a £5 billion fund to develop public transport and 50% of the daily commuters in the UK avail public transport to reach office comfortably to save time and cost. Therefore the substitution threat is medium.

The rivalry among competitors:  High

The number of brands in the electric car market is low, but the demand is very high. This leads to intensifying the rivalry to acquire more market share. The brands are investing in newer technology, design, customer safety to attract more customers. Since the exit barrier is high, every car manufacturer tries to acquire more market share. Tesla has to invest in new techniques and good customer service to attract more customers.

b) Growth opportunities

Developed Technology: Tesla has immense opportunities to grow in the UK market. When comparing with other cars, Tesla is proved as the best covering maximum distance with a single charge in the US. The developed technology helps to capture more market share in the UK.

New generation customer: The UK government sanctioned £1.3 billion for green cars and plug-in facilities. More than fifty per cent of the population of the UK is a young adult, and their preference is for the non-polluting vehicle. 91% of adult people in the UK are using digital platforms for their daily activities (Peytcheva-Forsyth, 2017).  On-line booking is an opportunity to attract young people in the UK.

Innovative marketing: Tesla does not appoint any intermediaries between the seller and the buyer. The booking can be made at the company showroom. This innovation will help to reduce the cost of the car as well as the delivery time of the product. The customers will be attracted by this innovative method in the UK market.

c) Current emerging threats

Exchange rate: Threats are the factors, which are a barrier to the economic growth of Tesla. As per Alghalith (2018), the stronger US dollar is affecting the automobile industry. The import of technologies from the US to the UK will cost more, and Tesla UK’s profit will be affected by this unfavourable exchange rate.

Price: In the luxury car segment in the UK, Tesla is facing threats from BMW, Audi, Lexus, and in the economy sector, Toyota, Ford, etc. Competitors are offering electric or hybrid vehicles at a lesser price than Tesla. Tesla has to increase its supercharger facility for better customer service in the UK.  The higher operating costs will affect the profitability of Tesla.

Affecting customer confidence: Due to complex engineering, Tesla car has developed flaws regarding product design, manufacturing defects, etc. The unstable manufacturing process put a hindrance on the long term customer confidence building, and it affects the brand value of Tesla. Tesla produces a futuristic car, and the customers are in a dilemma regarding the purchase decision. Poor information sharing is another emerging threat to Tesla.

Task 2

Though Tesla focuses on making a sustainable environment by delivering sustainable technology and offering electric cars, they have confronted some ethical dilemmas due to issues of social and environmental sustainability. The main ingredient of Tesla cars is the battery. However, 11m lithium-ion batteries can be rejected in the upcoming year because of less use of these batteries. To transport these batteries for recycling, there is a high chance of increasing global warming potential. Apart from that, it is evident that several crashes have been occurred with Model S using autonomous driving technology (Chen & Perez, 2018). Therefore, they face a significant ethical issue as the autopilot sensor is unable to detect many cars. Tesla said that the vehicle is fully autonomous, but this is only a driving assist feature, and it is not a fully autonomous car. Due to this, the customers face safety issues with their vehicles that result in affecting Tesla’s strategic implementation. This leads to affects their financial condition and business activities.

Besides that, safety issues have been faced by Tesla. There is a high possibility of hacking cars by the hacker. When the vehicle is running at a temporary speed or rides in the closures of lanes, storing the data with GPS coordinates cannot be enough to resolve any problem (Rogerson, 2017). It creates several accidents on the road. Due to these ethical issues, Tesla cannot make a proper strategic plan, and it prevents using the business strategy.

Task 3

a) Value chain analysis and financial analysis

Value chain analysis

Value chain analysis helps to find the commercial functions which make value and competitive advantages to Tesla. The framework has two activities; primary activities focus on production and support activities helps to develop the primary activities. The activities are described below.

Primary activities

Inbound logistics: The inbound logistics dealt with the procurement of raw materials, storage, and delivering the input for production. Tesla is required to develop a good understanding of suppliers for smooth inbound logistics.

Operations: Tesla’s function has different segments. Automotive parts include manufacturing, sales, and improvement of an electric car. Energy parts consist of sales of solar energy kits, electricity from solar energy to customers (Ussahawanitchakit, 2017).  Tesla can achieve profit maximization by analyzing these activities properly and develop its competitive advantages.

Outbound logistics: Outbound logistics consists of storage and delivery of Tesla products. Tesla prefers direct sales to customers to reduce the delivery time of the creation to UK customers. To facilitate this, Tesla has to combine all the activities appropriately.

Marketing and sales: Tesla needs to give full effort in marketing and sales its innovative products. The marketing department should not provide any misleading information to promote the products because it affects the brand value of the product.

Services: To promote customer loyalty, Tesla provides pre and post-sales services for its product. Tesla should develop new technologies and support activities to increase their brand value.

Figure: Value chain analysis.

Source: (Marschinski & Martínez-Turégano, 2019)

Support activities

Firm infrastructure: The organizational structure of Tesla is flat for effective communication and quick decision making. The activity includes financing, quality management, strategic management, etc. Tesla can develop its competitive advantage through effective control of the activities.

