tesla motors
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TESLA MOTORS: A STRATEGIC ANALYSIS
Student Name and ID: Hiba Okba, W1421671 Module: Strategic Perspectives Module Code: BKEY601.Y Module Leader: Ioannis Christodoulou Seminar Leaders: Sumita Ketkar and Kevin Heffernan
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Executive Summary This report provides a strategic analysis of the electric vehicle (EV) market. An analysis of the external environment was conducted using tools such as PEST and Porter’s 5 forces model to determine the attractiveness and profitability of the industry Tesla operates in. The PEST analysis focuses mainly on the UK, however, some global trends for the US, Europe and Asia has been included throughout where a lack of research is available on the UK EV market. The PEST analysis revealed that the most important political intervention is currently the consumer incentives offered by the government in the form of ‘Plug-‐‑in Car Grants’. However, this government incentive is a short-‐‑term measure to boost the competitiveness of EVs in the automotive industry, due to the pressure imposed by the current budget deficit. Furthermore, it has been reported that consumer awareness surrounding environmental issues such as climate change and the depletion of natural resources is on the rise, prompting them to consider investing in an EV or other alternative fuel vehicles. This has lead to the sales of EVs quadrupling from 2013-‐‑2014. A major challenge facing the EV industry is consumer’s perceptions and attitudes towards EVs – perceiving EVs as having a ‘cheap’ design, unreliable, underperforming and some driver’s experiencing ‘range anxiety’ – which has lead to their hesitancy in adopting EVs. Furthermore, high purchase costs and the lack of public charging infrastructure has created unwillingness by consumers to purchase EVs. Porter’s 5 forces model reveals that there is a low-‐‑moderate threat of new entry, moderate threat of substitution, low-‐‑moderate buyer power, high supplier power and moderate competitive rivalry. Overall, the EV market is attractive, especially in the long-‐‑term when the prices of gas and oil soar due to a lack of natural resources and EV technological advances. However, the market is currently experiencing difficulties persuading the mass market to adopt EVs which is impacting the industry’s current profitability. An analysis of Tesla’s internal environment using Porter’s value chain analysis reveals that Tesla has high levels of vertical integration that has enabled them to retain high levels of operational and cost control and,
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differentiate themselves from competitors. Tesla’s current marketing expenditure is low due to relying heavily on mass media and word of mouth to promote their products. This has enabled the automobile company to reinvest all free cash flow back into research and development to enable them to produce more affordable models to sell to the mass market. An analysis of a PR crisis experienced by Tesla demonstrates the importance of CSR, reputation management and customer relationship management on the overall success of the company. Although four of Tesla’s ‘Model S’ vehicles had caught fire in the space of a year, the automobile company managed to recuperate from the incident and alleviate consumer concerns surrounding the reliability and safety of EVs. Conclusively, a strategic analysis was conducted on Tesla’s business level strategy (focused differentiation strategy), corporate strategy (product development strategy and vertical integration strategy) and recommendations made to sustain their existing strategies with the aim of developing and expanding the global recharging infrastructure and developing a cheaper model to encourage socio-‐‑economic groups C2 and below to adopt an EV.
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Abbreviations CIO – Chief Information Officer CRM – Customer Relationship Management CV – Conventional Vehicle ERP – Enterprise Resource Planning EV – Electric Vehicle OLEV – Office for Low Emission Vehicles PICG – Plug-‐‑In Car Grant R&D – Research and Development SG&A – Selling, General and Administrative
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Table of Contents
Executive Summary ...................................................................................... 2
Abbreviations ................................................................................................ 4
Analysis of External Environment ................................................................. 6 Macro-‐‑Environmental Analysis – PEST .............................................................................. 6 Political and Legal Factors .................................................................................................... 6 Economic and Environmental Factors .................................................................................. 7 Sociological Factors ............................................................................................................... 7 Technological Factors ............................................................................................................ 8
Micro-‐‑Environmental Analysis – Porter’s 5 Forces Model ............................................. 10 Present Opportunities and Threats ..................................................................................... 11 EV Market Attractiveness and Profitability ....................................................................... 11
Analysis of Internal Environment ............................................................... 12 Tesla Motors Value Chain Analysis ................................................................................... 12 Primary Activities ............................................................................................................... 12 Supporting Activities .......................................................................................................... 14 Present Strengths and Weaknesses ..................................................................................... 16
