Strategic Report On Tesla l4zy
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EXECUTIVE SUMMARY
Regarding PESTEL, it is clear that the EV cars have an advantageous environment that benefits growth, thanks to governments’ tax reliefs and the increase awareness about ecology. Globally, the switch to EV is still slow, mainly due to a poor education on the topic. The Porter's 5 forces model describes a surge in demand and a low threat from the suppliers, new entrants and current rivals, making it a perfect occasion to rule the market. Internally, the resources play a fundamental role for Tesla, especially the HR and the financial ones, regarded as the foundation on the company today. Capabilities are also key, especially the product development, engineering, sales&service and R&D, which overall combine to create a differentiation-typed competitive advantage. The linkages in the value chain show similar outcomes to the previous analysis. During two major PR crises, Tesla overall showed an effective crisis management planning, despite Musk’s personal attitude against the issues, suggesting a possible future separation between ownership and control. Tesla is mainly pursuing a market development and a diversification strategic approach, which, in light of the SAF model, implies suitability to the overall strategy, thus making them feasible from an internal and external point of view.
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TABLE OF CONTENTS EXECUTIVE SUMMARY
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1 INTRODUCTION
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2 Q1 – ANALYSIS OF THE EXTERNAL ENVIRONMENT
5
2.1 MICRO-ENVIRONMENTAL ANALYSIS
6
2.2 MICRO-ENVIRONMENTAL ANALYSIS
9
3 Q2 – ANALYSIS OF THE INTERNAL ENVIRONMENT
12
3.1 RESOURCED-BASED VIEW OF THE COMPANY
13
3.2 VALUE CHAIN
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4 Q3 – ANALYSIS OF PR CRISES
16
4.1
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5 Q4 - STRATEGIC ANALYSIS
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5.1 BUSINESS LEVEL STRATEGY
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5.2 CORPORATE STRATEGY
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5.3 EVALUATION AND STRATEGY SUGGESTED FOR THE FUTURE
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5.4 IMPLEMENTATION MODES
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6 CONCLUSION
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2
7 REFERENCES
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8 APPENDICES
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3
1 INTRODUCTION
Tesla motors managed to become profitable after 10 years since its founding, suring highly experienced competitors such as Nissan or BMW in the electric car industry. The following report represents an independent strategic review on Tesla, and it has been commissioned to analyse the different elements that shaped the business. This document will critically evaluate the aspects from the company’s macro and micro environments, down to its internal analysis, along with the main PR events which endangered Tesla since 2003. Finally, based on the previous sections, there will be conducted a strategic analysis, both business and corporate level, in order to evaluate the approaches chosen by the company and suggest the right plans for the future. The investigation, ed by strong theoretical foundations, will be based on the given dossier and further secondary research, from academic journals, books and online resources. The data collected will mainly deal with the UK market, unless otherwise expressly stated.
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2 Q1 – ANALYSIS OF THE EXTERNAL ENVIRONMENT
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2.1 MACRO-ENVIRONMENTAL ANALYSIS – PESTEL
The following analysis is carried out exclusively relating to the UK electric car market. From a political point of view, the UK government favours the adoption of electric cars, offering tax incentives and grants, also valid for charging station building (gov.uk, 2015). Moreover, there are local initiatives (Businesslink.gov, 2015), such as free parking or no congestion taxes (Frost&Sullivan, 2014). On the same level, the legal impact is although not too strong, but the pollution taxes (environmentalprotectionuk, 2014) and circulation bans (theguardian, 2014) on regular cars are a very favourable point to the EV market. This shows a political pressure to gradually change the citizens’ transportation behaviour, but there is still a lack in the educational strength, which makes EVs simple alternatives. The first economic benefit is the cuts in oil imports (Neslen, 2015). The demand and sales have seen a surge in 2014 (theguardian.co.uk) but hybrids are still the most popular vehicles, leaving full EV like Tesla still too avant-garde (Nichols, 2014). The society has been increasingly involved into ecologic issues management, to which an EV seems the right step forward (Gorham, Kelly, 2014). The driving culture is although the hardest point to change: educate the mass is vital, and the shift to a 0-emission car is slow, as shown by the number of hybrids present on the market (SMMT, 2014), and with an ageing population, it is even more challenging (Cracknell, 2010). Berger’s study (2011) although suggests that there will be an emotional shift towards green transportation means, which would accelerate this transition. In fact, the progressively decadent ecology status of our planet could make the switch to an 6
EV car necessary (Neslen, 2015) – and soon (Sales, 2011), making it the most important external factor to create an electric car usage increase. Technology is intrinsic in EV, from the launch of an OS for cars (nextgreencar.com, 2015), to the increase safety and friendliness (KPMG, 2014). The new amelioration in battery engineer have also positively impacted the value chain of these cars, promising a continuous improvement in efficiency and size (Edwards, 2015).
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2.1.1 Global trends
Society around the globe is emotionally inclined to do switch to eco-friendlier cars: according to the Theory of Planned Behaviour, “Emotions and attitude towards the electric car are the strongest determinants of usage intention” (Moons, Pelsmacker, 2012). On the other side, as the PESTEL suggests, the adoption can be slow, with the “prioritization of personal mobility needs over environmental benefits” (GrahamRowe et al, 2011), studies suggesting a very minimal CO2 save (Steinhilber et al, 2013), or economy and infrastructure seen as unready to assimilate EV (Lamble, 2011), along with an overall business model that is not seen as possible to innovate over time (Teece, 2010). Overall, based on the PESTEL, the macro-environment is regarded as favourable for electric cars sales.
