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Tesla final

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Tesla final

  1. 1. 
 MONOGRAPHY OF AN INNOVATIVE CAR COMPANY Strategic Management December 2015 TESLA MOTORS Bas$en Mar$nez | Thomaz Talarico | Maria Garcia-Moreno
  2. 2. TESLA MOTORS Executive Summary
 2 Problem • Tesla is incurring yearly negative profits • Not a sustainable company yet • Lack of stable market environment for its product • Too few charging stations for electric cars installed • Risky market position as strategy involves speculation on future gains Recommendation • Diversifying intensifying research and developing in the battery sector • Position in the battery market could be used as a backup in case of the e-car industry becoming an unfavorable environment to invest in • Cost efficient battery could target the bottom of the pyramid • Innovation in efficient batteries could have positive externalities on the environment Ecosystem • Strong partnerships within the supply chain • Coopetition between competitors • Charging station network expansion • Sharing patents to lure newcomers in the electric car market • Ensuring a leading position in the ecosystem Disruptive Innovation • Tesla cars currently targeting high-end consumers • Strategic canvas value curve analysis • Tesla’s cars underperforming in term of price and battery stations • New features offered by Tesla on the market • Targeting low income consumers as Tesla’s final strategy • Too early to talk about disruptive technology but on the good way
  3. 3. TESLA MOTORS TABLE OF CONTENTS Opening 4_________________________________________________ A 150 Year-Old Market 4 Tesla Today 5 Tesla’s Current Issues 6 Choice of Analysis Grids 7 Ecosystem approach 10_____________________________________ First Stage : Ecosystem’s Birth 10 Second Stage : Ecosystem Expansion 11 Key Partners 12 Infrastructure 12 Demand and Product Value 13 Third Stage : Ecosystem Leadership 14 Fourth Stage : Ecosystem Self-Renewal 15 Disruptive Innovation Approach 16____________________________ Generic Strategies: Which Positioning to Obtain a Competitive Advantage? 16 Defining the Firm’s Strategy: Tesla’s Disruptive Innovation 17 Boosting Productivity : Tesla’s Gigafactory 17 Creating New Features For the Market 18 Recommendation 20________________________________________ Conclusion 24______________________________________________ Bibliography 25____________________________________________ Appendices 26_____________________________________________ 3
  4. 4. TESLA MOTORS Opening A 150 Year-Old Market When it comes to manufacturing cars, Tesla needs to keep in mind that - before creating and consolidating a fully-electric car market - it has to overcome a 150 years old traditional capital intensive industry: the Internal Combustion Motor Cars. During the late 1800s with the second Industrial Revolution, the first automobile pioneers challenged themselves to encounter an individualized and motorized mobile. In the early 1900s, William C. Durant founded an automotive company that would become known as General Motors, and Henry Ford quickly created a mass-producing company named after himself. The American automotive industry remained deeply dependent of a 500,000 people working class constantly unsatisfied. Their claim consisted into an increased profit sharing and basic working environment safety policies implementations. As a result, the American automobile’s ecosystem faced a crisis when the Japanese companies got into the business. Combining product variety, efficiency and quality, the Toyota-like companies had started an ecological war. The superiority of Japanese approaches forced the traditional industry of world automobile into a self- renewed ecosystem known as of today. This powerful new ecosystem admitted strong customer-based designs, flexible manufacturing, dedicated workers, technological engineering and a vast network of suppliers. More recently, with the Silicon Valley’s technological clusters and influence emergence, Japanese companies saw their ecosystem being altered once again. Due to rising fuel costs and a concern for air pollution, the first visionary businessmen started to develop and invest in electric vehicles during the 1960s and 1970s. By 2005, GM, Toyota and Honda had released their first zero emission vehicles but sales were disappointing due to high prices and low efficiency. The electric cars however, showed largely positive reviews and a high amount of new- adopters signed for waiting lists in order to buy the limited vehicles. Despite those promising results for electric vehicles (EV), the traditional automakers showed little enthusiasm for their new products and eventually dropped the EV industry and most of their projects related to this market. Knowing that the current hybrid vehicle - relying on both gasoline and electricity - market large sales were at an all-time high for traditional automakers, Tesla co-founders - Martin Eberhard and Marc Tarpenning - submitted their idea for the e-car company to AC Propulsion employees, Alan Cocconi and Tom Gage. As AC Propulsion showed too little interest in the electric car business, they redirected the Tesla’s founders to Elon Musk, who had expressed deep enthusiasm for this industry. This network connection brought birth for Tesla Company. 4
  5. 5. TESLA MOTORS Digitization had already changed many industries and Tesla knew the automobile industry (AI) was now relying itself in smart, connected and sustainable cars. Old core competencies of the car industry – large motors and roaring sound – were losing their value to consumer’s mind. Instead, the latter were expecting a more software-intensive product. In addition, given the 150 trillions dollars already invested into gasoline cars and the climate change current issue, the demand for a cleaner and zero marginal cost automobile kept growing consequently. Tesla engaged itself in vertical integration abilities teamed up with dynamic and premium services. It has great hopes to stand as one of the most efficient car manufacturer fueled by customer reviews, quality and innovative technology. Tesla Today 
 Tesla Motors is well-known for producing the best electric car models on the market by developing technology and pushing it as far as possible. Its headquarters are located in Silicon Valley, a highly strategical location for IT-companies. Tesla launched its first product following a niche market strategy. Tesla is starting from the top of the car industry as green technologies remain too expensive today for the low income consumer market. It has been selling premium differentiated cars so far, but has clearly define its final goal which is to reach the low-end market. While designing the Tesla Model S, they knew they were going to sell this car at a relatively high price - between $71000 and $106000 - and offer a high end product of greater value to consumers. Tesla's brand image - developed through their objectives and mission statements for instance - communicates on their aim to produce the best car in the world while using sustainable energy, a key-matter becoming increasingly important in today's world. In addition, given its positive externality, Tesla’s products beneficiate from a strong media exposure. 5 TESLA MODEL S - LUXURY SPORTS ELECTRIC CAR