Analysis of PR Crisis ..................................................................................... 17 An Analysis Of Tesla’s Response To The ‘Model S’ Fire Incident ................................. 17 Incident Overview ............................................................................................................... 17 Key Stakeholders .................................................................................................................. 17 Communications Objectives & Key Messages .................................................................... 18 Media Response ................................................................................................................... 18 Reputation Management ..................................................................................................... 19
Strategic Analysis ........................................................................................ 20 Business Level Strategy ........................................................................................................ 20 Growth Corporate Strategy ................................................................................................. 20 Recommended Future Strategies ........................................................................................ 21 Strategy Evaluation ............................................................................................................ 21
Strategy Implementation ..................................................................................................... 22 Final Suggestions .................................................................................................................. 22
Bibliography ................................................................................................ 24
Appendices ................................................................................................. 29 Exhibit 1 – Zap-‐‑Map Statistics – Number of charge points in UK, 2015 .......................... 29 Exhibit 2 – Tesla Model S Suppliers ................................................................................... 29 Exhibit 3 – Main Competitors ............................................................................................ 30 Exhibit 4 – Tesla’s expenditure on product R&D from 2010-‐‑2014 .................................... 31 Exhibit 5 – Email correspondence between Tesla and ‘Model S’ owner ............................. 32 Exhibit 6 – Elon Musk Statement on Tesla Blog ................................................................ 33 Exhibit 7 – Differentiation and Focus Strategy Requirements ........................................... 34
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Analysis of External Environment
Macro-Environmental Analysis – PEST This PEST analysis of the electric vehicle (EV) industry focuses mainly on the UK. However, global trends such as those in the US, Europe and Asia will be included where there is a lack of existing research on the current UK EV market.
Political and Legal Factors Plug-‐‑In Car Grant: A Consumer Incentive Over 25,000 claims have been made since its initiation in 2011 whereby grants of up to £5,000 are awarded to EV claimants. Moreover, £200 million has been made available to ensure PICG continues to be available from 2015-‐‑2020. Following a governmental market review set out in May 2015, new grant levels will be decided to ensure that industry support will resume without depleting the budget rapidly (Gov, 2015). Subsidy to research and development The OLEV has funded £60 million to identify and support emerging technologies in the field of ultra-low emission vehicles. £500,000 of which has been awarded to 6 British companies to carry out research on the practicality of recycling and re-using batteries for low and ultra low carbon vehicles (Gov, 2015). Infrastructure development Government funding of £37 million has gone towards the installation of EV charge points across the UK. Over a third is being given to homeowners to install domestic charge points, whilst the remainder is being allocated amongst local authorities (Pearson, Acenet). There are currently 8096 charge points in the UK (Zap-‐‑Map, 2015). Exhibit 1 demonstrates the growth in the number of UK charge points over the last year. Providing additional preferential access Other incentives include exempting EV owners from congestion charge in London and offering free parking to EV owners in Copenhagen (Tsang et al, RAND, 2013). Government efforts in supporting this growing industry are evident. However, the subsidy to purchase cost is arguably the most important political intervention in the short-‐‑term. The price difference between an EV and CV is considerable, at least £15,000 (Tsang et al, RAND, 2013). Therefore, significant funding in this area is required if the competitiveness of EVs is to
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be enhanced in the automotive market. However, relying heavily on government funding to sustain this competitiveness is impractical especially due to the current budget deficit. Due to this political pressure, consumer incentives may be reduced in the near future (Tsang et al, RAND, 2013).
Economic and Environmental Factors Consumption Rates and Fuel Prices Current global consumption rates are exhausting the planets ability to maintain our current lifestyles. Due to increased demand, fuel prices have increased drastically (theaa, 2015) and sources of conventional energy are depleting at a perturbing rate (alternative-‐‑energy-‐‑news). Global consumption rates have increased even more so in countries such as China and India due to the rise of the middle class. This has resulted in a higher demand for passenger cars and with it, the need for oil. It has been predicted that by 2050, there will be as many as 1.5 billion cars on the road; almost double of that in 2010 (Todd, Chen & Clogston, 2013). For this reason, alternative energy sources for transportation such as electricity is an inevitable investment. Levels of Employment The total job creation of EVs is not clear as of yet, however, many studies have predicted that employment growth in the EV industry will outweigh any reduction of jobs in the conventional fuel industries (Todd, Chen & Clogston, 2013). Additional Economic Development Opportunities The development of EVs will contribute to a greater quality of life with regards to pollution, reduction in energy spending and minimising the economies reliance on foreign oils (Todd, Chen & Clogston, 2013). This will create more disposable income for EV consumers, which will encourage more spending in other sectors such as housing and enable wealth to be contained within local economies.