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2.2 MICRO-ENVIRONMENTAL ANALYSIS – PORTER’S 5 FORCES
The market is hard to penetrate, setting the threat for new entrance to a medium level: capital and high technological knowledge is needed (Wesoff, 2012), although economy of scale can help. The segment is very attractive, but with the major car brand active in their R&D for years (Bailey, 2011), a new company would start in an unfair position. The danger for substitutes is very high. An EV is averagely priced £10,000 more than a fuel car (Prud’homme, Koning, 2012), and the range is very wide, from gas to hybrid, making EV not the only eco-friendly option. Additionally, the education on the EV topic is weak, reinforcing the customers' tendency to adopt a substitute. Buyers have a great influence. The price sensitivity is high, and although there is an eco-trend, dictated by increase awareness (Moons, Pelsmacker, 2012) and monetary benefits, the purchase of an EV is not compulsory. Within the eco-friendly industry however, the demand is surging, exceeding the supply, thus giving car companies the control. Suppliers’ power is low, since EV cars' core parts are in-house made, such as the technology (Van De Steen, 2014). The battery although, is often bought from an external dealer, and it being the fundamental part of the vehicle, would make any company vulnerable for price swings or contract termination. On the same threat level, are input materials and computer chips, the first tending to increase its buying price progressively, and the second risking a worldwide shortage (GlobalData, 2012).
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The rivalry for EVs is yet to develop, with consumers just starting to understand the concept (Van De Steen, 2014). The industry is in a growing phase, which makes the future uncertain: the big brands will come up with better models, trying to eliminate any competitive advantages of the opponents, and this, combined with an access to large funds destined to advertising and a large sales network, could become a threat. In conclusion, based on the previous analysis, the industry is assessed as fairly attractive, but only if investors are secured and technology and engineering skills are mastered before entering the market.
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2.2.1 Industrial Life Cycle
The graph below shows the estimated position of Tesla in the ILC (Klepper, 1997).
Introduction Growth Maturity Decline
The company will keep making profit, but the risks are higher, due to the increased number of competitors, which will consequently drain funds through marketing expenditure. It is important to expand the market share, maintaining a strong position: the way to achieve this goal, is by sustaining the competitive advantage through innovation, since the technology is wide-accessible, and the competition may start to imitate the winners.
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3 Q2 – ANALYSIS OF THE INTERNAL ENVIRONMENT
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3.1 RESOURCED-BASED VIEW OF THE COMPANY
According to Wernerfelt, from the Strategic Management Journal (1984), a company’s internal environment can be analysed through the identification and assessment of its resources and capabilities. Following, the application on Tesla Motors. The company is still recent, meaning that the tangible resources are few but very important, mostly high in durability and difficult to duplicate. It has one production base, whose fabrication output is still not fully exploited, but may still not a mass-produced model. The equipment is particularly valuable due to the machinery used, which made 90% of the car in-house. Location also plays a big role since the made-in-US is a synonym of quality, but also in the view of the cuts to all the import time waste and taxes, delivering a product faster, with higher flexibility. Stores and charging stations are under development, and will play a big role in educating the masses. The brand is young, but based on the ILC, it is expected to grow, helped by substantial marketing efforts (Mangram, 2012). Tesla has been well-covered by the press throughout the years, reinforcing its image and increasing its value. It has been praised on how it simplified and improved the way distribution is set and on the strategic relationships built with Smart and Toyota. The intangible resources are not especially durable, but are very hard to imitate or duplicate. Human resources were the foundation of the company. The team assembled, ranged from car specialists to technology gurus, who helped Tesla cars become
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technologically advanced in compare to the competition. Despite having high transparency, these resources are challenging to clone. The initial capital allowed Tesla to negatively operate for the first years, driving to their first profitable quarter 10 years later (Van Den Steen, 2014). The revenue saw a surge in 2011 by 74% (GlobalData, 2012) and still kept growing. ROE and ROC are still both negative, -4.94% and -37.25% respectively (Bloomberg, 2014). The company is able to fulfil its short-term obligation, with a current ratio of 1.5x, and has an EBITDA of 0.99%, still lower than industry average, as some of its other financial indicators (Bloomberg, 2014). Overall, Tesla has a Total Debt/Equity ratio of 278.65% and total liabilities/total assets ratio of 84.41%, suggesting a financial risk for longterm obligation (Bloomberg, 2014). The main capabilities showed by Tesla were Product Development, Engineering and Sales & Service, which are problematic for the competition to imitate, but have a low durability, requiring constant innovation. The company managed to deliver to the market exactly what the trends were requiring, overall stimulating the demand and shaking the conventional car market. Both the Model S and Roadster are a toptechnological products, build from scratch, with features never seen before in a vehicle. Furthermore, Tesla changed the car dealership structure, conducting sales through own retailers, and offering service operations independently from its sales network. In addition, R&D has also been a key activity, revolutionary in its simplicity, with the car parts being almost entirely designed and produced in-house. Finally, the management style and leadership skills of Musk, made sure to direct the company to the right direction, suring any crisis, creating a can-do culture.
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Regarding the concept above, Tesla has established a power culture (Harrison, 1972) where decisions are made quickly and by expert- and referent-powerful people (French and Raven, 1959), based on a rational model (Buchanan & Huczynski, 2003) with the additional help of some political tactics such as coalition with powerful allies – e.g. Toyoda (Kinicki and Kreitner, 2006). The following tables summarize and assess the previously mention information, based on the value they add to the company through high durability, and low transferability and duplicability. Transparency is unfortunately high.
Resources/Capabilities R1: Plant and Equipment R2: Location R3: Retailers R4: Brand R5: Relationships R6: Team R7: Distribution R8: Finance C1: Product Development C2: Engineering C3: Marketing & Service C4: R&D C5: Management Style C6: Culture
Importance 8 5 7 7 6 7 7 6 8 7 8 8 7 6
Tesla’s relative strength 6 8 7 8 8 9 7 6 9 8 7 9 9 9
Following, a matrix for a critical view of the key strategic resources, which shows the core competences of Tesla:
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In conclusion, based on previous analysis, and Porter’s generic strategies (1980), the company has built a competitive advantage through differentiation.
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3.2 VALUE CHAIN
Following, a practical assessment of how much value is added by each section of Tesla’s value chain, from the highest rate, in a stronger colour, to the lowest. It is based on the Porter’s model (1985) that allows to explore the linkages between primary and ing activities, identifying key capabilities and the competitive advantage that they built.
