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Tesla Strategy Recommendations Report

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Tesla Strategy Recommendations Report

  1. 1. STRATEGY PROJECT -- RECOMMENDATIONS REPORT Nate Aboussou 435-680-0627 D00174501@dmail.dixie.edu
  2. 2. 2 Contents Recommendation Summary .............................................. 3 Key Issues ........................................................................... 3 Qualitative and Quantitative Analysis .............................. 4 Synthesis of Key Issues ...................................................... 7 Best Strategic Alternative.................................................. 8
  3. 3. 3 RECOMMENDATION SUMMARY Similar to thelategreat—Muhammed Ali, Tesla is aimed (if theyhaven’t already)to shake up theworld. This SiliconValleybased companyhas changed the future of theautomotiveindustry and thebig three (Ford, Chrysler/Fiat, General Motors) are starting to payattention.Over recent years Tesla has made many strategic moves to gain competitiveadvantage.For example, their10 millionsquare foot “Gigafactory”(thiswill becomethesecond largest building in the world)which is projected to produce500,000 batterypacksfor the ModelS, X, 3 and otherderivatives. Because this automotivecompanyis losing more than $4,000 dollars on every vehiclethat theysell and in order to continue theirshake up of a mature, deeply entrenched, bureaucratic industry Tesla needs a strategicalliance. Applecorporation’s future plans and goalsare theclosest in industry to what Tesla aims to do. Because Appleis moving with purpose, towards an electric vehicle, it is easy to see how a partnership would be mutuallybeneficial. A strategicalliance will benefit Tesla both in thefuture and in the here and now. KEY ISSUES 1. Cost to produce:Tesla doesnot utilizea cost leadership strategyand has been operating at a net loss for about 7 Years. The SiliconValleyautomakerloses an average of $4,000 for every model S they produceand sell. Using its reckoning of operating losses, analysts estimate that Tesla burned $359 million in cash last quarter (Q2 of 2015) in a bull market for luxury vehicles (Module6). 2. Supply chain management:Supplychain issues have limited Tesla’s abilityto producevehicles. Tesla vehicles require specific and unique parts to produce.According to the results discovered using the porters 5 forces modelthe overallsupplier power working against thiscompanyis high (Module3). 3. Infrastructure:Tesla Motors needs to create an infrastructure for users to recharge, repair, and recycle. Their current infrastructure is limited (Thisis the initialcost of doing business). Although electricvehiclesare great theyrequire a vast infrastructure to support them. As Tesla grows so does its need for such an ecosystem. In order to reach
  4. 4. 4 theirgoals, Tesla has to eat many of theinitialcosts for thesesystems upfront (Module6). 4. Reliability: In order to advance itsnew, found success Tesla Motors needs to improve thereliabilityofvarious componentsand systems in its vehicles. The ModelS and X although fantasticvehicles stillare known to have issues such as electronic doorhandlesnot opening, electricmotors failing, and warped brake rotors. Othermature auto manufactures have an opportunityto introduce electric vehiclesthat will offer similar features and no defects (Module4). 5. Political and Legal:Tesla motors and its innovative technologiesface several politicalandlegalhurdles beforetheygain firm footing inthe automotive industry. Law makers are stillreviewing theidea ofself-driving cars to determine what it will or will not be capableof doing. Several states have banned Tesla vehicles from being soldin theirstates because Tesla doesnot generate sales through dealers (Module3 & 7). 6. Social Acceptance: Electricvehicles as a wholeare not quite social acceptable. Tesla’s brand needs to make great strides. Tesla’s and otherEV’s account for a very small portionof theauto market. Many peopleview them as expensive, limited,undeveloped technology (Module7). QUALITATIVE AND QUANTITATIVE ANALYSIS 1. Cost to produce: Tesla does not utilize a cost leadership strategyand has been operating at a net loss for about 7 Years. Qualitative Analysis: Cost leadership is strategyused bybusinesses to create a low cost ofoperationwithin theirniche. The use ofthis strategyis primarily to gain an advantageover competitorsbyreducing operationcosts belowthat of others in thesame industry. In regard to this strategyTesla does not employ these ideals.In fact, theSiliconValleyautomaker is losing money on every ModelS electric sedan it sells. This a growing problemthat has been effecting its overall goalsand visions. Tesla’s cash consumption has limited theirabilityto accomplish theiroverall mission. Quantitative Analysis: Statisticsshow that Tesla Motor’shas been operating at a net loss from thefiscal year of 2008 to thefiscal year of 2015. Tesla Motor's