Sociological Factors Consumer Behaviour The demand for EVs in the UK has seen a significant increase, with the number purchased quadrupling from 3,500 in 2013 to 15,500 in 2014 (NextGreenCar, 2015; Business Green, 2015). This is perhaps largely due to both government incentives for consumers to go green and a greater awareness surrounding environmental issues such as climate change and the depletion of natural resources.
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Consumer Status Studies conducted by the university of Michigan and Pike research reported that the owner of an EV is more likely to be well-‐‑educated, earn a high income, and middle-‐‑aged (Todd, Chen & Clogston, 2013). Values, Perceptions and Attitudes Although more fuel efficient, many consumers’ associate EVs with having a ‘cheap’ design and being unreliable (Tsang et al, RAND, 2015). Furthermore, car trial programmes have reported that ‘range anxiety’ is a current issue causing EV drivers to take extra precautions before journeys (Tsang et al, RAND, 2015). Unfamiliarity with EVs is leading to feelings of underperformance when compared with CVs, demonstrated by in-‐‑depth interviews with EV drivers in Denmark (Tsang et al, RAND, 2015). Although consumers are becoming more aware of the impacts caused by their fuel consumption, hesitancy in adopting EVs is somewhat caused by doubts in its current technological capabilities. However, the entrance of luxury car manufacturers into the EV market could reverse the image associated with owning an EV.
Technological Factors Much technological development has transpired over recent years in the EV industry. However, there are still many limitations present surrounding battery technology including all-‐‑electric drive range which currently only allows on average for a 100 mile journey. Furthermore, the length of time it takes to fully recharge batteries typically requires 6-‐‑8 hours (Tsang et al, RAND, 2015). Issues remain with the lack of publicly available charging infrastructure and other infrastructure fundamentals such as overnight parking devoted to EVs (Tsang et al, 2015). Moreover, many technical issues have been encountered by EV drivers attempting to recharge their vehicles including; batteries ceasing to charge, batteries overheating or EVs being set for ‘delayed charging’ due to electricity rates being cheaper at night (chargepoint.com). Furthermore, concerns surrounding price needs to be addressed if EVs competitiveness against CVs is to become a reality and move it away from its current niche. This means that the battery production costs needs to be reduced whilst maintaining or enhancing vehicle performance.
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Although the UK government and many others globally have invested heavily in R&D to support the expansion of the EV industry into mass market, any breakthrough in technology cannot be guaranteed.
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Micro-Environmental Analysis – Porter’s 5 Forces Model
Competitive Rivalry
Buyers Power
Suppliers Power
Threat of Substitution
Threat of New Entry
Buyer Power: ⇒ Level of competition creates moderate
choice for consumers in terms of price, functionality and design
⇒ Future buyer power likely to increase if EV’s are sold to mass market
Supplier Power: ⇒ EV companies highly dependent on
suppliers (Exhibit 2 shows number of suppliers used by Tesla)
Threat of New Entry: ⇒ High capital investments ⇒ No economies of scales due to low
volume production ⇒ Extensive knowledge and expertise
is required ⇒ Established CV manufacturers with
high economic power can enter market with more ease
Competitive Rivalry: ⇒ Moderate number of successful
competitors (Exhibit 3 shows 5 Main Competitors) in EV market
⇒ EV industry currently in developmental stage
⇒ Global sales of EV’s expected to grow from 352,000 per year to 1.8 million in 2023 (Hill, 2014)
⇒ Future rivalry intensity is likely to increase, therefore EV companies need to remain innovative and technologically-‐‑driven
Threat of Substitution: ⇒ Substitutes include hybrid and
alternative fuel cars ⇒ In the event of slow/no technological
breakthroughs within EV industry, other technologies may emerge
⇒ Consumers are extremely price sensitive and will tend to substitute if they do not perceive a great difference in immediate value
Low -‐‑ Moderate Low -‐‑ Moderate
Moderate -‐‑ High Moderate
High
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Present Opportunities and Threats Key Opportunities:
§ Short-‐‑term government support in consumer incentives and R&D due to EV industry growth stage
§ Increase in oil and gas prices Key Threats:
§ Doubtful consumer perception and attitudes towards EVs in terms of price, design and reliability
§ Unpredictable technological development § Increased future competition § Lack of global charging infrastructure
EV Market Attractiveness and Profitability The EV market is an attractive one to enter due to the inevitable depletion of natural oils and gases. The use of electricity in transportation as a substitute to CV energy has become a near-‐‑term reality for countries internationally. Although the adoption of EV’s within recent years has been slow, research has shown that the market will become more attractive and profitable within the next decade.