  6. 6. TESLA MOTORS If global car sales are expected to grow on a 4-percent-per-year basis, e-car sales should skyrocket over the next years. Appendix 1 is highlighting this trend. Well-known consulting agencies (J.D. Power, BCG, BAIN, JRC) are expecting e- car’s sales to reach up to 10% of the global car industry market by 2020, which would mean around 10 million of e-cars sold. In 2014, only half a million electric vehicles were sold, representing less than a percentage of the global car industry market shares. Tesla’s aiming to sell 500 000 cars in 2020 - this is way bigger than its 2014’s 18480-vehicle sales. Tesla had a net income of negative $108 million in 2013, and this illustrates its strategy of strong initial investments and long-term return expectations. The CEOs have invested million of dollars in R&D knowing their return would not be immediate. However, Tesla beneficiates from a high financing leverage ability as many investors are willing to invest in the company. This year, Tesla's shares has increased 15%, while last year it increased 7%. Many banks are starting to buy Tesla's shares considering that it is a company with future prospect and efficient managerial organisation; Musk's company is starting to gain confidence and trust from the market. Tesla’s Current Issues As the brilliant as the initial project can be, Tesla still faces serious issues. Its profits are way negative and its turnover rate, too low due to small sales volume. The company remains yet to be sustainable. Five successive large investments phases took place in order to instill artificial life to the business. Tesla also lacks of a stable market environment for its product. With too few charging stations, massive expenses will be incurred sooner or later as it is a sine qua non for the business expansion. In this way, Tesla is facing several technological challenges. It will have to create batteries more durable and efficient while reducing the price. Last but not least, the company should meet the market expectations while exploiting the green trend. As Tesla has in hand a potential weapon to eradicate a 150 years old combustion car industry, analyzing Tesla’s ecosystem to understand its sustainability on the long-run appears as priority.
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  7. 7. TESLA MOTORS Choice of Analysis Grids The ever-evolving conventional car ecosystem must be contextualized. If Tesla is pretty much the only company who only sells on electric cars, its competitors adopted another strategy : they launch some new electric car product lines, sold in rather small quantities. One must acknowledge that the green trend is present today in most industries. Conventional car suppliers such as BMW, Volkswagen or Smart are also positioned on Tesla Motors’ market. However, there seems to be a difference between Tesla and those companies. Conventional mechanical car manufacturer are investing smaller amounts into R&D for e-cars as compared to Tesla, even if they have extremely high funding abilities. Volkswagen, for instance, owns sufficient financial power and could easily decide to fund a colossal R&D campaign for green technologies. This could lead to important breakthroughs in the market, yet none has been committed in such operation so far but Tesla. For the traditional automakers’ perception of the electric car is not more than an evolution of their current ecosystem. In other words, if the car is not viable today, it will certainly be in the future and from that point, one should invest just as much not to be late on the market, compared to its competitors. Of course, Tesla’s mindset is completely different : the electric car industry is a market in itself. Tesla wishes to create a whole new ecosystem around it whereas other competitors would rather see their “already- in-place” ecosystems drifting toward it. Tesla remains convinced that the green shift is a process that should be pushed forward whereas others would let it develop by itself. In addition to this difference of beliefs, Tesla is also different from its competitors as it is positioned on different markets. Known for being a car manufacturer, the company is a leading laboratory for battery technology improvement. Elon Musk seems to be investing a lot in the development of smart 7 ELON MUSK - CEO OF TESLA MOTORS
  8. 8. TESLA MOTORS homes. Tesla car will hardly create unanimity on its market unless it differentiates itself from other electric cars. For the company plans on future synergies between different industry Tesla is positioned on. Later on in this study, the case of the Powerwall battery will be addressed. Over the last years, quite a few household goods were launched by the company which are not directly connected to the car industry. Tesla is certainly exploiting its Silicon Valley’s IT-network to enlarge the scope of its innovation. As a matter of fact, not only Tesla is equipping its cars with tablets today, but it is also selling technology that are using this tablet as a remote to households. Tesla Smart Systems (TSM) denotes its product line for households. If there is not yet any link between TSM and Tesla’s cars, the ambition for Tesla to work on it remains clear. As E. Musk’s products will be more and more interconnected, Tesla car will no longer be an option. Here again, the perception difference between traditional manufacturers and Tesla is obvious. Tesla wishes to implement an enhanced product in synergy with our daily life whereas others perceive the e-car as a traditional car with a different kind of motor. It appears important to analyze Tesla under the ecosystem approach as its ability to give birth to such new ecosystem remains questionable. In his book The Wide Lens, Ron Adner describes as “ecosystem carryover” the ability for a company to enter then leapfrog competitors in an existing market supported by deep rooted positions on other markets. Just as iPod users who supported the iPhone launching with Apple, Tesla could be using the same strategy. Convincing and gathering trustful customers on different markets in order to strengthen Tesla’s support when taking over the e car market. Tesla’s mass investment policy is an all-or-nothing situation with a payoff that remains unknown yet. So far, it is true the company has been behaving quite uniquely on the market with a pretty aggressive expansion strategy. But, one can hardly conclude about its efficiency. Tesla is rather young company that has yet to prove its sustainability. For this reason, it appeared that studying Tesla’s current business model was irrelevant. With an ever-evolving market, a simple business model analysis would have failed to address Tesla’s dynamism. For the green remains based on future forecasts. The figures speak for themselves : with around half a million electric cars sold in 2014, the sales are expected to reach 10 million by 2020. Tesla today stands as an infantile firm that has yet to fully implement its strategy. Business model would either lead to wrong conclusions by only taking into account current figures and rejecting the long-term horizon or, to highly subjective assumptions if intending to understand its future evolution. Though, one can hardly deny future’s importance for the green car market. In a similar fashion, studying dynamic capabilities seemed inappropriate. As they describe the firm’s ability to adapt to market evolutions. What needs to be understood here is that Tesla adopted from the beginning a speculative position on the e car market : it is today gambling and betting on future trends. Therefore, dynamic capabilities are not what matters here as Tesla’s business can only be perceived on a long-term horizon. Rather than 8