  5. 5. 5 net loss increased to approximately254 millionU.S. dollars in thefiscal year of 2011. 2. Supply chain management: Supplychain issues have limited Tesla’s abilityto producevehicles. Qualitative Analysis: Tesla motors deals with hundreds of suppliers in order to produceand sell its vehicles. Many of its suppliers operateoverseas or in adjacent countries. These factors have increased theimpact that delayed shipments, poorquality, or unmet specificationscan have on production. Recently, Tesla’s operationshave been limited by supplychain issues. For example, a shoot up at the Mexican border prevented deliveryof carpet for its modelS. As result, productionwas halted. Quantitative Analysis: Supplychain issues have reduced Modelx productionby greater than50%. Overall, thesupplier power in thisindustry is fairly high based on themissed productiongoals.These delays have impacted revenue projectionsand contributeto net operating losses. 3. Infrastructure: Tesla Motors needs to create an infrastructure for users to recharge, repair, and recycle. Their current infrastructure is limited (Thisis the initialcost of doing business). Qualitative Analysis: In order to power its vehicles Tesla has channeled large amounts ofrevenue into its supercharger network (which Tesla owners can use for free). Additionally,inorder to sell and repair its vehicles it has established showrooms/service centers to assist its customers. Creating thisinfrastructure has not been cheap and has contributed to Tesla’s net operating loss. Quantitative Analysis: Tesla intends to advance the desire for sustainable transportation.So far all theyhave reallydone is eat a tonof the upfront cost of doing business. As theycontinue to takeannual sales from tens of thousands to hundreds of thousands theexpense of theirinfrastructure will grow. 4. Reliability: In order to advance itsnew, found success Tesla Motors needs to improve thereliabilityofvarious componentsand systems in its vehicles. Qualitative Analysis: Similar to any automaker Tesla has experienced its fair share of recalls and product defects. Bycomparison thisEV producer is young in terms of car manufacturing thoseand otherfactors have contributed to problems with theirsystems or parts. Several of its vehicles have hadreliability issues and Tesla has hadto eat thecost of repair and PR damage control.
  6. 6. 6 Quantitative Analysis: Tesla has hadto recall 2,700 of its ModelX vehicles because the thirdrow seats were likelyto fall forward in theevent ofa crash. This and otherproblems have compounded theissue of reliability. Thisissues have increased the cost ofdoing business and will effect brand perceptionifnot resolved. 5. Political and Legal: Tesla motors and its innovative technologiesfaceseveral politicalandlegalhurdles beforetheygain firm footing inthe automotive industry. Qualitative Analysis: The U.S. federal government has verbally and through incentives supported theadvent of electricvehicles. However, many of those incentives are scheduled to run out by Q4 of 2017 and theverbal support has hadlimited impact on consumers. Additionally,several states have banned the sale of Tesla vehicles because theydo not follow thedealership sales model. Quantitative Analysis: By thetime theTesla Model3 ships in the fourth or fifth quarter of 2017, the$7,500 federal tax credit for Tesla electricvehicles may no longer bein full force. Tesla is doing such a goodjobselling the more expensive Tesla’s — Tesla ModelS, Tesla ModelX — that theyalone might possiblypush Tesla past the200,000-sales cap that triggerslower tax credits. And withina year, there will beno Tesla creditsat all. That means for themajorityof Tesla Model3 buyers in thereservations line, if Tesla’s delivery timelineslips, there may not bea Model3 $7,500 federaltax credit — maybe not even the wind-it- down $3,750 or $1,875 credits for buyers taking delivery after 2018. 6. Social Acceptance: Electricvehicles as a wholeare not quite socially acceptable.Tesla’sbrand needs to make great strides. Qualitative Analysis: Electric vehicles account for onlya small amount of cars on theroad today;Tesla vehicles, likethe modelX and S, account for even smaller sections of theautomotivemarket. CEO Elon Musk has said I don’t think peoplequiteappreciatethegravityof what is going on [with regardto global warming] or just how much inertia theclimate has. We really need to do something”. Many consumers do not see electricvehicles or Tesla’s as the solutionfor environmental protection. Quantitative Analysis: The majorityof Tesla’s customers are technology enthusiasts theymake up about 1 percent of Tesla’s potentialmarket.Although, Tesla as a brand is prettywell known based on 275,000 pre-orders for their model3 great strides need to be madein order to secure firm footing in the automotiveindustry. Overall, social acceptancefrom themasses has yet to be acquired for thisSiliconValleycompany.