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Analysis of Internal Environment
Tesla Motors Value Chain Analysis
Primary Activities Supply chain management Tesla motors currently have high levels of vertical integration in its manufacturing processes. Although ‘Model S’ uses over 3,000 purchased parts that are internationally sourced from over 350 suppliers and several major components for their other vehicles are outsourced; much of the manufacturing processes occur in-‐‑house that enables them to maintain control over their quality standards and intellectual property (Tesla Motors, 2015). Tesla currently owns and operates two automobile manufacturing plants in California – Tesla Factory, and Nevada – Gigafactory. The latter is currently being developed and expected to be fully operating by 2016. By 2020, it is estimated that the Gigafactory will produce approximately 500,000 EVs annually. Total capital expenditure is estimated to be around $4-‐‑5 billion with half of that expected to be financed by Tesla (Tesla Motors, 2015). With regards to raw materials, Tesla predominantly consumes aluminium, steel, cobalt, nickel and copper (Tesla Motors, 2015). Although they possess an adequate supply of these materials to ensure manufacturing and supply requirements are met, material prices are constantly fluctuating depending on market conditions and global demand. Operations Both of Tesla’s factories are well equipped for several manufacturing operations including stamping, plastics, body assembly, paint operations and final vehicle assembly (Tesla Motors, 2015). High levels of reliability for the design and production of their products and services are maintained through their quality control processes. Quality engineers are employed to work with engineering teams to ensure that functional design and durability requirements for their products are met as well as ensuring suppliers are efficient in delivering parts at the required quality level within a specified time frame and budget (Tesla Motors, 2015).
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Distribution Tesla currently distributes its vehicles to consumers directly through their online stores. Additionally, Tesla’s loan programme introduced in North America in 2013 and Europe in 2014 provides customers with a resale value guarantee that enables customers to resell their vehicle back to Tesla for a predetermined price within 36-‐‑39 months of delivery (Tesla Motors, 2015). This eliminates customer concerns regarding the resale value of the Model S whilst enabling them to enjoy ownership of the vehicle during this period. Vehicle inventory is typically low due to Tesla providing the vast majority of their customers with the option to customise their vehicles before ordering. For the ‘Model S’, a deposit of $2,500 is required to begin the production process. Outstanding payments are collected upon delivery (Tesla Motors, 2015). Marketing and Sales Tesla’s key marketing objectives are:
Thus far, the primary driver of sales for Tesla has been media coverage and word of mouth. Both forces have enabled Tesla to achieve sales without the use of traditional marketing activities such as television, radio and print advertising, which would have otherwise resulted in high marketing expenditures. Tesla’s marketing efforts include holding ‘display and demonstration’ events. Additionally, they market and sell their cars through highly visible and premium company-‐‑owned outlets and galleries in major metropolitan locations. Tesla’s marketing and sales strategy allows them to offer differentiated and persuasive customer experiences that would not otherwise be present with franchised automobile dealers and service centres. This also allows them to
⇒ To generate demand for their vehicles and drive leads to their sales teams;
⇒ Build long-‐‑term brand awareness and manage corporate reputation; ⇒ Manage their existing customer base to create loyalty and customer referrals; and
⇒ Enable customer input into the product development process (Musk and Ahuja, 2015)
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retain better control over costs associated with inventory, warranty services and pricing as well as enabling them to maintain/enhance their brand and obtain prompt customer feedback (Tesla Motors, 2015). Currently Tesla’s marketing strategy is working in their favour by relying heavily on media coverage, word of mouth and industry trade shows to promote their brand. However the longevity of their approach is doubtful as established automobile manufacturers plan to enter the EV market in the near future. This will inevitably lead to a change in Tesla’s current marketing practices, causing them to increase marketing expenditure so they can effectively compete with bigger companies who have the advantage of stronger brand awareness, larger customer base and considerably greater resources than Tesla. Service Tesla focuses heavily on customer support, providing both company-‐‑owned service centres – Service Plus, and employing a number of mobile technicians – Tesla Ranger’s. Tesla service centres are located at 95 different sites and the company plans to open several more worldwide in the near future. Technical issues with the vehicles can be diagnosed through an on-‐‑board wireless system, and in the event that the vehicle is in need of a service, customers can contact one of the service centres for a repair (Tesla Motors, 2015). For ‘Model S’, Tesla provides customers with an eight-‐‑year new vehicle limited warranty in addition to a comprehensive maintenance programme. The maintenance plan covers around the clock roadside assistance, annual inspections, and the replacement of wear and tear parts. This comes as either a fixed fee per ‘Tesla Ranger’ visit or as an unlimited service for a higher initial purchase price. Tesla ‘Roadster’ customers are provided with a four year new vehicle limited warranty, the opportunity to buy an extended service plan and a battery replacement option (Tesla Motors, 2015).