HR is fundamental to the efficiency of the company: the carefully selected team has been able to optimize the operations, develop the technology and finally create a solid network of sales dealerships. It shows how the unit is in fact a core resource that was an essential part in the growth of the company, allowing Tesla to fulfil its plan, and ultimately contributing to build a differentiation competitive advance, trough the tech and engineering expertise. 17
Telsa’s technology development favours an optimization in the inbound logistics and the operations. It lets Tesla producing most of the car in-house, not only making the most of the plant purchased, but most importantly, allowing a flexibility the competitors do not possess. This situation crafts another two important key capabilities: the engineering, through the car manufacturing, and the overall product development, through the avant-garde features of the vehicles, which contribute to create a differentiation. The operations, are also ed by the risk management style from the firm infrastructure. From the starting idea, through the first logistics problems, this strategic technique has been critical to make Tesla sur its crises, hence making it one of its most precious capabilities. Additionally, stretching the finances helped to run the company since 2003 on a regular loss base, also making it a core resource, that was essential to keep Tesla go, allowing it to finally see the first profit in 2013. The distribution and dealer management, part of the outbound logistics, is ed by the customer focused approach of the firm infrastructure’s ing activities. It is fully integrated in the value chain, resulting in a network of private retailers which can assure a full-immersion in the world of Tesla, for each client that walks in. The linkages analysis above shows similar outcomes to the resourced-based view, also concluding that Tesla has indeed a differentiation approach, which is the core of its competitive advantage.
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4 Q3 – ANALYSIS OF PR CRISES
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1
BATTERY PERFORMANCES IN COLD CLIMATE
In early 2013, the NYtimes posted an article about a battery failure due to cold weather on a test drive of the Tesla Model S (Broader, 2013), spreading the panic about the inefficiency of lithium-ion batteries in weathers below 30 F. Shares closed down 2% (Woolley, Steverman, 2013). Musk did not appreciate the comments, hitting Twitter, TV and writing a blog post (Woolley, Steverman, 2013). This crisis, despite being a sudden type (James, 2008), could have been expected through a crisis planning model, as below, or a
Trivial
Minor
Moderate
Major
Extreme
Very Likely
Probability
contingency plan (Swanson et al, 2010).
Likely Moderate Unlikely Very unlikely According to Herrero and Pratt’s Crisis management model (1996), the first step would be the diagnosis of an impending trouble, which thanks to theImpact advanced technology and wireless control of the car’s system from the headquarters, could have been done before the actual problem, with data collection and analysis
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The lack of planning (Smith, 1990) brought Musk to answer very fast but without an actual full-though strategy. The rational-planning model by Robbins and Judge (2007), explored the ideal mind process which can deliver the best strategy to handle a crisis, and it is not the offensive strategy used (Simon, 1955). According Berle and Means (1930), without the separation of ownership and control, there is no effective way to check managerial work. Even though Musk retains part of the company, his behaviour followed the Agency theory (Bebchuck, Fried, 2004), which would explain why it was suggested on multiple occasion to let someone else handle the communication crises of the company (Quinn, 2013). Tirole (1996) explains how an enterprise is damaged by the reputation of their , on a long-term, even if the member would not be part of the party anymore. The blog entry written as a response (Musk, 2013) showed that the problem was taken on a personal level, while it should have been dealt focusing on displaying Tesla as a company that despite the issue, was respecting their ethical and legal responsibility from CSR (Wood, 1991) and also was facing the problem putting the stakeholder at the centre of their attention (Freeman, 1994). The final result was a media battle between the author of the article and Musk, which kept damaging Tesla tweet after tweet, especially when the NYtimes was answering with compelling proofs on the car's performance, suggesting a real problem for any Tesla cars owner.
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4.1 MODEL S IS ON FIRE
In October 2013, a Tesla model S went up in flames, and despite no injuries, the video became immediately viral, causing a drop in the company’s stock price (Peckham 2013). James (2008) would categorize this as a smouldering crisis, due to the initial signal detection, with the first car on fire, but the too slow preparation and prevention, which led to other similar episodes (Nelson, 2014). Herrero and Pratt (1996) crisis management model shows how Tesla was although following the right protocol, first with a diagnosis and later creating a turnaround strategy. The company immediately ed the car owner, apologised and kept him update with the positive results of their investigation. It could be argued that the slow response was a consequence of the lack of a crisis management planning (Smith, 1990) or contingency plan (Swanson et al, 2010), but overall, based on CSR concept, Tesla immediately recognised ethical and legal obligations, to the car owner and the public. Hilburg (2014) and James (2008) define a crisis also as an opportunity to showcase an institution’s character, which was exactly Tesla’s plan, and the unfortunate car owner was so impressed that wrote an article on how satisfied he was with Tesla’s crisis management and product safety (Shibayama, 2013). Hearit (2008) defines apology as a valuable crisis management tool. Tesla after the first accident, issued an online statement for the public (Popp, 2013), apologising for the inconvenience and assuring the safety for the other products. The blog entry
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though, raised more questions, about lithium-ion battery safety. As shown in the
Probability
reputation risk matrix below:
Trivial
Minor
Moderate
Major
Extreme
Very Likely Likely Moderate Unlikely Very unlikely Impact
A crisis like a battery that spontaneously combust, has a moderate probability and a major impact is a medium-level threat, which is expect to produce a flow of online reactions, sometimes unfounded, and therefore has to be carefully controlled and managed (Davies, Miles, 1998). The NHTSA declared that the car did not have a defection trend, thus being safe. Tesla although, added additional armour (Musk, 2013) in the hope of eliminating any remained doubts around costumers and potential consumers, showing again a great deal of respect to its stakeholders (Freeman, 1994) and finally archiving this crisis.
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5 Q4 - STRATEGIC ANALYSIS
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5.1 BUSINESS LEVEL STRATEGY
In section 3 of the report, after an analysis of the functional level in Tesla’s strategy, the key resources and competences were identified, based on their high durability, transparency, low transferability and duplicability. From these, it was concluded that Tesla’s competitive advantage is of a differentiation type, as summarised in the Porter’s generic strategy model below (1985).
