Strategic Management Capstone Comprehensive CaseTesla Motor Inc.Trevor McLaughlinUniversity of Central OklahomaTable of Contents TOC o “1-3” h z u Problem Summary PAGEREF _Toc512822924 h 3Analysis 1: Identify the Firm’s Strategy PAGEREF _Toc512822925 h 6NAICS and SIC PAGEREF _Toc512822926 h 6Strategy as a link between the firm and its environment: PAGEREF _Toc512822927 h 6Describe the Firm’s Strategy PAGEREF _Toc512822928 h 7Analysis 2: Data Interpretation PAGEREF _Toc512822929 h 9Analysis 3: Assess the Firm’s Strategy: PAGEREF _Toc512822930 h 12Analysis 4: Analyze the Firm’s External Environment PAGEREF _Toc512822931 h 16Porters Five Forces PAGEREF _Toc512822932 h 16Strategic Alternative 1 PAGEREF _Toc512822933 h 20Analysis 5: Analysis of the Firm’s Internal Environment PAGEREF _Toc512822934 h 21Problem SummaryTesla Motors, Inc. is an automobile manufacturer formed in 2003 and named after Nikola Tesla. Nikola Tesla was a great inventor and is responsible for some of the positive differences technology make in daily life. Elon Musk and Tesla’s CTO, JB Straubel were the founding members.
Musk with his personal fortune made from selling startups provided most of the capital. Beginning in California’s tech industry of Silicon Valley gave them access to the nations best and brightest tech and engineering employees. Their roots in Silicon valley gave them the edge to assemble a specialty team formed of members from the car industry and members from Silicon Valley. These innovative engineers decided to introduce new technology to the automobile industry and provide electric vehicles(EV) instead of internal combustion(IC) engine powered vehicles. Tesla designs, produces, and manufactures EV but, they also manufacture and design EV powertrains to sell to other EV manufacturers, Toyota and Daimler. While being headquartered in Palo Alto, California their subsidiaries are in North America, Asia, and Europe. In 2007, the company was experience delays and their capital was in a downward spiral Elon Musk took over as Chief Executive Officer(CEO). He reduced headcount and became the face of Tesla during this transition from founder to CEO.
Tesla Motors, Inc. with Elon Musk leading the charge wants to become a mass producer of EV.The American car industry is one of the largest industries in the U.S., having 1.7 million employees at more than 3% of GDP. The industry is composed of three car companies making up 49% of the U.S.
Market in 2012, which in 1969 was 98%. The three companies that made up this large percentage were Ford, General Motors(GM), and Chrysler. In 2009 both GM and Chrysler filed for Chapter 11 bankruptcy due to the economic and political shift of high oil prices and public view point of IC vehicles. Since the end of World War II, no automobile manufacturer has been able to successfully enter the industry with a mass-produced vehicle. As mentioned, Tesla has made this their goal.
These high oil prices shifted public opinion to find other options of travel, specifically with EV. EV had been popular in the late 1800’s but were extremely slow and difficult to charge considering not everywhere had electricity readily available at the time. Being replaced by the IC vehicle due to better range and speeds the indsutry has come full circle again. Now the EV is gaining popularity again and being produced in larger quantities. The expenses accrued to design a new car are in the upwards of one billion to six billion depending on if domestic or international. These expenses due not even include the expenses from refitting and modifications the manufacturing plant must undergo. These designs also take time almost four or five years to complete although if they are just simply redesigning existing models this cuts the time down to less than one year. In 2008 the company produced the Tesla Roadster targeting consumers with a high living standard.
The Tesla Roadster is a sports car operated on electricity that attracted the attention of all consumers due to its sleek look. They took advantage of this popularity to expand their market. Tesla only produced 2,500 Tesla Roadster and ended production in 2012 per its contract with Lotus and shifted their focus towards their mass producible Model S. Mass production during the present time takes an assembly plant to accomplish.
Traditionally an assembly plant could reach its minimum efficient scale between 100,000 and 250,000 cars per year and the plant could cost as much as one to two billion. Tesla in 2010 purchased the NUMMI plant in Fremont, California for $42 million from Toyota. The NUMMI plant at its prime manufactured a stunning 500,000 cars per year. Their Model S was fully assembled in house because of this plant and began their first truly mass produced EV. The Model S being priced at just a little more $60,000 was able to target more of the market than their $109,000 Tesla Roadster. The Model S was awarded the 2013 Car of the Year and received Consumer Reports that achieved the highest rating ever for a EV. The Model S design was nearly half a billion USD to design, including a new battery design and evolved powertrain from the Roadster. In 2013 Tesla was able to finally obtain their first profitable quarter every, taking them ten years.