Supporting Activities Product R&D, Technology, and Systems Development Exhibit 4 shows Tesla’s spending on product R&D since 2010. The increase in expenditure is a result of them developing their new ‘Model X’ which they aim to sell at a price of $30,000 -‐‑ $40,000 to $50,000 less than its predecessor ‘Model S’ (Ross, 2014).
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As Tesla’s success in the market is based on the utilisation and development of advanced technology, they rely heavily on introducing breakthrough innovations. The company-‐‑owned service centres enables their technicians to collaborate with their engineering and R&D team to identify problems with existing technology, create solutions and incorporate those improvements into their new output (Tesla Motors, 2015). However, there is a risk that Tesla’s R&D efforts may be inadequate in adapting to new EV technology that may result in them being unable to source and integrate latest technology into their vehicles. Human Resource Management Currently employing over 6,000 employees in over 100 different locations (Radius, 2014), Tesla continues its plans to recruit and develop a high number of new talents from around the world to support its growth plans. Currently their team has core competencies in computer-‐‑aided design and crash test simulations as well as expertise in lightweight materials that will enable them to reduce the product development time of new models (Tesla Motors, 2015). However, as EVs are currently in the developmental stage, Tesla may face difficulties in recruiting experienced workers that will result in them having to dedicate substantial time and expense training new recruits. Tesla’s sales output is expected to grow dramatically in the coming years and a key concern for them is the limited number of specialised service engineers in their workforce, especially in Europe and Asia. This compels them to hire a high number of specialised staff in high voltage training and servicing techniques (Tesla Motors, 2015). Employing qualified workers is fundamental to the success of the business, as limited expertise will adversely affect customer relationships which will in turn impact the businesses ability to breed customer loyalty and sell additional vehicles. General Administration Tesla’s SG&A expenses consist primarily of personnel and facilities costs. These relate to their company-‐‑owned stores, marketing and sales activities, executive, finance, human resources, information technology and legal organisations (Tesla Motors, 2015). Tesla’s management information systems were developed by CIO – Jay Vijayan who worked with a team of 250 employees to build Tesla’s ERP system from concept to finished product. It currently serves as the foundation of Tesla’s operations, with every department utilising it (Oleg, 2013). Furthermore, several other IT systems including Tesla’s e-‐‑commerce and
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service and logistics systems have been designed to ensure simplicity, agility and flexibility to fit Tesla’s needs (Vijayan, LinkedIn). Current strategic and commercial partners include Panasonic, Toyota and Daimler. A key strategic alliance with Panasonic has enabled the two companies to work on developing the Gigafactory, with both investing in production equipment. However, Tesla has greater control over all other aspects of management due to providing the land and, buildings and utilities.
Present Strengths and Weaknesses
Key Strengths:
§ Technological and physical assets such as their factories and intellectual property
§ Global charger infrastructure § Component manufacturer for other automotive manufacturers
entering the electric vehicle market such as Toyota, Mercedes-‐‑Benz and BMW
§ Exclusive EV manufacturer § High levels of confidentiality § Low marketing expenditure
Key Weaknesses:
§ Profits difficult to retain due to substantial R&D expenditure which is currently causing losses
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Analysis of PR Crisis
An Analysis Of Tesla’s Response To The ‘Model S’ Fire Incident
Incident Overview Since 2013, Tesla has had to deal with four of their ‘Model S’ vehicles catching fire (Lopez, Business Insider, 2014). However, the incident that gained most media attention was when one ‘Model S’ caught fire following a collision with a large metal object on a highway outside of Seattle late 2013 (Musk, 2013; Forbes, 2013). Although the driver escaped without injury, the collision caused significant damage to the vehicle, which was captured on video by a witness that went viral instantaneously. The aftermath of the incident caused the company shares to drop from $193 to a value of $172.81 within a matter of two days (Forbes, 2013).