Industry wide
Low cost
Single Segment/s
Competitive Scope
Source of competitive advantage Differentiation
Cost Leadership
Differentiation
Focus
Tesla also adopts a focus approach, converging their resources and attention a few specific segments (Liu et al, 2014). The previous data can also be analysed trough Bowman’s strategy clock model (1997), which gives a more detailed insight about the company’s generic strategy. 25
Tesla possesses products of high perceived value with high prices, surviving on highly targeted markets and high profit margins.
High
Hybrid
Differentiation
Focused
Perceived value for
Differentiation
Risky High
Low Price
Margins
Low price/ Low added value
Monopoly Pricing Loss of Market Share
Low
Price
High
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5.2 CORPORATE STRATEGY
Based on Hitt’s (et al, 2007) definition of corporate strategy, Tesla can be linked to a growth-type generic corporate strategy (Chafee, 1985). The Ansoff matrix (1957) further develops this concept, exploring the aspects of the game-plan.
Product
Existing
Existing
Product Development
New
Market
Market Penetration
New
Market Development
Diversification
Tesla’s introduction of the Roadster into the market is regarded as a related-diversification tactic, due to both the new product and the new market. The following models, follows the same path, as yet again, a different type of car is produced, marketed for another segment. Market development is also pursued, with the launch of the model S in a new market, China (Young, 2015).
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Additionally, the company can boast a successful vertical integration strategy, like Ford Motor did (The Economist, 2009). Tesla, in fact, designs its car parts, produces up to 90% of them, along with the technology, and personally owns the retail stores, rather than using a common car dealer, receiving valuable insights on the clients’ behaviours. Based on the strategic gameboard (Kerin et al, 1990):
Niche Entire Market
Where to Compete?
Focusing
Innovation in niche Market
Superior,
Reconfiguration of
comprehensive
rules of
market coverage
competition
Same game
New Game
How to Compete?
Tesla initially possessed a new-game, also called Blue Ocean strategy (Kim, Mauborgne, 2005), since the first Roadster model combined attributes of the green vehicles with those of sports car. The company raced “past the competition with a superior hyper-dimensionalized feature set, creating a new green performance vehicle market space” (Halle, 2009). This approach was later abandoned for a more collaborative one, which would stimulate market growth, offering a wider choice to 28
the consumers, thus going toward the goal of building an affordable EV (Van De Steen, 2014).
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5.3 SUGGESTED STRATEGIC APPROACH
Based on the previous data, it is suggested to develop both the differentiation and vertical integration existing strategies. Davis (2010) describes the EV marketplace as crowded in a near future, due to big-league manufacturers. Tesla would need to grow and keep innovating, and to make this happen, scale is essential (Davis, 2010), which also makes Market development an important focus for the future. The latter should although be fully developed, to avoid disappointing results such as the Chinese market (Young, 2015).
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5.4 STRATEGIES EVALUATION
This section will deal with the evaluation of the market development and diversification strategies through the SAF model – suitability, acceptability, feasibility (Johnson et al, 1998).
Feasibility Suitability Acceptability
The diversification strategy is highly favourable as the PESTEL and Porter’s models show in section 2, displaying a standard car market in decline and a demand for ecofriendly vehicles. The strategy appears consistent, with Tesla using its own core competences in new areas which can lead to better returns at higher risks. Market development is also ed by the macro-environmental analysis, which shows a global trend for eco-friendly cars. Tesla, at a medium risk, can obtain high returns 31
supplying its core product in the new segments, still being consistent with its overall strategy.
The ROCE shows the profitability analysis, based on previous Tesla performances. Both the strategies would require a financial risk at different levels, but Tesla already showed in the past its enormous potential for both innovation and actual profits (Gurufocus, 2014).
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According to the Cost-Benefit analysis, even though the expenditure might be high due to R&D, the plans would also be beneficial for the intangible assets. Lastly, below is the Real Options framework (Luehrman, 1998). Both the scenarios pursued are assessed as predominantly positive, due to the high value in respect to cost and a mid-volatility, but clearly the market development strategy shows the most optimistic results, due to the lower level of exposure.
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Regarding risks, the development of new products negatively impacts the liquidity of the company, thus the adoption of the sensitivity analysis, taking into considerations three assumptions which assure a positive outcome to these strategic decisions: demand growth, fund availability, purchasing power. Being a diversification plan, a slower growth in the demand is not scary, but liquidity might be. In the latter case, Tesla would need to raise money from new investors or privately, and due to the brand image and the mission statement, this should not present a problem, making the strategy feasible, thanks to Tesla’s capabilities. On the other side, regarding the market development strategy, a drop in the demand and the purchasing power could
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seriously jeopardize the profit, along with tight liquidity, but based on the expected market trend forecasts, this unfortunate scenario would most probably not happen.
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5.5 IMPLEMENTATION MODES OF SUGGESTED STRATEGIES
In order to entry the new markets, Tesla should choose the franchising method, giving the company a firm control over the marketing and sales. To implement the plan, the company must focus its attention on building brand awareness, a solid sales network, and acquiring a new plant in a strategic location which can easily serve the new geographical segments easily and cheaply. The implementation of the diversification strategy would consist of increase expenditure on R&D, focusing on new product development through t alliances, which would accelerate market growth and stimulate competition. This practice should be then terminated to avoid giving up on its own competitive advantage, which would leave the company without strengths to fight in the future market.
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6 CONCLUSION
Tesla lives in a highly favourable environment, both at a macro and micro level, which allowed the company the reach its first milestone, becoming profitable in 2013 (Van De Steen, 2014). The strong capabilities build throughout the time unified with the powerful resources has led the company to launch very successful products, effectively competing with the big brands. Strategy has been perfectly chosen at the start, with their Blue Ocean game-changer, and it has maturely evolved into a progressively vertical integration along with a kept diversification approach, and a market development. Tesla has chosen to collaborate with the competition in order to grow the EV market, stimulating a shift to more eco-friendly cars, having as a goal purely the benefits of the consumers. Tesla is projected to keep its competitive advantage strong and alive, but the t alliance will need to be ended in a near future in order to survive in a progressively-crowded market.