On March 31, 2013 their CEO Elon Musk tweeted, “First profitable Q for Tesla thanks to awesome customers & hard work by a super dedicated team.” Trying to maintain this positivity they continued to innovate and released the Tesla Model X in September 2015. Elon Musk wants Tesla to be a mass manufacturer of electric cars. With a plant capable producing half a million cars per year the goal is easily attainable but, with their sales not even equaling 100,000 cars per year it still seems out of reach.
Will their success continue through the years? Should the travel the path they are currently on or diversify? Is their end goal of mass production in sight or still far from reach? Finally, will they be the first to mass produce in the U.S. automobile industry since WWII?Analysis 1: Identify the Firm’s StrategyNAICS and SIC:Tesla’s Primary North American Industry Classification System(NAICS) Code is 336111 Automobile Manufacturing. Tesla’s Primary Standard Industrial Classification(SIC) Code is 3711 Motor Vehicles and Passenger Car Bodies.
Strategy as a link between the firm and its environment:left78740THE FIRMGoals and Values: Mission StatementQualityResources:Human CapitalFinancial ResourcesProduction PlantService CentersCapabilities:Brand ManagementR;DStructure:U-Form Organizational StructureCentralization00THE FIRMGoals and Values: Mission StatementQualityResources:Human CapitalFinancial ResourcesProduction PlantService CentersCapabilities:Brand ManagementR;DStructure:U-Form Organizational StructureCentralizationright116840THE INDUSTRY ENVIRONMENTCompetitors: FordGMToyotaCustomers: ConsumerManufacturersSuppliers: Global Suppliers Vertical Integration0THE INDUSTRY ENVIRONMENTCompetitors: FordGMToyotaCustomers: ConsumerManufacturersSuppliers: Global Suppliers Vertical Integration2171700897890Differentiation Strategy00Differentiation Strategy36576001316990001914525131699000-66675453390StaticWhere are we competing?Product Market Scope:RoadsterModel SModel XModel 3SuperchargerEnergy Storage ProductsSolar SystemsGeographical Scope: North America(US and Canada) Europe United Kingdom China Hong Kong AustraliaVertical Scope:In-House AssemblyManufacturingSales StoresHow are we competing?The basis for the competitive advantage is the battery supply chain along with the differentiation of their vehicles compared to the industry.00StaticWhere are we competing?Product Market Scope:RoadsterModel SModel XModel 3SuperchargerEnergy Storage ProductsSolar SystemsGeographical Scope: North America(US and Canada) Europe United Kingdom China Hong Kong AustraliaVertical Scope:In-House AssemblyManufacturingSales StoresHow are we competing?The basis for the competitive advantage is the battery supply chain along with the differentiation of their vehicles compared to the industry.Describe the Firm’s Strategyright16510DynamicWhat do we want to become?Vision Statement – To create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles.What do we want to achieve?Mission Statement – To accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.
Performance Goals – Unlock production capacity of 6,000 Model 3 vehicles per week.How will we get there?Guidelines for DevelopmentTesla says, “As we at Tesla reach for our goal of producing a mass market electric car in approximately three years, we have an opportunity to leverage our projected demand for lithium ion batteries to reduce their cost faster than previously thought possible. In cooperation with strategic battery manufacturing partners, we’re planning to build a large-scale factory that will allow us to achieve economies of scale and minimize costs through innovative manufacturing, reduction of logistics waste, optimization of co-located processes and reduced overhead.Growth Modes:Market PenetrationPartnershipsOrganic Growth00DynamicWhat do we want to become?Vision Statement – To create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles.What do we want to achieve?Mission Statement – To accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.
Performance Goals – Unlock production capacity of 6,000 Model 3 vehicles per week.How will we get there?Guidelines for DevelopmentTesla says, “As we at Tesla reach for our goal of producing a mass market electric car in approximately three years, we have an opportunity to leverage our projected demand for lithium ion batteries to reduce their cost faster than previously thought possible. In cooperation with strategic battery manufacturing partners, we’re planning to build a large-scale factory that will allow us to achieve economies of scale and minimize costs through innovative manufacturing, reduction of logistics waste, optimization of co-located processes and reduced overhead.Growth Modes:Market PenetrationPartnershipsOrganic Growth Tesla’s current strategy is differentiation which is an excellent fit with the Static and Dynamic lists mentioned above. Their constant improvement of their batteries enables them to cut costs and simply scale with their car manufacturing. These batteries offer another source of income other than vehicles for they can handle stationary energy storage contracts. Their product scope ensures their differentiation strategy considering everything they produce is environmentally friendly and runs on electricity.