  9. 9. TESLA MOTORS seeing the firm as a spaceship on cruise trying to anticipate and avoid asteroids, it should be imaged as a spaceship that has yet to arrive on Mars to prove its worth. It shall be pointed out that, as an underdog, Tesla could be the game changer for its market. Mechanical car manufacturers function in a different way : they are pushing further their current technology while trying to cut costs. As a matter of fact, Elon Musk is going the opposite way with his company - creating new technologies with costs as their last matter. It may result in a bottomless pit for Tesla but they are taking the best. With the strategy being quite risky, either the payoff turns out to be huge in case of favorable market answer or the loss associated will be dramatic. Such a situation reminds large corporations’ deficiency when spotting and investing on low margin technologies. Traditional car manufacturers stand blind in front of potential innovation on their market. Focusing on their current profit equation, they tend to reject expenses that would substantially lower their short-term profit. Tesla’s main strength certainly lies in their financial power : with the full trust of their shareholders, the company keeps spending while almost turning the blind eye on it. On the long-run, this could lead Tesla to commercialize specific features its competitors would not possess. By developing cost efficient components, Elon Musk could dramatically lower its costs and target bottom-class segment. Disruptive innovations appeared relevant for Tesla’s case as the company has clearly stated its final goal : reaching the low-end segment. By doing so, if Tesla succeeds in bringing new features while improving already-in-place ones, the company will certainly be able to take over the market. Tesla’s small target segment and the fact that its cars are far from being as attractive as mechanical cars nowadays are some early signs of a potential disruptive technology emergence. Tesla’s value curve needs to be analyzed with all the features the company can offer. Whether Tesla will be the company that overthrow the car market or not is a question that to be addressed. 9
  10. 10. TESLA MOTORS Ecosystem approach Every business ecosystem is developed through four distinct stages: birth, expansion, leadership and self-innovation. Each of the stages shall be well structured and stable so that the newly-built ecosystem remains efficient. Tesla - as an e-car manufacturer - currently stands at the edge of different other industries: from the energetic industry to the luxury industry and even through the digital industry. First Stage : Ecosystem’s Birth During the birth stage of an ecosystem, entrepreneurs and visionary businessmen are deeply concerned into designing a product or service that will meet the customer’s expectations. At the center of their brainstorming : customer value is questioned. Entrepreneurs will aim on finding ways to enhance value brought to customers and exploiting those paths through an efficient model : strategic supplier and distribution channels. Elon Musk, a typical entrepreneur from Silicon Valley initially known for the funding of PayPal, held three valuable tools to create a sustainable ecosystem. Due to his previous e-commerce experience, he knew the Internet would be a worthy ally for a future ecosystem creation. Of course, his huge intellectual network constituted a key success factor for the Tesla ecosystem. By teaming up with other successful entrepreneurs, Tesla could finance itself through important rounds of investments as 10 TESLA’S ROADSTER CAR BORN FROM ITS PARTNERSHIP WITH LOTUS
  11. 11. TESLA MOTORS shareholders were confident enough that this highly specialized human capital would reach future success. At the birth stage, cooperating with well-established companies and setting up a business partner's network is a highly valuable strategy. No exception were made concerning Tesla. The company developed a strong partnership with Lotus when launching its first fully electric prototype model : the Roadster (cf. picture below). Produced at a low volume and high cost, Tesla beneficiated from positive reviews thanks to its contractual agreement with Lotus. This strategic alliance definitely leveraged the product and also brought value to Tesla by improving its brand image, gaining market’s confidence. Yet, in the birth stage - other than satisfying consumers and teaming up with established partners - a wanna-be leader must initiate rapid and ongoing improvements that will drive the entire community into a greater future. In other words, Tesla needs to conduct deep study of the market to define new generations and orchestrate operational strategies to improve the market. Known for its highly skilled R&D department as well as its company culture of decentralization and innovation, Tesla succeeded in protecting its ideas from other competitors - by establishing patents and also building a strong network with other companies (Lotus, Daimler, battery suppliers etc…) and long-term oriented angel investors. Tesla held on hand all the tools required for succeeding in the birth stage of its ecosystem. The second main concern was its expansion. Second Stage : Ecosystem Expansion The expansion stage describes the situation in which the business ecosystem tries to conquer broader territories in order to strengthen its grip on the market. A few challenges await Tesla. The company should develop key resources such as partners, suppliers or even alliances with competitors. The market stimulation in order to ramp up the demand as well as enhancing the product’s perception remains one of the main priorities. Also, Tesla needs to set up its own capabilities and design its infrastructure so that the core product can be produced. This second stage of the creation of an ecosystem induced few hardships for Tesla. Even though the company found little resistance from rival ecosystems, scaling up its production to reach the global market and designing a product concept that would be accessible to mass population remained extremely tricky. As a matter of fact, the company was facing serious expansionary issues. 11