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47
8 APPENDICES
48
EXECUTIVE SUMMARY
Regarding PESTEL, it is clear that the EV cars have an advantageous environment that benefits growth, thanks to governments’ tax reliefs and the increase awareness about ecology. Globally, the switch to EV is still slow, mainly due to a poor education on the topic. The Porter's 5 forces model describes a surge in demand and a low threat from the suppliers, new entrants and current rivals, making it a perfect occasion to rule the market. Internally, the resources play a fundamental role for Tesla, especially the HR and the financial ones, regarded as the foundation on the company today. Capabilities are also key, especially the product development, engineering, sales&service and R&D, which overall combine to create a differentiation-typed competitive advantage. The linkages in the value chain show similar outcomes to the previous analysis. During two major PR crises, Tesla overall showed an effective crisis management planning, despite Musk’s personal attitude against the issues, suggesting a possible future separation between ownership and control. Tesla is mainly pursuing a market development and a diversification strategic approach, which, in light of the SAF model, implies suitability to the overall strategy, thus making them feasible from an internal and external point of view.
1
TABLE OF CONTENTS EXECUTIVE SUMMARY
1
1 INTRODUCTION
4
2 Q1 – ANALYSIS OF THE EXTERNAL ENVIRONMENT
5
2.1 MICRO-ENVIRONMENTAL ANALYSIS
6
2.2 MICRO-ENVIRONMENTAL ANALYSIS
9
3 Q2 – ANALYSIS OF THE INTERNAL ENVIRONMENT
12
3.1 RESOURCED-BASED VIEW OF THE COMPANY
13
3.2 VALUE CHAIN
16
4 Q3 – ANALYSIS OF PR CRISES
16
4.1
19
5 Q4 - STRATEGIC ANALYSIS
21
5.1 BUSINESS LEVEL STRATEGY
22
5.2 CORPORATE STRATEGY
23
5.3 EVALUATION AND STRATEGY SUGGESTED FOR THE FUTURE
24
5.4 IMPLEMENTATION MODES
25
6 CONCLUSION
26
2
7 REFERENCES
27
8 APPENDICES
33
3
1 INTRODUCTION
Tesla motors managed to become profitable after 10 years since its founding, suring highly experienced competitors such as Nissan or BMW in the electric car industry. The following report represents an independent strategic review on Tesla, and it has been commissioned to analyse the different elements that shaped the business. This document will critically evaluate the aspects from the company’s macro and micro environments, down to its internal analysis, along with the main PR events which endangered Tesla since 2003. Finally, based on the previous sections, there will be conducted a strategic analysis, both business and corporate level, in order to evaluate the approaches chosen by the company and suggest the right plans for the future. The investigation, ed by strong theoretical foundations, will be based on the given dossier and further secondary research, from academic journals, books and online resources. The data collected will mainly deal with the UK market, unless otherwise expressly stated.
4
2 Q1 – ANALYSIS OF THE EXTERNAL ENVIRONMENT
5
2.1 MACRO-ENVIRONMENTAL ANALYSIS – PESTEL
The following analysis is carried out exclusively relating to the UK electric car market. From a political point of view, the UK government favours the adoption of electric cars, offering tax incentives and grants, also valid for charging station building (gov.uk, 2015). Moreover, there are local initiatives (Businesslink.gov, 2015), such as free parking or no congestion taxes (Frost&Sullivan, 2014). On the same level, the legal impact is although not too strong, but the pollution taxes (environmentalprotectionuk, 2014) and circulation bans (theguardian, 2014) on regular cars are a very favourable point to the EV market. This shows a political pressure to gradually change the citizens’ transportation behaviour, but there is still a lack in the educational strength, which makes EVs simple alternatives. The first economic benefit is the cuts in oil imports (Neslen, 2015). The demand and sales have seen a surge in 2014 (theguardian.co.uk) but hybrids are still the most popular vehicles, leaving full EV like Tesla still too avant-garde (Nichols, 2014). The society has been increasingly involved into ecologic issues management, to which an EV seems the right step forward (Gorham, Kelly, 2014). The driving culture is although the hardest point to change: educate the mass is vital, and the shift to a 0-emission car is slow, as shown by the number of hybrids present on the market (SMMT, 2014), and with an ageing population, it is even more challenging (Cracknell, 2010). Berger’s study (2011) although suggests that there will be an emotional shift towards green transportation means, which would accelerate this transition. In fact, the progressively decadent ecology status of our planet could make the switch to an 6
EV car necessary (Neslen, 2015) – and soon (Sales, 2011), making it the most important external factor to create an electric car usage increase. Technology is intrinsic in EV, from the launch of an OS for cars (nextgreencar.com, 2015), to the increase safety and friendliness (KPMG, 2014). The new amelioration in battery engineer have also positively impacted the value chain of these cars, promising a continuous improvement in efficiency and size (Edwards, 2015).
7
2.1.1 Global trends
Society around the globe is emotionally inclined to do switch to eco-friendlier cars: according to the Theory of Planned Behaviour, “Emotions and attitude towards the electric car are the strongest determinants of usage intention” (Moons, Pelsmacker, 2012). On the other side, as the PESTEL suggests, the adoption can be slow, with the “prioritization of personal mobility needs over environmental benefits” (GrahamRowe et al, 2011), studies suggesting a very minimal CO2 save (Steinhilber et al, 2013), or economy and infrastructure seen as unready to assimilate EV (Lamble, 2011), along with an overall business model that is not seen as possible to innovate over time (Teece, 2010). Overall, based on the PESTEL, the macro-environment is regarded as favourable for electric cars sales.