Their geographical scope puts them in large economical markets and appeals to the large populations for less of a carbon footprint. They have an amazing vertical scope because they produce nearly everything in house. Reading the Vision Statement, they want to produce compelling cars for the worlds transition to EV. Their mission statement, needs to be updated to include not just electric cars. Although they may be focusing on car mass production there are other areas to explore.
Tesla has a problem meeting performance goals but continues to strive forward. There current goal is to be able to produce 6,000 cars per week which seems nearly in grasp. They continue their development through their partnerships and the creation of their enormous Gigafactory. Their growth modes are to continue market penetration to appeal to an even larger market.
They also continue their organic growth, but it may not be sustainable if they do not start meeting more deadlines.Analysis 2: Data InterpretationComparing Tesla to Ford shows that Tesla has room for improvement. Tesla was improving their Return on Capital Employed(ROCE) from 2015 to 2016 it improved from -21.36% to -8.6% increasing by 12.76%. In 2017 it decreased from 2016s -12.
91% to -8.6% decreasing by 4.31%. Tesla competitor GM has had a heavy fluctuating in their ROCE with a result in 2017 of -7.2%.
Toyota has had a stable ROCE from 2015 to 2016 it stayed the same as 6.27% but in 2017 in decreased to 4.82%. This shows that compared to their competitors Tesla is not converting their capital to profitable investments.
The new factory that Tesla is building has had a negative impact on their results. Until the factory is fully operational they may become stagnant in this area because of their total capital. Tesla’s Return on Equity(ROE) has increased and decreased excessively. In 2015 it was -87.
01% and increased to -22.91% in 2016 then decreased in 2017 to -43.59%. For 2017 GM had a ROE of -7.2% and Toyotas was 10.
36%. Compared to competitors Tesla is not being profitable through their shareholders invested money. Neither of these will end Tesla as a company but it shows they are not performing well against their competitors in investors eyes. Tesla’s Return on Assets(ROA) has once again increased than decreased ending with a -7.64% in 2017. They are still behind competitors in 2017 ROA with Toyota being at 3.79% in and GM being -1.
79%. Tesla’s low ROA percentage is due to their supply not meeting demands. They had to postpone their Model 3 and did not meet the deadline for the demand. Their Gigafactory should provide sufficient space for them to begin mass production which in return will lead to a higher ROA percentage.
This will help Tesla in the future Gross margin is calculated by revenue minus cost of goods sold(COGS) divided by revenue. This percentage represents what the companies keep after production or services are sold. Tesla’s gross margin is well off at a 18.9% in 2017 but this is a decrease from 22.85% in 2016. Tesla should be able to increase this with the reduction in labor from the robot automated plant they are constructing.
Toyotas gross margin has decreased as well to a 17.62% in 2017 from a 20.41% in 2016.
GM gross margin has increased since 2015s 16.75% to a 19.23% in 2016 further increased to 21.2% in 2017. Tesla is comparable to its competitors although each have risen and fallen.
Tesla supply chain is complex and the main reason their COGS are so high are because they still need international suppliers. These suppliers have missed deadlines forcing Tesla to miss deadlines increasing their cost of labor, materials, and manufacturing overhead. They should be able to come out ahead of the competition in 2018 as long as they meet their goals with their Model 3. Operating Margin is a gauge of how risky a company is and how well it is being managed. Tesla has an operating margin of -13.88% in 2017 which is up from 2015’s -17.
71% and down from 2016’s -9.53%. This shows that their company is the considered the riskiest out of their competitors. Toyota has a positive operating margin 7.23% in 2017 but that is a decrease from 2016 which was 10.
05%. GM’s operating margin is the only one out of the competitors that has increased yearly, in 2015 it was 4.08% and in 2017 it was 6.68%.
Telsa’s operating margin shows the company is overall risky for investors but, with higher risk comes higher rewards.Tesla is currently a growing company and still young in comparison to the industry. Since they plan to ramp up productions and by setting realistic attainable goals they should increase in 2018. The increase of overall car sells and the completion of their Gigafactory will possibly turn around their financial situation. Tesla has seen year after year of growth along with their stocks rising as well.