  12. 12. TESLA MOTORS Key Partners In 2009, Tesla got into in a strategic journey with Daimler - Mercedes-Benz parent company - and Toyota. At first, Tesla would be in charge of providing battery cells expertise to the two other companies. This meant Tesla would ensure a service- supplying role for its competitors. After this unilateral exchange which was not that valuable to Tesla at first stand, Daimler decided to buy 10% of Tesla’s shares for $50 million and so did Toyota. The two then-competitors are now direct partners, actively participating in the funding of Tesla. Elon Musk’s ultimate strategy in this alliance relies on Daimler's vast supply chain and production expertise and Toyota japanese overall know-how. If Tesla wants to reach a mass-market, Daimler is a right parent company to partner with : making it possible for Tesla to make use of economies of scale and achieve greater volumes. Also, Daimler brings Tesla access to Evonik Industries, which is Daimlers advanced battery venture that will definitely leverage Tesla’s knowledge of battery efficiency. Elon Musk is also the founder of another company called SpaceX, an astronomic technology and spacecraft supplier. Being able to share the know-how of SpaceX and co-evolve their technologies with Tesla, E. Musk establishes valuable synergies adding value to Tesla. This stands as an important alliance for its ecosystem expansion. In addition, Tesla built an important battery supply channel. Panasonic, one of Tesla’s investor, ensures the battery providing to Tesla. Thanks to this partnership, Tesla holds a valuable advantage compared to other electric vehicle manufacturer : instead of using heavy conventional battery cells in their car, the Silicon Valley-based company is using a new kind of battery made with thousands of lithium-ion 18650 cells - found in Laptops and mobiles devices. This allowed Tesla to display the lowest rates for electric cars batteries: $200 per kWh. Appendix 2 gives us a better understanding of Tesla’s partnerships. Infrastructure In order to achieve mass expansion, Tesla must guarantee a favourable physical setting. One of the consumer’s main concerns lies in the lack of charging stations around the world. As a Tesla car can’t run more than 200 miles without recharging it yet, setting up a network of “SuperChargers” stations seems to be a prerequisite. Addressing this issue, Elon Musk has taken rapid actions : today, a Tesla car can cross the USA as several battery stations will be available on its way. The same thing can be said for Europe; it can travel from Norway to Lisbon without facing any issue. The Tesla cars are equipped with an app that calculates the routes according to charging locations. Solarcity, an energy service company provider also founded by Elon Musk, supplies solar panels to keep the stations energized and ready to charge in 9 minutes any car that shows up. According to Tesla’s official 12
  13. 13. TESLA MOTORS website, there are today 554 supercharging stations on the planet with 260 located in the US, 200 in Europe and 100 in the Asia Pacific area. Demand and Product Value Creating a close relationship with its client and making sure the product sticks to the customer’s expectations is compulsory. One of Tesla’s production strategies is just in time production with very little inventory in order to reduce loss risks and holding costs. Customers are stacking up and queueing in a long waiting list to get their Tesla car. The company obviously maintains a privileged contact with them, updating them with fresh news from the company and a transparent deadline policy : no matter what happens, the car will be delivered on time. On a financial perspective, this policy totally makes sense as it allows the company to benefit from instant cash inflows while increasing its liabilities and future cash outflows. Tesla is then able to generate instant liquidity from future liabilities. However, it seems that it would not longer be viable if Tesla aims to reach the mass market. The company will have to reconsider its no-inventory policy and perhaps, intensify its production abilities to be able to produce more than 20,000 cars per year - their actual production capacities. Tesla always never hid its intention of running the business with a premium product to attract new adopters then reach a higher margin level through lowered production costs. If the premium market is not an end in itself, the company’s finality is to be able to broaden her market position. Tesla is performing well when it comes to showing the world what they are capable of. Yet designing an extremely efficient and premium car is one thing, but without bringing prices to an average-to-low price and owning appropriate production capacities, the company’s chances to reach future domination of the market share remain questioned. Tesla should definitely push on its distribution model : B2C direct selling channel. Tesla estimates that the savings for the final customer amounts to around 8.6% when the product is sold via a direct selling channel. This estimation remains quite controversial as many States have denied this fact. 13 TESLA’S SUPERCHARGING STATIONS LOCATED IN THE US AND IN EUROPE
  14. 14. TESLA MOTORS Elon Musk already proved his cars superiority in term of performances in many ways in the past. Maintaining Tesla’s media exposure and placing the company in the spotlight appears extremely important. Third Stage : Ecosystem Leadership The third stage of an ecosystem creation is critical. The ecosystem must become profitable and wide enough to be considered worth fighting for. Also, its structure should be reasonably stable; the value added must be well-assimilated and the consumers, in a certain way, “evangelized”. In order to take the ecosystem’s leadership, the company should bring a competitive advantage that will ensure a central position in the ecosystem and increase its bargain power. In Tesla’s case, the ecosystem has yet to become stable and profitable. As seen earlier, the e-car manufacturer is still in the red, with yearly negative profits. However, people might reasonably assume that, with the well-known Silicon Valley’s mindset, Tesla’s investors will be willing to fight for it aiming for real profits on the long-run. In short, Tesla will become the leader in its ecosystem if and only if it succeeds into turning into a fundamental and necessary gearwheel for its ecosystem. The central contributor status is important because of its grip on consumers and its massive influence on the market. As of today, Tesla is the most- known electric car company in the world, with an ever-growing market influence. Continuing its project to standardize battery stations and maintaining synergies with its partners in order to innovate with technologies future competitors won’t be able to reproduce on time seems essential. In 2014, Elon Musk publicly announced he would share ALL of his technological patents to anyone willing to invest in electric cars. This attempt was definitely a way to attract investors and young entrepreneurship from all around the world to join Tesla’s ecosystem, driving cooperation and competition that will boom the EV industry. Elon Musk knows that Tesla’s competitive advantage such as innovative know-how, production line abilities, partners and suppliers and R&D would allow the company to keep its leadership no matter what. Elon basically acted as a true leader, generating positive externalities for the whole ecosystem and increasing its bargain power over newly-attracted firms attracted on the market. His move was definitely risky but most certainly clever. Tesla appears to be a central company that is not afraid of new-comers. Effort to attract companies and investors into the electric car scene should be pushed on. In this way, the whole ecosystem could expand and hopefully, beat the traditional carbon- polluting combustion cars industry. Shaping the ecosystem ecology constitutes another task assigned to the leading firm. Investing in mutually benefitting relationships with suppliers and partners while bringing not only informational synergies but physical ones too was Tesla’s strategy for this purpose. Many suppliers are being moving to the Bay Area 14