8
2.2 MICRO-ENVIRONMENTAL ANALYSIS – PORTER’S 5 FORCES
The market is hard to penetrate, setting the threat for new entrance to a medium level: capital and high technological knowledge is needed (Wesoff, 2012), although economy of scale can help. The segment is very attractive, but with the major car brand active in their R&D for years (Bailey, 2011), a new company would start in an unfair position. The danger for substitutes is very high. An EV is averagely priced £10,000 more than a fuel car (Prud’homme, Koning, 2012), and the range is very wide, from gas to hybrid, making EV not the only eco-friendly option. Additionally, the education on the EV topic is weak, reinforcing the customers' tendency to adopt a substitute. Buyers have a great influence. The price sensitivity is high, and although there is an eco-trend, dictated by increase awareness (Moons, Pelsmacker, 2012) and monetary benefits, the purchase of an EV is not compulsory. Within the eco-friendly industry however, the demand is surging, exceeding the supply, thus giving car companies the control. Suppliers’ power is low, since EV cars' core parts are in-house made, such as the technology (Van De Steen, 2014). The battery although, is often bought from an external dealer, and it being the fundamental part of the vehicle, would make any company vulnerable for price swings or contract termination. On the same threat level, are input materials and computer chips, the first tending to increase its buying price progressively, and the second risking a worldwide shortage (GlobalData, 2012).
9
The rivalry for EVs is yet to develop, with consumers just starting to understand the concept (Van De Steen, 2014). The industry is in a growing phase, which makes the future uncertain: the big brands will come up with better models, trying to eliminate any competitive advantages of the opponents, and this, combined with an access to large funds destined to advertising and a large sales network, could become a threat. In conclusion, based on the previous analysis, the industry is assessed as fairly attractive, but only if investors are secured and technology and engineering skills are mastered before entering the market.
10
2.2.1 Industrial Life Cycle
The graph below shows the estimated position of Tesla in the ILC (Klepper, 1997).
Introduction Growth Maturity Decline
The company will keep making profit, but the risks are higher, due to the increased number of competitors, which will consequently drain funds through marketing expenditure. It is important to expand the market share, maintaining a strong position: the way to achieve this goal, is by sustaining the competitive advantage through innovation, since the technology is wide-accessible, and the competition may start to imitate the winners.
11
3 Q2 – ANALYSIS OF THE INTERNAL ENVIRONMENT
12
3.1 RESOURCED-BASED VIEW OF THE COMPANY
According to Wernerfelt, from the Strategic Management Journal (1984), a company’s internal environment can be analysed through the identification and assessment of its resources and capabilities. Following, the application on Tesla Motors. The company is still recent, meaning that the tangible resources are few but very important, mostly high in durability and difficult to duplicate. It has one production base, whose fabrication output is still not fully exploited, but may still not a mass-produced model. The equipment is particularly valuable due to the machinery used, which made 90% of the car in-house. Location also plays a big role since the made-in-US is a synonym of quality, but also in the view of the cuts to all the import time waste and taxes, delivering a product faster, with higher flexibility. Stores and charging stations are under development, and will play a big role in educating the masses. The brand is young, but based on the ILC, it is expected to grow, helped by substantial marketing efforts (Mangram, 2012). Tesla has been well-covered by the press throughout the years, reinforcing its image and increasing its value. It has been praised on how it simplified and improved the way distribution is set and on the strategic relationships built with Smart and Toyota. The intangible resources are not especially durable, but are very hard to imitate or duplicate. Human resources were the foundation of the company. The team assembled, ranged from car specialists to technology gurus, who helped Tesla cars become
13
technologically advanced in compare to the competition. Despite having high transparency, these resources are challenging to clone. The initial capital allowed Tesla to negatively operate for the first years, driving to their first profitable quarter 10 years later (Van Den Steen, 2014). The revenue saw a surge in 2011 by 74% (GlobalData, 2012) and still kept growing. ROE and ROC are still both negative, -4.94% and -37.25% respectively (Bloomberg, 2014). The company is able to fulfil its short-term obligation, with a current ratio of 1.5x, and has an EBITDA of 0.99%, still lower than industry average, as some of its other financial indicators (Bloomberg, 2014). Overall, Tesla has a Total Debt/Equity ratio of 278.65% and total liabilities/total assets ratio of 84.41%, suggesting a financial risk for longterm obligation (Bloomberg, 2014). The main capabilities showed by Tesla were Product Development, Engineering and Sales & Service, which are problematic for the competition to imitate, but have a low durability, requiring constant innovation. The company managed to deliver to the market exactly what the trends were requiring, overall stimulating the demand and shaking the conventional car market. Both the Model S and Roadster are a toptechnological products, build from scratch, with features never seen before in a vehicle. Furthermore, Tesla changed the car dealership structure, conducting sales through own retailers, and offering service operations independently from its sales network. In addition, R&D has also been a key activity, revolutionary in its simplicity, with the car parts being almost entirely designed and produced in-house. Finally, the management style and leadership skills of Musk, made sure to direct the company to the right direction, suring any crisis, creating a can-do culture.
14
Regarding the concept above, Tesla has established a power culture (Harrison, 1972) where decisions are made quickly and by expert- and referent-powerful people (French and Raven, 1959), based on a rational model (Buchanan & Huczynski, 2003) with the additional help of some political tactics such as coalition with powerful allies – e.g. Toyoda (Kinicki and Kreitner, 2006). The following tables summarize and assess the previously mention information, based on the value they add to the company through high durability, and low transferability and duplicability. Transparency is unfortunately high.
Resources/Capabilities R1: Plant and Equipment R2: Location R3: Retailers R4: Brand R5: Relationships R6: Team R7: Distribution R8: Finance C1: Product Development C2: Engineering C3: Marketing & Service C4: R&D C5: Management Style C6: Culture
Importance 8 5 7 7 6 7 7 6 8 7 8 8 7 6
Tesla’s relative strength 6 8 7 8 8 9 7 6 9 8 7 9 9 9
Following, a matrix for a critical view of the key strategic resources, which shows the core competences of Tesla:
15
In conclusion, based on previous analysis, and Porter’s generic strategies (1980), the company has built a competitive advantage through differentiation.
16
3.2 VALUE CHAIN
Following, a practical assessment of how much value is added by each section of Tesla’s value chain, from the highest rate, in a stronger colour, to the lowest. It is based on the Porter’s model (1985) that allows to explore the linkages between primary and ing activities, identifying key capabilities and the competitive advantage that they built.