The competitors, Toyota and GM, are declining and remaining stationary while Tesla is striding EV progress. Unless Tesla keeps advancing their goals to increase production rate these numbers will continue to be in the negatives and they will find it difficult to find investors and/or partnerships.Analysis 3: Assess the Firm’s Strategy: Considering the ratios above Tesla is performing well for being in the industry less time than its competitors. They are behind in areas and outperforming in others but the need for becoming positive is lurking.
The COGS/Sales percentage is an efficiency measurement that with lower percentages mean a higher operating efficiency. Tesla’s COGS/Sales percentage is at an 81.1% in 2017 meaning they were not very efficient at generating revenue from their resources. Toyota and GM have lower percentages in this category being more efficient, GM has the lowest in 2017 at 73.9%. Tesla is going in the opposite direction with this ratio and they need to lower it but in comparison they are not far off from their competitor.
With no information on Toyota on Depreciation/Sales the comparison will only be between GM and Tesla. Tesla ratios are two times higher then that of GM. Since 2015 Tesla’s Depreciation/Sales percentage has been steadily declining. With them purchasing used equipment for their plant their depreciation on the equipment will continue to decline year after year. So long as the equipment does not need to be replaced this ratio will continue to lower and by their sales increasing it will decrease this even further.
Selling, General and Administrative(SGA) expenses divided by sales is an expense ratio that companies want to be low. Tesla has the highest of the three comparisons with a 21.1% in 2017. The have the lease efficient ratio which means their expenses are way higher than their sales at the moment. This SGA expense to sales ratio is one of the most harmful to Tesla’s sales margin. With these expenses the normal way to cut them back is to eliminate unnecessary jobs getting rid of the personnel. Tesla has ramped up their employee count to 37,543 full-time at the end of 2017. This increased their administrative expenses which lead to a higher ratio than in 2016.
Tesla being new to the industry still forces it to pay more in marketing than its competitors which would also raise their SGA expenses. Tesla also raises this ratio through not dealing the traditional way in the industry with selling. Tesla instead of dealing with car dealerships created their own stores where they do not carry inventory but where people can order a Tesla EV. These stores are also home to the Tesla Rangers who are called out on repairs and to the Tesla Valets. The Tesla Valets will bring a Tesla EV owner a loaner if their vehicle is having problems. This sets Tesla way above the standard dealership but also incurs more expenses for the red-carpet customer service experience.
The Fixed Asset Turnover ratio is a measurement of how able a company is to generate net sales from fixed-asset investments. Tesla is ahead of the competition in this ratio with a 6.4 in 2017 compared to Toyotas 2.
9 and GMs 4. Tesla had a decrease from 2016s 9.5 probably due to production problems with their Model 3. The higher the ratio the more effective a company is at utilizing investments in fixed assets to generate revenue.
The purchase of the 5.5 million square foot Gigafactory will increase this ratio further once it is at producing at maximum capacity. They plan on the Gigafactory producing more “… lithium-ion batteries annually than were produced worldwide in 2013″(!!!).
Increased production means having a larger inventory.Inventory turnover is a measurement of how fast a company is selling their finish products. Tesla is behind in this ratio by a large margin comparing their ratio from 2015 to 2017 their highest was 2017 at 4.4.
There ratio has increased over the past three years, but their competitors has remained the same. GMs inventory turnover ratio is 10.6 and Toyotas is 10.2 both in 2017. GMs ratio has increased two points since 2015 and Toyotas as decreased by 0.6 since 2015. Tesla inventory turnover ratio should be extremely higher considering most of their vehicles are a per order request.
This turns into their manufacturing rate not meeting deadlines due to new technology or suppliers not able to keep up with their ramped production.Creditor turnover shows just how often the company pays its average payable amount. Tesla is the leading the competition in this turnover ratio with their highest being in 2017 at 23.18. Toyotas creditor turnover ratio is almost even across the board with a slight increase in 2016 which put it at 3.49 but in 2017 it is back to the same as 2015 at 3.4. This means they do not pay off more or less of their debt but they continuously pay it off over a longer period.
GM is the same as Toyota although their ratio is higher at 5.44 in 2017 and their low of 5.22 in 2015.