  15. 15. TESLA MOTORS cluster in California. Companies such as Futuris Automotive which assemble seats for use in Tesla cars are setting up operations near Tesla’s technological cluster to satisfy quick and specific requests from Tesla. Furthermore, Tesla constitutes the corporate anchor of Fremont’s Warm Springs Innovation district project which aims to transform 850 acres near the factory into a vibrant employment and housing center with as many as 4,000 housing units and 12,000 jobs. Shops, entertainment, restaurants and various facilities should also see the light of the day. In reality, Tesla is imitating what was previously achieved by the conventional car manufacturers. Appendix 3 and 4 are illustrating this. Even if the ecosystem seems rather unstable at the moment, Tesla clearly displays a certain will to define the future gaming rules of its ecosystem. By taking the lead with its company, E. Musk’s demonstrates his drive and ambition once again. Fourth Stage : Ecosystem Self-Renewal The self-renewal ability of an ecosystem matters when the matured ecosystem is threatened by rising new ecosystems and innovations. To face new- comers, Tesla should make good use of its innovative skills to bring up new ideas to its existing ecosystem. The company holds the world’s most rapid prototyping and product-development cycle. Thanks to the latter, it has been able to quickly react and adapt to eventual market shifts and emerging technologie threats. At any point in time, the leader firm may lose its central position due to a lack of innovation. Tesla appears ready to rumble on this aspect. Another solution, if not to keep an innovative advantage would be to neutralize new threats with cooperation. Working as partners will help Tesla consolidating its future supremacy. The EV industry revolution will hardly happen if Tesla stands on its own. Incentivizing new-comers without crushing them with a too-coercive monopoly seems to be the key to success. Competition remains important to drive innovation and to keep the market running. As a matter of fact, Tesla would not even be able to satisfy the whole current e-car demand. Appendix 5 & the F. Leroy’s model allow to define more accurately Tesla’s strategy. Elon Musk is doing a great job in providing a sustainable ecosystem based on premium services, good relationships and synergies. Surviving in a technological ecosystem demands innovation and brilliant ideas. However, to implement them, one must have friendly companies in the technological field to back it up. Tesla is renewing itself every day. The most recent innovation was the Solar Storage battery, which was announced by Elon Musk as their new product. Once again, Tesla is taking a shot in spotting the trend for future demands. By doing so, Tesla is constituting a live proof that disruptive innovations are key-assets. 15
  16. 16. TESLA MOTORS Disruptive Innovation Approach Generic Strategies: Which Positioning to Obtain a Competitive Advantage? In order to stand out in the market, every company is setting up a strategy that aims on differentiating itself from its competitors. Bowman’s strategy clock provides us a convenient analyzing tool for the car industry market in which Tesla is operating. Based on two criterias : price & value-added, the strategy clock helps defining the different strategies possible in a specified market (cf. Appendix 6). Analyzing Tesla’s relative strategy with its competitors is important as they are all positioned on the e-car segment and offering a substitute product. All the firms specified in the chart above have their chance to succeed in the market. They are all meet to consumer’s need in a different way. As promising as it gets, the e-car market remains highly competitive with profits yet to incurred. Most of the companies positioned in this segment have a core activity in the conventional mechanic car market that allows them to fund secondary businesses in a market-at-loss. Tesla offers products with a high prize and a high added value which appears as a viable strategy. With its innovative and revolutionary product, Tesla aims on creating an enhanced customer value that would make the product perceived as worth its price. As described earlier, Tesla is facing two different kinds of competition. Direct competition arises from other companies that are producing electric cars. As those competitors, Tesla has yet to implement an efficient charging station network around the world. In most countries, owning an electric car remains inconceivable. In addition, conventional gasoline car producers constitute another form of competition for Tesla. In order to compete, Tesla improve its margins and lower its production costs. Tesla’s cars are today perceived as too expensive and complex by most consumers and the firm is willing to improve its acceptance in the market. Elon Musk’s company aims to slowly reach the mass market with an affordable car model in the next years. According to the Clayton M. Christensen theorem, Tesla seems to be positioning itself as a highly innovative top tier market-targeting company. On the long-run, such a situation would be rather dangerous if Tesla was drawing a high margin from its sales. Yet, the company is still incurring losses every year. In fact, Tesla is trying to avoid disruptive technologies to emerge from the market bottom. By keeping its profitability at such level, the company’s will is to be the first one positioned in the e-car bottom market - where disruptive technologies can be implemented. Consequently, Tesla leads massive investing policies and low returns 16
