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Contents
Recommendation Summary .............................................. 3
Key Issues ........................................................................... 3
Qualitative and Quantitative Analysis .............................. 4
Synthesis of Key Issues ...................................................... 7
Best Strategic Alternative.................................................. 8
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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
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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
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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.
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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.
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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
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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
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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.