Key Stakeholders To limit the damage caused by the incident on company performance, Tesla had to address its stakeholders. The stakeholder theory proposes that organisations that effectively manage their stakeholder relationships will survive longer and perform better than organisations that neglect their stakeholder relationships (Freeman, 1984). Consumers Tesla communicated directly and promptly with the driver who was involved in the ‘Model S’ incident in order to provide them with updates of the investigation that was being carried out by Tesla’s engineering team. A clear explanation was provided as to why the vehicle had been set on fire and assured the driver of their continuous support until the case was concluded. Exhibit 5 shows the email correspondence between Tesla and the ‘Model S’ owner, and demonstrates their efforts in trying to compensate the owner of the vehicle as well as assure them that the incident was a rare occurrence. Tesla’s appropriate actions in dealing with this incident was crucial to the business as without the proper intervention, their sales would have been adversely affected due to current owners and potential customers having a negative perception of Tesla vehicles and the business’s CRM. Shareholders Millon (2013) explains that ‘Enlightened Shareholder Value’ (ESV) is “the idea that corporations should pursue shareholder wealth with a long-‐‑run orientation that seeks sustainable growth and profits based on responsible
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attention to the full range of relevant stakeholder interests”. In order to avoid further reductions in their share value, Tesla had to immediately convince shareholders that the incident was being rectified to the fullest extent to minimize further occurrences. Investors key concern is the financial performance of Tesla and need to be constantly updated on matters that could potentially affect share prices. The Press The media is considered to be another key external stakeholder that acts as a bridge between the company and its other stakeholders. Studies have indicated that even limited negative press can undesirably impact a consumer’s perceptions and attitudes towards a business (Ioanas and Stoica, 2014; Schlosser, 2005). As mentioned previously, Tesla relies heavily on mass media and word of mouth to promote their vehicles. Therefore it was crucial that the company provided clear and accurate details of the incident and how they were working to rectify any issues caused on their part to mass media in a timely fashion to avoid the ramifications caused by circulated false information.
Communications Objectives & Key Messages Exhibit 6 shows a statement that was released by Tesla’s CEO and product architect, Elon Musk, three days after the incident on the company’s official blog providing an articulate explanation as to why Tesla’a ‘Model S’ vehicle had caught fire. Furthermore, he had provided statistics comparing an EV with a CV, arguing how a driver is five times more likely to experience a fire in a CV than in a Tesla (Musk, 2013). It was apparent that Musk had three key communication objectives that he set out to achieve in his statement; prevent the circulation of false information regarding Tesla’s vehicles by providing a clear and rational explanation, reinstate consumer’s trust in the company, and boost Tesla’s reputation through media coverage.
Media Response Positive Media Response Following Musk’s official statement, many media platforms quoted directly from his blog in a positive way to overturn the speculations surrounding the incident involving Tesla’s ‘Model S’. Many supporting Musk’s argument that “for consumers concerned about fire risk, there should be absolutely zero doubt that it is safer to power a car with a battery than a large tank of highly flammable liquid” (NYTimes, 2013; WashingtonPost, 2013; TheWallStreetJournal, 2013; LATimes, 2013).
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Negative Media Response Contrary to the positive reactions, some provoking content was written in response to Musk’s statement. Forbes (2013) pointed out “there’s no gasoline here and lithium-‐‑ion batteries already have a reputation for running hot and catching fire. Boeing’s 787 Dreamliner was grounded soon after its inaugural flights earlier this year because of electrical fires traced to the plane’s lithium-‐‑ion batteries”. Furthermore, some had accused Musk of ‘blaming’ the fire fighters who attempted to put out the fire, sarcastically insinuating that “the fire fighters didn’t read the driver’s manual” (Rayman, 2013).
Reputation Management Watson and Kitchen (2010) explain that for an organisation to meet their corporate objectives and remain competitive within their industry “good reputation paves the organisational path to acceptance and approval by stakeholders”. A positive reputation is not created coincidentally; rather it is the combinational outcome of strong leadership, management and organisational operations – quality of products and services and stakeholder relationships (Watson and Kitchen, 2010). Tesla dealt with the company’s PR crisis effectively. However, they must continue to monitor, understand and nurture their stakeholder relationships (Watson and Kitchen, 2010). Kitchen and Laurence (2003) explain that “if the organisation or its CEO cannot communicate its mission, brands or values, some other organisation, stakeholder or irate public with communication capabilities can or will…corporate communication must be mastered by the corporation and those duly appointed to speak on its behalf; or it will master the corporation” (Watson and Kitchen, 2010).
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Strategic Analysis
Business Level Strategy Tesla is currently pursuing a focused differentiation strategy (Porter, 1980), whereby the source of their competitive advantage derives from the way they differentiate their products and services. Furthermore, their competitive scope of the market focuses on a specific niche – AB Social Grade1. Exhibit 7 highlights the commonly required skills and resources needed to adopt a focused differentiation strategy along with the common organisational requirements, which are currently being met by Tesla.