  17. 17. TESLA MOTORS expected operations. Given the segment it is targeting, the e-car company could certainly raise its price but this could have terrible consequences on its leadership. Even if Tesla appears to be attracting new-comers in its ecosystems, the company’s leaving no space at the e-car market’s bottom for any competitor. The company is obviously aware of the stakes this market represents and it is its private turf. Defining the Firm’s Strategy: Tesla’s Disruptive Innovation Disrupting innovation consists in introducing a more affordable product that will overturn the current ecosystem. Thanks to disruptive innovation, a bigger number of consumers can have access to the product. As said earlier, disruptive innovations take place in markets where there is enough space left at the bottom, which means some companies will be able to target low-end customers and benefit from economies of scale. On early stage, the company offers a lower performing products as compared to the market standards but at the meantime, introduces new features unknown to the market before. The final aim for this new company will be to catch-up on the main market attributes and fit to the standards, while offering those extra-features. At this final stage, the company should take-over the market. Earlier on, Tesla was described as a company who leaves no space in the bottom market that can be exploited. Surely, it wishes to be the first one to revolutionize the market. Of course, Tesla’s ambition to finally reach the low-end customer segment matches this will of preserving the bottom market so far. Thinking that Tesla’s currently luring competitors into its ecosystem to make it grow, then plans to overtake it with disruptive innovation totally makes sense. However, in order to implement such strategy, Tesla will have to improve production performance and invent features that remained unknown to the market so far for its product. Boosting Productivity : Tesla’s Gigafactory Targeting the low-end segment involves being able to satisfy a massive demand while setting up low margins. In other word, if Tesla wants to introduce any disruptive technology on the market, it should produce electric vehicles in sufficient volume to push the shift in the automobile industry. With a yearly planned production rate of 500,000 cars in the latter half of this decade, Tesla alone would require today’s entire worldwide production of lithium ion batteries. Answering to this supply issue, Tesla Gigafactory recently saw the light of the day. It should supply enough batteries to support the forecasted demand. By 2020, the Gigafactory will reach full capacity and produce more lithium ion batteries annually than were produced worldwide in 2013. In cooperation with Panasonic and other strategic partners, the Gigafactory will produce batteries for significantly less costs using economies of 17
  18. 18. TESLA MOTORS scale first by optimizing most manufacturing processes by relocating them under the same roof, but also through innovative manufacturing and reduction of waste. The company expects to drive down the per kilowatt hour (kWh) cost of the battery pack by more than 30 percent. The Gigafactory will also be powered by renewable energy sources, with the goal of achieving net zero energy. 
 If Tesla’s production facilities are rather small today, the company is investing a lot in its future. With its Gigafactory, the e-car manufacturer is aiming high and is willing to be able to meet any future mass demand. Creating New Features For the Market Tesla’s car project seems like the revealed part of an iceberg, as the company is also expanding on other businesses. With its massive investments in R&D, the e- car manufacturer has been able to push further its research in term of battery. Needless to say that this constitutes Tesla’s main competitive advantage. As a matter of fact, most car manufacturing tasks have been outsourced in Tesla’s production line. Only the sensitive parts remained, which mostly involves the battery. Recently, the company created The Powerwall which is a home battery that charges with solar panels and powers your home in the evening. It might as well serve as a backup for electricity supply. Now, nobody knows yet whether this battery is a product per se or if it was meant to part of the ecosystem’s expansion plan. In the future, synergies between Tesla cars and such household items could see the light of the day. Elon Musk’s desire for massive investment totally makes sense : given the current performances or green batteries, the research needs to be pushed further. Sooner or later, Tesla’s battery-powered cars will offer better performances than mechanical 18 GIGA-FACTORY - SPARKS NEVADA
  19. 19. TESLA MOTORS cars. Gradually, those batteries are flourishing everywhere - from battery stations to households - and this reflects the interest for such product. Now, of course, electric cars offer amazing features as compared to conventional cars and represent an opportunity saving. What matters the most if Tesla wants to be able to implement a disruptive innovation in the car industry is to have distinct features. The company needs to search for empty spaces on the market, a strategic room for manoeuvre where it will be able to exceed the average industry cost/value ratio. Such spaces are called Blue Oceans. Appendix 7 - Tesla’s strategic canvas value curve - shows it is located at the edge of a blue and a red ocean - a highly competitive sphere. The company is positioned on various features that are far from being mastered by competitors or even not owned. The company’s safety standards are way above the market. Tesla’s latest model S achieved the best safety ratings any car has ever had. No competitor are yet competing with Tesla on this point. As its electric competitors, Tesla is a fully green car and there is barely any way this feature could ever change. As long as the car remains fully electrical, it should remain on top of the green standards. As compared to its competitors, mechanic but also electric car manufacturers, Tesla implemented some new features, unknown to the market. The autopilot is one example, but the Tesla Tablet, which enhances even more car’s performances, could also be cited. Known to be extremely efficient, Tesla’s autopilot feature appears as luxurious today. Yet it is precisely those kind of features that could help Tesla overcoming the market. If Tesla manages to lower its costs with economies of scale and R&D, it might be able to implement those extras in the low-end market one day. However, as disruptive innovation theory states, there is still an effort to put in catching up with the conventional cars. Appendix 7 clearly highlights Tesla’s lack of competitiveness in term of price and charging station amount. Before overtaking the market from the bottom, Elon Musk will have to equal, or even surpass those industry averages. For nobody will buy a car with an autopilot if its autonomy performance is below the average mechanical car’s. Tesla will need to keep offering such extra features while improving on its common features such as price and autonomy. Tesla seems to be on the right track to introduce a disruptive technology in the car market in the next years. Elon Musk still has plenty of work ahead though. Bringing down its costs and expanding its charging station network appear to be the two priorities. Despite early signs of disruptive technology - small target segment and e-cars being some unattractive substitute yet -, Tesla’s cars remain way too expensive at the moment to conclude. 19