Human resources management: Human resource management is an integral part of support activities. The staff and workers of Tesla put their efforts and skill to increase productivity. The company can help workers by motivating and enhancing abilities. In this way, Tesla can reduce employee turnover and increase production.

Technology development: Technological development is an integral part of value chain analysis. Without technological development, Tesla cannot progress in the competitive market (Marschinski & Martínez-Turégano, 2019). Tesla should develop new technologies to make its products more unique to sustain in the competitive market of the UK.

Procurement: To make the production process, continuous good procurement services are a necessity. Tesla needs to align it with value chain activities. This process helps to achieve competitive advantages in the market.

Financial analysis of Tesla

The automobile industry requires massive capital to invest in the manufacturing process. The existing competitors of Tesla have enjoyed their existing infrastructure; Tesla used debt to build its infrastructure. The total revenue of 2018 was USD 21.4 billion compared to USD 11.75 billion in 2017. According to Jenčová (2019), the net loss of Tesla was USD 1.063 billion compared to USD 2.241 billion in 2017. BMW profit in 2018 was reduced to USD 2.3 billion from USD 3.2 billion in 2017. The debt of the company increased to approximately USD 10 billion in 2018, from USD 598 million in 2013 (Huang, 2019). At the end of 2018, Tesla’s debt-equity ratio was 1.63% which is lower than the average market ratio. The other established competitors’ rate is higher than Tesla. It means the company is highly overvalued.

Figure: Financial analysis of Tesla

Source: (Armstrong, 2019)

According to Lu (2020), institutional investors owned 63% of Tesla’s equity. The expansion of production facilities of its automobiles and batteries affects the profitability till 2020. The return on equity is -9.54%. And it affects the shareholders’ trust. Tesla planned to raise USD 2 billion in 2019 to fund its expansion. It will be submitted through the selling of equity shares or long term debt. It has nearly USD 9.4 billion in deficits in the books without considering the short term debt in the books (Gafarov, 2019).

Further debt will lead to a negative cash flow of the company. It will affect the earning per share value to the investors. The capital structure of Tesla is affected due to increased debt capital and share capital.  To get the confidence of the stakeholder’s Tesla emphasized earning more revenue from the sales of its product. At the same time, it will try to increase its profits making per share, return on assets profit margin reducing operating and administrative costs.

b) VRIO analysis

The core competency of the company is the prime suit. Core competencies of Tesla, as given below:

Brand image: its design mainly inspires tesla branding with technology. This company manages to build a picture of environmental concerns for appeasing the environmentalist inner conscious. Tesla has made cars with high and luxury performance, soothing the status symbol people crave. The latest car models of Tesla lead to the buzz over the company.

Proprietary battery: Battery of Tesla is another core competency. The cars run on the power of the battery for 40 miles. Currently, they have bought land for 5.5 million sq ft Gigafactory to meet consumers’ demand (Roper & Users’Manual, 2020).

Supercharger network: This company has built its charging station with the Tesla logo and colours. Tesla also offers a supercharging system to the consumers in charging the cars for free. This charging station is unique as this helps in setting the cars quickly that other stations that create highly competitive value.

Manufacturing: Tesla has conducted its manufacturing process with robotics technology, investors, and suppliers. Therefore, manufacturing is the most intangible resource for Tesla.

Innovative technology: Tesla becomes successful due to its innovative technology. The immense expertise and innovation of Tesla drive other automotive companies. Its R&D department has developed a culture within the invention, and $834 million is invested in this department in bringing more innovation in the upcoming days. Through sustainable technology, they have maintained to penetrate the automotive sector with technological expertise that can compete with established competitors.

Based on the core competencies, the VRIO framework is analyzed for TESLA. This analysis helps determine the company’s strength by assessing its capabilities and resources (Lopes et al., 2018).

Valuable: All of the capabilities for Tesla are valuable as this help deliver the best service and make tremendous value to the customers.

Rare: Most of the capabilities are rare as all are innovative and are not assessed by other companies. However, manufacturing can be integrated by others, and therefore, it is not rare.

Imitable: Innovative technology used by Tesla is imitable for technology-based companies as Tesla invests in the colossal scale production strategies and technologies that are difficult to be copied by others. Branding of Tesla is also not imitable as this is unique for each company.  Excellent battery, supercharger network is easily imitated by others.

Organized: All capabilities of Tesla are well-organized as these help in gaining a considerable level of competitive benefits.

c) Generic strategy and strategic group of the company

Generic strategy of Tesla

With the help of Porter’s generic model, the generic method used by Tesla can be analyzed. This model emphasizes four different ways. Tesla mainly uses a differentiation strategy to explore the business.

Figure: Porter’s generic model

Source: (Islami et al., 2020)

They focus on implementing a differentiating strategy than a cost leadership strategy. This company put large investment in new technology for differentiating their car models that help in leading the whole industry in innovation. A high investment allows the R&D team to bring modern car models day by day and Tesla becomes differentiated from the competitors. Therefore, Tesla concerns about performance and sustainable technology in competing with rivals within the market. Through technological innovation, electric cars become quicker and better in driving than gasoline cars (Islami et al., 2020). They also use developed and new processes and technologies in elevating the production system of the vehicles that lead to developing the cars’ quality.