HR is fundamental to the efficiency of the company: the carefully selected team has been able to optimize the operations, develop the technology and finally create a solid network of sales dealerships. It shows how the unit is in fact a core resource that was an essential part in the growth of the company, allowing Tesla to fulfil its plan, and ultimately contributing to build a differentiation competitive advance, trough the tech and engineering expertise. 17
Telsa’s technology development favours an optimization in the inbound logistics and the operations. It lets Tesla producing most of the car in-house, not only making the most of the plant purchased, but most importantly, allowing a flexibility the competitors do not possess. This situation crafts another two important key capabilities: the engineering, through the car manufacturing, and the overall product development, through the avant-garde features of the vehicles, which contribute to create a differentiation. The operations, are also ed by the risk management style from the firm infrastructure. From the starting idea, through the first logistics problems, this strategic technique has been critical to make Tesla sur its crises, hence making it one of its most precious capabilities. Additionally, stretching the finances helped to run the company since 2003 on a regular loss base, also making it a core resource, that was essential to keep Tesla go, allowing it to finally see the first profit in 2013. The distribution and dealer management, part of the outbound logistics, is ed by the customer focused approach of the firm infrastructure’s ing activities. It is fully integrated in the value chain, resulting in a network of private retailers which can assure a full-immersion in the world of Tesla, for each client that walks in. The linkages analysis above shows similar outcomes to the resourced-based view, also concluding that Tesla has indeed a differentiation approach, which is the core of its competitive advantage.
18
4 Q3 – ANALYSIS OF PR CRISES
19
1
BATTERY PERFORMANCES IN COLD CLIMATE
In early 2013, the NYtimes posted an article about a battery failure due to cold weather on a test drive of the Tesla Model S (Broader, 2013), spreading the panic about the inefficiency of lithium-ion batteries in weathers below 30 F. Shares closed down 2% (Woolley, Steverman, 2013). Musk did not appreciate the comments, hitting Twitter, TV and writing a blog post (Woolley, Steverman, 2013). This crisis, despite being a sudden type (James, 2008), could have been expected through a crisis planning model, as below, or a
Trivial
Minor
Moderate
Major
Extreme
Very Likely
Probability
contingency plan (Swanson et al, 2010).
Likely Moderate Unlikely Very unlikely According to Herrero and Pratt’s Crisis management model (1996), the first step would be the diagnosis of an impending trouble, which thanks to theImpact advanced technology and wireless control of the car’s system from the headquarters, could have been done before the actual problem, with data collection and analysis
20
The lack of planning (Smith, 1990) brought Musk to answer very fast but without an actual full-though strategy. The rational-planning model by Robbins and Judge (2007), explored the ideal mind process which can deliver the best strategy to handle a crisis, and it is not the offensive strategy used (Simon, 1955). According Berle and Means (1930), without the separation of ownership and control, there is no effective way to check managerial work. Even though Musk retains part of the company, his behaviour followed the Agency theory (Bebchuck, Fried, 2004), which would explain why it was suggested on multiple occasion to let someone else handle the communication crises of the company (Quinn, 2013). Tirole (1996) explains how an enterprise is damaged by the reputation of their , on a long-term, even if the member would not be part of the party anymore. The blog entry written as a response (Musk, 2013) showed that the problem was taken on a personal level, while it should have been dealt focusing on displaying Tesla as a company that despite the issue, was respecting their ethical and legal responsibility from CSR (Wood, 1991) and also was facing the problem putting the stakeholder at the centre of their attention (Freeman, 1994). The final result was a media battle between the author of the article and Musk, which kept damaging Tesla tweet after tweet, especially when the NYtimes was answering with compelling proofs on the car's performance, suggesting a real problem for any Tesla cars owner.
21
4.1 MODEL S IS ON FIRE
In October 2013, a Tesla model S went up in flames, and despite no injuries, the video became immediately viral, causing a drop in the company’s stock price (Peckham 2013). James (2008) would categorize this as a smouldering crisis, due to the initial signal detection, with the first car on fire, but the too slow preparation and prevention, which led to other similar episodes (Nelson, 2014). Herrero and Pratt (1996) crisis management model shows how Tesla was although following the right protocol, first with a diagnosis and later creating a turnaround strategy. The company immediately ed the car owner, apologised and kept him update with the positive results of their investigation. It could be argued that the slow response was a consequence of the lack of a crisis management planning (Smith, 1990) or contingency plan (Swanson et al, 2010), but overall, based on CSR concept, Tesla immediately recognised ethical and legal obligations, to the car owner and the public. Hilburg (2014) and James (2008) define a crisis also as an opportunity to showcase an institution’s character, which was exactly Tesla’s plan, and the unfortunate car owner was so impressed that wrote an article on how satisfied he was with Tesla’s crisis management and product safety (Shibayama, 2013). Hearit (2008) defines apology as a valuable crisis management tool. Tesla after the first accident, issued an online statement for the public (Popp, 2013), apologising for the inconvenience and assuring the safety for the other products. The blog entry
22
though, raised more questions, about lithium-ion battery safety. As shown in the
Probability
reputation risk matrix below:
Trivial
Minor
Moderate
Major
Extreme
Very Likely Likely Moderate Unlikely Very unlikely Impact
A crisis like a battery that spontaneously combust, has a moderate probability and a major impact is a medium-level threat, which is expect to produce a flow of online reactions, sometimes unfounded, and therefore has to be carefully controlled and managed (Davies, Miles, 1998). The NHTSA declared that the car did not have a defection trend, thus being safe. Tesla although, added additional armour (Musk, 2013) in the hope of eliminating any remained doubts around costumers and potential consumers, showing again a great deal of respect to its stakeholders (Freeman, 1994) and finally archiving this crisis.
23
5 Q4 - STRATEGIC ANALYSIS
24
5.1 BUSINESS LEVEL STRATEGY
In section 3 of the report, after an analysis of the functional level in Tesla’s strategy, the key resources and competences were identified, based on their high durability, transparency, low transferability and duplicability. From these, it was concluded that Tesla’s competitive advantage is of a differentiation type, as summarised in the Porter’s generic strategy model below (1985).