  20. 20. TESLA MOTORS Recommendation Tesla commits to a rather risky strategy. Without knowing exactly when the Green Revolution will happen, investing such amounts at this stage leads to uncertain returns. The outcome in which Tesla loses all its initial investments must be taken into account. For there is no way Tesla will be able to carry out this strategy over the long term. Elon Musk took an uncovered speculative position when he entered the e-car industry. Needless to say, he might have done it too early. Without any backup in case of failure, Tesla’s strategy remains hazardous. The firm holds an advantage that lies in its battery technology. With the gigafactory, Tesla is now capable of producing more lithium batteries than the rest of the world. If Elon Musk seems to consider the e-car industry as Tesla’s future, there could be another alternative. Focusing less on electric cars and more on battery technology would constitute a backup for Tesla. As a matter of fact, the company’s authority on the battery market stands indisputable today. In case of failure - Tesla not being able to meet the expected demand on the electric car market -, Elon Musk would catch up on his battery activity. As green energy remains a big trend, not only for cars but also for households, the more Tesla improves its battery technology, the better its sales will get. In addition, with less competitors and an already existing demand, Tesla’s success in the battery manufacturing business much more certain. Indeed, households are increasingly being equipped with Tesla’s powerwall but this could be pushed further. If Tesla succeeds in developing its revolutionary battery technology, it could become a battery supplier for other industries such as the smartphone industry. This strategy would be similar to that of Intel which first positioned itself on the computer market but ended up specializing in the chipset industry, Tesla could achieve a quasi-monopoly in the long-lasting lithium-ion battery market. Also, Tesla would broaden its horizons as such technology could be useful to most. 20 TESLA CHARGING STATION
  21. 21. TESLA MOTORS Engaging in a bottom of the pyramid strategy would allow Tesla to benefit from a substantially larger consumer base as it concerns more people than the United States and Europe combined. For instance, the company could end up installing battery systems in African villages or in South East Asian motorcycles. The impact on emerging markets could be huge. Of course, such expansion requires high investments on R&D and technology to achieve smaller prices but Tesla appears as the ideal candidate. Their endless funding ability is undeniable, as shown through their ever-negative profits. The governments and ONG’s are providing more and more aid programs for such initiatives as well. Tesla would certainly spend huge amounts in infrastructures but through its partnerships, the company would build strong interactions on the local scale. With the help of SolarCity, Tesla could create an all-in-one package that would supply solar electricity to a whole Ivorian village. This product could potentially provide a combination of services in areas where gasoline has not yet taken over as the main energy source. The possible implications are staggering, for if Tesla can create enough stations, we could see people shift from petrol powered scooters to electric ones not to save the environment but simply because electricity is cheaper than gas. It could establish a charging station network in Vietnam along Highway One, from Hanoi to Ho Chi Minh City, as most of the traffic there is concentrated on this road. The economic justification could well prove to push developing countries into a clean energy era. Beside the fact that use of such technology is colossal and that it could be implemented anywhere in the world, such a battery could turn out to be a disruptive technology for most emerging economies. For developing countries are mostly relying on fossil fuel for their expansion. Given the high marginal cost of extracting fossil fuel today, the introduction of a cheaper source of energy is highly valuable. On the global level, green energies are developed countries’ concern. Usually more expensive, green technologies are targeted at relatively wealthier populations that can afford it. By selling its batteries to the bottom of the pyramid, Tesla needs to lower its margin while targeting mass market. In another way, the company should work on its battery’s convenience and make it easily accessible for several ranges of consumers. The bottom line is that creating the change through economic advantage rather than environmental concern is the easiest way to spread green tech and make it a worldwide standard. With the COP21 and recent events that took place in Paris, emerging countries’ energy transition is put on the table as a critical subject of discussion. India publicly announced its intention to develop and eradicate poverty through a sustainable practice. Developed countries that underwent the highly polluting transition process are now investing billions of US dollars in a Green Fund. This will be targeted at carbon free initiatives for endangered and poorer countries. By introducing this efficient and cheap technology, Tesla would become one of the main actors of the Green Revolution. It would also participate in reducing inequalities in the world. The following graph illustrates Tesla’s potential expansion strategy if it chooses to pursue this recommendation. 21
  22. 22. TESLA MOTORS 22 TESLA’SPOTENTIALMARKETCOVERAGE/SEGMENTATION IFITPURSUESTHESUGGESTEDEXPANSIONSTRATEGY
  23. 23. TESLA MOTORS In order to strengthen its Tesla’s ecosystem hold, the company should go further in its attempt to lure new businesses. Open sourcing its patents was a first step to forge a coercitive ecosystem but this policy must not end here. At the moment, Tesla is succeeding in taking the leading position in its ecosystem by making itself indispensable to competitors and partners. The ecosystem appears to be well-functioning as relationships between various actors are getting more and more intense. If Tesla decides to expand in developing countries, the company will open a window of opportunity for its ecosystem to follow. The answer for Panasonic’s mass consumer electronics would become more favorable as electricity will become mainstream in the first place. It might be interesting to take into account the increasing interaction between products connected to the internet. Today, information technologies are facilitating ecosystems’s interconnection. Tesla is playing into the probable future of the “Internet of Things”, theorized by Jeremy Rifkins in his book Zero Marginal Cost Society. In this hypothesis, following the third industrial revolution - digital/green revolution -, everything will be interconnected through the Internet in a smart grid. This process will gradually reduce costs by generating economies of scale. If Tesla is able to design an Advanced Distribution Management Software, it could take advantage of this trend and improve energy efficiency in and outside homes, throughout the world. Tesla's shift to the battery market together with its technological expertise and range of influence, could lead this model where things are going to be connected and in balance with energy usage; a Tesla consumer may have its car linked to its house-battery and all its electrical equipments in the house adding value to the society by providing efficient and coordinated services. 