Strategic Group of Tesla

Strategic group mapping means a concept of utilizing strategic management of Tesla that identifies several strategies. Tesla mainly focuses on cars’ quality, and thus the cost of products is high (Meilich, 2019). They always make their products differentiated by offering innovative vehicles. On the other hand, this company has operated its stores in several countries, but not everywhere. Based on this, the strategic map for Tesla is drawn below:

Figure: Strategic Group Map of Tesla

Source: (Meilich, 2019)

Task 4

a) Recommend a set of new strategic options (at least TWO) for the organization from 2018–2023

After analyzing the TOWS framework, it is seen that Tesla can get several opportunities if they develop their weakness area and mitigate the threats with their strengths. Therefore, they should develop some strategic options by which they can sustain their business successfully. 1. Cost-reducing contract with Tesla’s suppliers: In this case, it is seen that their high price of the car models gives some competitive threats as their main competitors like Toyota, Volkswagen offers their EVs at a lesser cost (Stobbe Jr, 2019). Therefore, Tesla should make some cost-reducing contracts with its suppliers and develop a more sustainable supply chain. It is seen that many suppliers are unable to meet Tesla’s initial requirements for efficient production. Thus, Tesla gets a limited option from the suppliers, which increases the production cost. Therefore, if it optimizes its supply chain and gathers some dedicated suppliers, then the economic scale will be maximized, and production cost will also be lessened. In this case, merging with the SolarCity will facilitate this company by providing high-quality batteries for its EVs. In 2016, Tesla conducted M&A with this company as it will help this company to diversify its market in the energy storage sector. Apart from that, this company produces electric batteries for Tesla’s vehicle. Therefore, the supplier’s problem is reduced to some extent. On the other hand, in 2014, Tesla makes a strategic alliance with Japan-based Panasonic Corp., Osaka which specialized in battery technology. These companies together invested $5 billion to produce lithium-battery, which is supplied for Tesla’s EVs (McCain, 2019). In this way, if the price of the EVs will lessen, it can increase its revenues as well as it can penetrate the existing market easily.

2. Expansion of the Supercharging Stations: Tesla should expand the number of Supercharger stations in several places in the UK. One of the main issues Tesla’s consumers faced is the ability of charging of its electric battery. Tesla’s batteries provide 260-265 miles in one charge. However, it is not suitable for a long-distance journey. Therefore, to get a competitive advantage over the gasoline engine-based vehicles, it should expand the number of charging stations (Hoelzlhammer, 2018). The prime significance of this strategic option is that the investment at first should be costly, but Tesla will get a benefit for the long term, and the maintenance cost of this charging station is also less. As the implementation cost for this strategic option is costly, Tesla can acquire some previously owned gasoline or pumping stations, or it can make partnerships with some multinational retail sectors like Walmart to expand the Supercharger stations. Therefore, it will give them an opportunity for horizontal growth.

b) Evaluation of Strategic direction through SAF Framework

SAF Framework

Implementation of a new strategic option is an arduous task, and a higher line of Tesla’s management should choose perfect methods, utilize all the available resources and assets for making the strategy successful. In this case, the SAF framework will facilitate higher management to determine the usefulness, effectiveness, and needed assets for implementing the strategic option. Therefore, higher power can know whether the strategic option will work or not for their strategic growth by analyzing factors like feasibility, suitability, and acceptability. In this case, lessening the price of the car models is very important for Tesla to compete with other firms in the same strategic groups.

Suitability

Tesla has approximately 200 suppliers who provide raw materials to this company (Dana, 2018). However, due to the inefficiency of the suppliers and lack of the contract makes some difficulties for Tesla during the production. Therefore, Tesla cannot conduct a mass production like its competitors like Toyota, Volkswagen, etc. On the other hand, due to limited options, the cost of production becomes high, which reflects a negative impact on Tesla’s revenue. Therefore, if Tesla applies this strategic option, then it will be suitable for getting competitive advantages.

Acceptability

Tesla should implement some methods or processes; otherwise, it will disrupt this company’s overall manufacturing process. Therefore, the strategic direction will be accepted when Tesla maintains some significant steps. They should identify the suppliers who will be able to provide the essential raw materials and components for EVs and Tesla should make negotiation agreements with these suppliers (Bilbeisi & Kesse, 2017). If the suppliers are not eager to accept the contracts, then Tesla should search for other suppliers. In this way, the strategic directions will be taken as the risks of Tesla can be mitigated.

Feasibility

The feasibility analysis will help to know Tesla’s assets and resources are enough to extract this strategy. In this case, Tesla has substantial revenue over the years, and it has a vast range of suppliers. Due to the large brand image in several international markets, the suppliers always try to maintain a good relationship with Tesla (Bilbeisi & Kesse, 2017). On the contrary, as their revenue is healthy, they can make an attractive agreement with the suppliers.

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Appendix 1: TOWS Framework