Growth Corporate Strategy Tesla’s corporate strategy is a combination of product development with vertical integration in its manufacturing processes, as highlighted in the value chain analysis. By adopting a product development strategy, the company aims to become the leading innovator in the automotive market. However, the costs and risks involved with this strategy are high (MarketingDonut.co.uk). Tesla has already invested heavily in R&D in order to make their vehicles more affordable and attractive to the mass market. Elon Musk explains “Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model” (Musk, 2006). Thus far, Tesla’s strategy has been successful and difficult to imitate by competitors due to the extensive investments and countless patents. However, in 2014, Elon Musk permitted the release of Tesla’s portfolio of patents to the public allowing others to use their technology in good faith. The decision to release Tesla’s patents was in the hope that it would drive the growth EV market. Tesla’s forward vertical integration strategy has provided the company with numerous benefits. This strategy allows for Tesla to gain more control over their entire value chain from the supply chain right through to their distribution channels. This allows their capital to be internally contained by eliminating the ‘middle-‐‑man’ costs by optimising resource utilisation and avoiding unnecessary expenditure. Furthermore, vertical integration also allows Tesla to distinguish themselves from competitors at all operating levels – from production inputs to retail channels (Kokemuller, Chron).
1 Social Grade A: Upper Middle Class, Social Grade B: Middle Class
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Recommended Future Strategies Elon Musk stated that “the overarching purpose of Tesla...is to expedite the move from mine-‐‑and-‐‑burn hydrocarbon economy towards a sustainable, solar electric economy” (Tesla Motors Inc, 2012). In order to pursue Musk’s mission and vision of the EV company, two strategies should be supported.
Market Penetration Strategy: Develop and Expand Re-Charging Infrastructure The recent change in Tesla’s strategy has meant that the company’s portfolio of patents “have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology” (Musk, 2014). Although an extremely risky move, and one that will affect Tesla’s competitive advantage, Tesla has made it clear that the benefits of mass customer adoption far outweigh the costs of strengthening competitors (Shane, 2014). Tesla’s current problem isn’t outdoing competitors, but rather that the mass market is resistant to adopting electric vehicles. This is largely due to the lack of global recharging infrastructure, among other things. Currently the sales for EV’s only account for 0.6% of the total number of vehicles sold worldwide, a quarter of those sales being Tesla vehicles. In order for Tesla to adopt a market penetration strategy, they will need the long-‐‑term support of other automobile manufacturers in order to incentivise the development of recharging stations (Shane, 2014).
Product Development Strategy: Continue to develop cheaper alternatives to enable Tesla to sell to mass market In order to support Tesla’s vision, it is recommended that their product development strategy be sustained. Tesla is currently adopting a top-‐‑down approach and it is recommended for them to continue doing so, in order for their vehicles to become more attractive and affordable to the mass market. Tesla’s ‘Model X’, an all-‐‑electric SUV, is currently being developed and set to enter the market early 2016. Aimed at socio-‐‑economic group C12, this new model will sell at a price of $30,000. However, in order to reach a broader customer base, this suggests that an even cheaper EV should be developed to accommodate those in social grades C23 and below.
Strategy Evaluation Both strategies have been evaluated according to Johnson and Scholes SAF model.
Market Penetration Strategy Evaluation Suitability: Aligning with Tesla’s overarching goal, this strategy is suitable for the long-‐‑term success and profitability of the business. Although Tesla’s 2 C1 – Lower Middle Class 3 C2 – Skilled Working Class
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share of sales will most likely shrink as a result, their profitability will increase due to EVs accounting for a greater share of the total automotive market. Acceptability: Tesla’s decision to publicly release its portfolio of patents has currently been accepted by shareholders. Surprisingly, it has resulted in the company’s share price to increase by around 14% (Shane, 2014). However, the long-‐‑term effect it has on shareholder value will only become evident once the success of the strategy has been determined. Feasibility: The likelihood of this strategy succeeding depends on how the rest of the automobile industry reacts to it. In order for this strategy to succeed, several well-‐‑established competitors would have to utilise these patents and create a greater demand for EVs. This can be done by developing and expanding the recharging infrastructure worldwide, which would eliminate one of the major concerns consumers have about the reliability of EVs.
Product Development Strategy Evaluation Suitability: This strategy supports Tesla’s overall mission and vision, allowing them to utilise their strengths in technological development to provide cheaper alternatives for a broader range of consumers so that their long-‐‑term strategic objectives are met. Acceptability: This strategy is deemed to be acceptable to shareholders since it aims to promote the widespread adoption of EVs, hence leading to higher profit margins and an increase in shareholder return. Feasibility: For this strategy to succeed, Tesla must continue to reinvest all free cash flow into making their vehicles more affordable. Furthermore, Tesla needs to recruit a large number of skilled workers who are experienced and knowledgeable in EV engineering, as production capacity will significantly increase if EVs are adopted by mass market.