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  24. 24. TESLA MOTORS Conclusion Tesla’s main weakness lies in the unpredictability of the Green Revolution. So far, the company put all its hope in it. Conventional car manufacturers took the opposite bet as they decided not to invest too much in the electric car field. As the payoff of Tesla’s strategy remains unknown as of today, concluding about the company’s efficiency appears impossible yet. Elon Musk predicts that the conventional car market will be gradually overthrown by electronic cars in the next year. To optimize his hold on this emerging industry, the Silicon Valley entrepreneur relied on mass investments with Tesla incurring losses every year. To prepare the field for its future domination, the company implemented several strategies. By creating strong partnerships, Tesla tries to develop a valuable ecosystem. Relying on synergies with IT-firms from the Silicon Valley and component suppliers, the e-car manufacturer aims on aggregating all the electric car industry actors. Opening its patents was a way to lure new competitors and to accelerate the shift for green technologies. Tesla is positioning itself at the center of its ecosystem. Behaving as a true intermediary, Elon Musk fosters on multiplying and intensifying relationships between the different ecosystem members. In addition, with ever- improving cars, Tesla offers leadership in the e-car segment. Its media exposure. Benefiting from a strong media exposure, it is also able to catch the external investors’ eye. Even if Tesla’s latest model S remains a high-end differentiated product targeted at high income consumers, the company clearly stated its final goal. The electric car manufacturer wishes to reach the mass market in the near future. Such a strategy would lead Tesla to lower its margins by cutting down the costs. Tesla’s cars offer some extra features other conventional cars do not possess. However, when it comes to conventional performance metrics, Tesla appears to be underperforming. If the company wishes to introduce a disruptive technology in the car market, it will first need to catch up its delay with basic features. So far, the car has been underperforming on many aspects that matter the most to consumers. The Tesla car will not become disruptive until it offers additional features while performing at least as well as gasoline cars on basic features. Tesla remains exposed to a high risk. With no certainty on future occurrences, the company should reconsider its strategy. By focusing on the electric car industry, the company neglects the monopoly opportunity it has in the battery market. Such position could be used as a backup in case of failure on the electric car field. Last but not least, Tesla would become one of the major actors of the Green Transition and reach the bottom of the pyramid. 24
  25. 25. TESLA MOTORS Bibliography - E-Mobility Market Study by Castellan AG (2012) - Tesla’s 2014 financial statement, Yahoo Finance website, 11/30/15 - Safety ratings, National Highway Traffic Safety Administration (NHTSA), 11/30/15 - Tesla’s Smart house website, 12/01/15 - The Wide Lens by Ron Adner (2013) - Tesla equity, Markets.ft website, 11/20/15 - Driving new growth through disruptive innovation, Innosigh website, 11/21/15 - The Innovator´s solution by Christensen C. (2003) - Check out the latest views of Tesla’s massive Gigafactory, Bloomberg, 07/24/15 - Tesla’s Powerwall to flow batteries: a guide to the energy storage revolution, The Guardian, 08/27/15 - Tesla is not as disruptive as you might think, Harvard Business Review, May 2015 - What Tesla and Apple Both Know About Entering New Markets, Harvard Business Review, 05/12/15 - How disruptive is Tesla, really?, MIT Technology Review, 07/07/15 - Zero marginal cost society by Jeremy Rifkins (2015) - Tesla Ventures Into Solar Power Storage for Home and Business, New York Times, 01/05/15 - The Evolving Automotive Ecosystem, The Wall Street Journal, 04/06/15 - Building an EV Ecosystem: Why Tesla Will Likely Succeed Where Better Place Failed, TriplePundit, July 2013 - Tesla's Competitive Advantage, Scribd, 2014 - Tesla’s Unique position in the car market is one of its biggest strenghts, Forbes, 07/02/15 - Numbers Don't Lie: Tesla Is Beginning To Put The Hurt On The Competition, Forbes, 08/24/13 - Tesla High end disruption gamble, Forbes, 08/20/15 - This new SUV shows how car companies can't compete against Tesla, Business Insider, 08/20/2015
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  26. 26. TESLA MOTORS Appendices 26 APPENDIX 1 : CAR SALES FIGURES
  27. 27. TESLA MOTORS 27 APPENDIX 3 : TESLA’S POSITIVE EXTERNALITIES APPENDIX 2 : TESLA’S KEY PARTNERS
  28. 28. TESLA MOTORS 28 APPENDIX 4 : TESLA’S “MARSHALLIAN DISTRICT” APPENDIX 5 : TESLA IN THE F. LEROY MODEL
  29. 29. TESLA MOTORS 29 APPENDIX 6 : TESLA IN THE STRATEGY CLOCK APPENDIX 7 : STRATEGIC CANVAS VALUE CURVE

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