Industry wide
Low cost
Single Segment/s
Competitive Scope
Source of competitive advantage Differentiation
Cost Leadership
Differentiation
Focus
Tesla also adopts a focus approach, converging their resources and attention a few specific segments (Liu et al, 2014). The previous data can also be analysed trough Bowman’s strategy clock model (1997), which gives a more detailed insight about the company’s generic strategy. 25
Tesla possesses products of high perceived value with high prices, surviving on highly targeted markets and high profit margins.
High
Hybrid
Differentiation
Focused
Perceived value for
Differentiation
Risky High
Low Price
Margins
Low price/ Low added value
Monopoly Pricing Loss of Market Share
Low
Price
High
26
5.2 CORPORATE STRATEGY
Based on Hitt’s (et al, 2007) definition of corporate strategy, Tesla can be linked to a growth-type generic corporate strategy (Chafee, 1985). The Ansoff matrix (1957) further develops this concept, exploring the aspects of the game-plan.
Product
Existing
Existing
Product Development
New
Market
Market Penetration
New
Market Development
Diversification
Tesla’s introduction of the Roadster into the market is regarded as a related-diversification tactic, due to both the new product and the new market. The following models, follows the same path, as yet again, a different type of car is produced, marketed for another segment. Market development is also pursued, with the launch of the model S in a new market, China (Young, 2015).
27
Additionally, the company can boast a successful vertical integration strategy, like Ford Motor did (The Economist, 2009). Tesla, in fact, designs its car parts, produces up to 90% of them, along with the technology, and personally owns the retail stores, rather than using a common car dealer, receiving valuable insights on the clients’ behaviours. Based on the strategic gameboard (Kerin et al, 1990):
Niche Entire Market
Where to Compete?
Focusing
Innovation in niche Market
Superior,
Reconfiguration of
comprehensive
rules of
market coverage
competition
Same game
New Game
How to Compete?
Tesla initially possessed a new-game, also called Blue Ocean strategy (Kim, Mauborgne, 2005), since the first Roadster model combined attributes of the green vehicles with those of sports car. The company raced “past the competition with a superior hyper-dimensionalized feature set, creating a new green performance vehicle market space” (Halle, 2009). This approach was later abandoned for a more collaborative one, which would stimulate market growth, offering a wider choice to 28
the consumers, thus going toward the goal of building an affordable EV (Van De Steen, 2014).
29
5.3 SUGGESTED STRATEGIC APPROACH
Based on the previous data, it is suggested to develop both the differentiation and vertical integration existing strategies. Davis (2010) describes the EV marketplace as crowded in a near future, due to big-league manufacturers. Tesla would need to grow and keep innovating, and to make this happen, scale is essential (Davis, 2010), which also makes Market development an important focus for the future. The latter should although be fully developed, to avoid disappointing results such as the Chinese market (Young, 2015).
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5.4 STRATEGIES EVALUATION
This section will deal with the evaluation of the market development and diversification strategies through the SAF model – suitability, acceptability, feasibility (Johnson et al, 1998).
Feasibility Suitability Acceptability
The diversification strategy is highly favourable as the PESTEL and Porter’s models show in section 2, displaying a standard car market in decline and a demand for ecofriendly vehicles. The strategy appears consistent, with Tesla using its own core competences in new areas which can lead to better returns at higher risks. Market development is also ed by the macro-environmental analysis, which shows a global trend for eco-friendly cars. Tesla, at a medium risk, can obtain high returns 31
supplying its core product in the new segments, still being consistent with its overall strategy.
The ROCE shows the profitability analysis, based on previous Tesla performances. Both the strategies would require a financial risk at different levels, but Tesla already showed in the past its enormous potential for both innovation and actual profits (Gurufocus, 2014).
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According to the Cost-Benefit analysis, even though the expenditure might be high due to R&D, the plans would also be beneficial for the intangible assets. Lastly, below is the Real Options framework (Luehrman, 1998). Both the scenarios pursued are assessed as predominantly positive, due to the high value in respect to cost and a mid-volatility, but clearly the market development strategy shows the most optimistic results, due to the lower level of exposure.
33
Regarding risks, the development of new products negatively impacts the liquidity of the company, thus the adoption of the sensitivity analysis, taking into considerations three assumptions which assure a positive outcome to these strategic decisions: demand growth, fund availability, purchasing power. Being a diversification plan, a slower growth in the demand is not scary, but liquidity might be. In the latter case, Tesla would need to raise money from new investors or privately, and due to the brand image and the mission statement, this should not present a problem, making the strategy feasible, thanks to Tesla’s capabilities. On the other side, regarding the market development strategy, a drop in the demand and the purchasing power could
34
seriously jeopardize the profit, along with tight liquidity, but based on the expected market trend forecasts, this unfortunate scenario would most probably not happen.
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5.5 IMPLEMENTATION MODES OF SUGGESTED STRATEGIES
In order to entry the new markets, Tesla should choose the franchising method, giving the company a firm control over the marketing and sales. To implement the plan, the company must focus its attention on building brand awareness, a solid sales network, and acquiring a new plant in a strategic location which can easily serve the new geographical segments easily and cheaply. The implementation of the diversification strategy would consist of increase expenditure on R&D, focusing on new product development through t alliances, which would accelerate market growth and stimulate competition. This practice should be then terminated to avoid giving up on its own competitive advantage, which would leave the company without strengths to fight in the future market.
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6 CONCLUSION
Tesla lives in a highly favourable environment, both at a macro and micro level, which allowed the company the reach its first milestone, becoming profitable in 2013 (Van De Steen, 2014). The strong capabilities build throughout the time unified with the powerful resources has led the company to launch very successful products, effectively competing with the big brands. Strategy has been perfectly chosen at the start, with their Blue Ocean game-changer, and it has maturely evolved into a progressively vertical integration along with a kept diversification approach, and a market development. Tesla has chosen to collaborate with the competition in order to grow the EV market, stimulating a shift to more eco-friendly cars, having as a goal purely the benefits of the consumers. Tesla is projected to keep its competitive advantage strong and alive, but the t alliance will need to be ended in a near future in order to survive in a progressively-crowded market.
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8 APPENDICES
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