Strategy Implementation Tesla should continue to support these existing strategies by utilising and developing their current tactics – continue investing in the expansion and development of recharging infrastructure with the support of other automobile companies and government assistance, persuade and support businesses to install recharging stations for their employees to use, and develop an even more affordable and compact EV for consumers of social grade C2 and below ($20,000 and below).
Final Suggestions Currently, Tesla’s marketing expenditure is low due to relying heavily on mass media and word of mouth to support the growth of their company. Although this is freeing up capital for Tesla to use on R&D, it is limiting them in other areas – supporting the widespread understanding, knowledge and
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reassurance of owning an EV (short and long term value) and, encouraging consumers to purchase a Tesla vehicle over those of its competitors. Therefore, it is advisable that Tesla intensifies the marketing efforts to overcome existing barriers preventing the adoption of EVs by the mass market.
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Appendices
Exhibit 1 – Zap-Map Statistics – Number of charge points in UK, 2015
Exhibit 2 – Tesla Model S Suppliers “Supply Chain – Model S uses over 3,000 purchased parts which we source globally from over 350 suppliers, the majority of whom are currently our single source suppliers for these components. We have developed close relationships with several key suppliers particularly in the procurement of cells and certain other key system parts. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. In addition, while several sources of the battery cell we have selected for our battery packs are available, we have currently fully qualified only one cell. We expect to fully qualify additional cells from other manufacturers in 2015. We use various raw materials in our business including aluminum, steel, cobalt, nickel and copper. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials. We believe that we have adequate supplies or sources of availability of the raw materials necessary to meet our manufacturing and supply requirements. There are always risks and uncertainties, however, with respect to the supply of raw materials that could impact their availability in sufficient quantities or reasonable prices to meet our needs.” (Source: Tesla Motors. (2014) Form 10-K. [Online] Available from: http://ir.teslamotors.com/secfiling.cfm?filingid=1564590-15-1031&cik= [Accessed on 6th April 2015]
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Exhibit 3 – Main Competitors “We believe that our vehicles compete in the market both based on their traditional segment classification as well as based on their propulsion technology. For example, Model S competes primarily in the extremely competitive premium sedan market with internal combustion vehicles from more established automobile manufacturers, including Audi, BMW, Lexus and Mercedes. Our vehicles also compete with vehicles propelled by alternative fuels, principally electricity.” “Many established and new automobile manufacturers have entered or have announced plans to enter the alternative fuel vehicle market. BMW, Daimler, Nissan, Fiat, Ford and Mitsubishi, among others, have electric vehicles available today. Moreover, Porsche, Lexus, Audi, Volkswagen and Volvo are also developing electric vehicles. Electric vehicles have also already been brought to market in China and other foreign countries and we expect a number of those manufacturers to enter the United States market as well. In addition, several manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles. Most of our current and potential competitors have significantly greater resources than we do, may be able to devote greater resources to the manufacture, sale and support of their products, and have other advantages. We believe our exclusive focus on electric vehicles and electric vehicle components, as well as our history of vehicle development and production, however, are the basis on which we can compete in the global automotive market in spite of the challenges posed by our competition.” (Source: Tesla Motors. (2014) Form 10-K. [Online] Available from: http://ir.teslamotors.com/secfiling.cfm?filingid=1564590-15-1031&cik= [Accessed on 6th April 2015]
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Exhibit 4 – Tesla’s expenditure on product R&D from 2010-2014
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Exhibit 5 – Email correspondence between Tesla and ‘Model S’ owner
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Exhibit 6 – Elon Musk Statement on Tesla Blog
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Exhibit 7 – Differentiation and Focus Strategy Requirements Generic Strategy Commonly Required
Skills and Resources Common Organisational Requirements
Differentiation ⇒ Strong marketing abilities
⇒ Product engineering ⇒ Creative flair ⇒ Strong capability in
basic research ⇒ Corporate reputation
for quality or technological leadership
⇒ Long tradition in the industry or unique combination of skills drawn from other businesses
⇒ Strong cooperation from channels
⇒ Strong coordination among functions in R&D, product development, marketing
⇒ Subjective measurement and incentives instead of quantitative measures
⇒ Amenities to attract highly skilled labour, scientists, or creative people
Focus Combination of the above policies directed at the particular strategic target
Combination of the above policies directed at the particular strategic target