  7. 7. 7 SYNTHESIS OF KEY ISSUES 1. Tesla is one ofthe most exciting companies operating in theworld today. Currently, theystruggle with creating and maintaining an infrastructure that will support their products.The also dealwith high operating costs and rely heavily on suppliers to producetheirvehicles. One of theways Tesla’s can improve would bethrough implementing a cost leadership strategy.In order for thisto become a realitytheboardof directors willneed to evaluateall systems, products, and assets. The finance department shouldinternallyaudit allmajor expense categoriesand consult with operationsto establish lean processes. The legaldepartment shouldbrainstorm with boardmembers on ways to reduce costs through government incentives and lobbying forlegislativeacts. The Qualitydepartment shouldbe engaged in redoubling its efforts to reduce product defects. Customer service should collaboratewith marketing to provide cost effective alternatives to meeting consumer needs (Keyissues 1&3). 2. Tesla has thegreat opportunityto changetheworldas we know it. However, there are several barriers that thiscompany faces before accomplishing this task. Electricvehicles as a wholeare not quite sociallyacceptable.Tesla’sbrand needs to make great strides. Additionally,Teslamotors and its innovative technologiesfaceseveral politicalandlegalhurdles beforetheygain firm footing in theautomotiveindustry. A multinationalenterprise approach would assist in removing these hurdles. Establishing themselves in well developed markets such as China, India, or England would greatlybenefit this firm. The marketing department would need to providean extensive analysis on culture, income, and social factors. The legaland finance departmentswould need to consult with related foreign governments on policiesand procedures. The board of directors as a wholewould need to consider structure and product offers to maximize the effect of this approach (Keyissues 5&6). 3. So far Tesla has created a relativelystrong brand and developed sustainable core competencies. However, in order to advance its new, found success Tesla Motors needs to improve the reliabilityofvarious components and systems in its vehicles. Many of its suppliers operateoverseas or in adjacent countries. These factors have increased theimpact that delayed shipments,poor quality, or unmet specificationscan haveon production.Tesla’s operationshave been limited bysupply chainissues. A strategy to improve in these areas would include foreign direct investments and verticalintegration. In order to accomplish thesetasks operationsand finance wouldneed to ascertain what supplychain investments wouldcreate a mutually beneficialenvironment (for example suppliers of vehiclecarpet might require investments as opposed to purchase). Furthermore, Tesla’s analyticsand finance department would need to monitor thesuccess of investments or purchases. The boardof directors
  8. 8. 8 would also need to discuss thelevel of integrationand amount of foreign investment (Keyissues 2&4). 4. From conceptionTesla as a companywas something that was first ignored by mature automakers thenapplauded,criticized,imitated,andnow slightly respected and feared. Even with theirsuccess electric vehicles account for onlya small amount of cars on theroad today;Tesla vehicles, likethe modelX and S, account for even smaller sections of theautomotivemarket. As Tesla continues to take annual sales from tens of thousands to hundreds ofthousands the expense of theirrequired infrastructure will grow. In order to advance their overall mission, Tesla needs to create strategicalliances. These alliances will need to be effectively managed by candidatesselected by theboardof directors. Marketing shouldplaya hugerole in ensuring stakeholdersare pleased with theresults of such initiatives. Operationsshouldcollaboratewith human resources in establishing culture norms for alliances. Additionally, finance shouldconsult with boardmembers on allocationofresources during theterm ofan alliance. Thelegal department should beinvolved in the allocationofintellectualpropertyandprotectionof firm assets tangibleand intangible(keyissues 3&6). BEST STRATEGIC ALTERNATIVE The best strategic alternative for Tesla motors is to create a strategic alliance with Applecorporation(recommendation number 4). Because Tesla’s “Master Plan” is to builda sports car, use that money to buildan affordablecar, use that money to build an even more affordablecar, while doing above,also providezero emission electric power generationoptions, don't tellanyone, theyneed to cut costs. Furthermore, similar to their“Master Plan” its common knowledgethat thisautomotivecompanyis losing more than$4,000 dollarson every vehicle that theysell. Therefore, in order continue theirshake up of a mature, deeplyentrenched, bureaucratic industry Tesla needs a strategicalliance. The“join em, to beat em” strategyis Tesla’s best chance. Applecorporation’sfuture plans and goalsare theclosest in industry to what Tesla aims to do.Since Septemberof 2015 Applehas (somewhat in secret) committed itself to its electricvehicle program codenamed “Project Titan.” Appleis said to have hundreds of employeesworking on thisprogram at a secret locationnear its Cupertino headquarters. Littleis known about thecar, but sources have suggested early prototypesmayresemble a minivan. Thisis in line with Tesla’s ModelX which is a modernized vehiclefor families. Thecar may or may not include self-driving technology -- rumors have thus far disagreedon this point,but the latest news suggests thefirst
  9. 9. 9 version will not beautonomous. Although thefirst Applevehicle willnot be self-driving there is no doubt thiscompany is aimed towards that end which is similar to Tesla. The AppleCar is in theearly stages ofdevelopment, and Appleis still in theprocess of recruiting peoplefor theproject and meeting with car makers and automotive suppliers. This also parallelsTesla’s productionstage for theirfuture Model3. Additionally,Applehasbeen searching for a placein theBayArea where it can begintesting vehicleprototypes,talked with theDMVabout vehicle regulations, and has initiated talkswith charging station companies, allmoves that suggest Apple's interest in a car is serious. Because Appleis moving with purpose it easy to see how a partnership would be mutuallybeneficial. Themajor advantagesof such an initiative include cost reduction(concerning R&D, testing, and production),EVindustry growth, and thetransference of tacit knowledge.All of theseadvantages will benefit Tesla both in the future and in thehere and now. I know that ifTesla Motors effectivelyestablishes a strategicalliance with Apple corporationtheeventualityof affordablesustainable transportationto themasses will be realized within less thana decade.
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