Tesla creditor turnover ratio is extremely high and with great cause considering they always pay off their debt. In 2013 Tesla paid off its debt to the Department of Energy plus interest totaling $451.8 million(!!!). Tesla is pale in comparison to the other two competitors when ROCE is compared. This will improve over time but for now it is a low performance area.
Tesla is attempting to cut manufacturing costs by finding new quality suppliers and by having vertical integration within themselves. Cutting costs will lower their expenses and with the continuation of increased production rate their revenue will begin to increase and better their sales margin. They will need to raise there ROCE to be more comparable to the industries competition. Analysis 4: Analyze the Firm’s External EnvironmentTesla’s industry according to the SIC is Motor vehicles and car bodies under code 3711 and NAICS has them as Automobile Manufacturing under code 336111. “Overall, the United States is the world’s second largest market for vehicle sales and production”(!!!). The industry is always evolving and creating innovative solution towards social trends. The automobile manufacturing industry is labor intensive and requires high capital to enter which deters most competitors. Analyzing Tesla’s external factors with the help of Porters Five Forces(!!!).
Porters Five ForcesThe threat of new entrants into the automobile industry is consider low because of the barriers to entry. The ability to enter the industry requires high capital, technological savviness, a distribution network, and an infrastructure. The product design taking years and near a half billion USD would require a new entrant to self-sustain their company with no automotive revenue until their design met current safety standards to produce.
This generates significant losses for new entrants within an already competitive market. Another barrier to entry is the economies of scale, where the larger firms will have a competitive advantage. New entrants will have a finite number of resources and the risk of failure is high leaving the threat of new entrants low. This is shown since no company has been able to penetrate the market of mass producing an automobile since WWII.
The second of Porter’s five competitive forces is threat of substitutes, which is considered low for the automobile manufacturing industry. There are numerous forms of transportation available to consumers which include public transportation(buses, railcars, etc.), trains, airplanes, and bicycles. These clarified are no where near as convenient as owning a car which allows for personal flexibility. Consumers location may make it difficult for them to access public transportation or it could be easier to take a bus than drive a car in highly populated areas.
While these alternate forms of transportation none are a direct substitute for a car.The third of Porter’s five competitive forces is bargaining power of suppliers. The bargaining power of suppliers within the automobile manufacturing industry is low. This is because there are many suppliers throughout the industry and there are low costs when switching suppliers.
Tesla also develops most of their own products and is attempting to be at one hundred percent vertical integration. Since they manufacture their own batteries through a partnership with Panasonic they removed their supplier. Tesla and their suppliers enter partnerships to ensure the betterment of the industry. Tesla receives parts they do not create in house from over 200 suppliers, and due to demand they buy the same item from multiple suppliers. This puts suppliers at a disadvantage because Tesla can just increase volume to a supplier if they do not agree with another supplier’s terms. This reduces Tesla’s dependency on one supplier and keeps suppliers at a disadvantage for bargaining. The fourth of Porter’s five competitive forces is bargaining power of buyers.
The bargaining powers of buyers in this is industry is low to moderate. Consumers are the main source of profit in the industry and each of them is different to consider the price of an automobile. Even at times of great discount when dealers are trying to get rid of last years model consumers still hold little power because the dealership can still not sell them a vehicle at a price they would consider a bargain. Premium consumers are less sensitive to the price and more concerned with the status the vehicle represents. This leads manufacturers to ensure they are building their brand in order to reduce the bargaining power of customers. Since the industry is made of a large sales volume this means there is an equal number of consumers. Meaning due to so many consumers they lower each other’s bargaining power since the manufacturers can just wait for the next customer to come along. The fifth of Porters five competitive forces is rivalry amongst existing firms.
The rivalry is between Tesla, GM, and Toyota including other manufacturers of EV vehicles. The rivalry amongst existing firms is high in the automobile manufacturing industry. The competition continues to stiffen with the industry investing heavily in alternate fuel sources. Competition amongst EV manufacturers is even greater considering that each states legislature determines if they can sell there. Since the industry is mature it puts pressure on the manufactures to innovate new creations to capture more of the market. The largest depressing of industry profitability has been the rivalry amongst existing firms. With IC manufacturers attacking Tesla about there four car fires and how none of there fires were put on national news. The competition between manufacturers always lows the price of their products to make them more appealing to consumers.
This also leads to more extensive supplier contract scrutiny to try and cut costs were available. Also, since the government is pushing EV towards the public giving pay backs to consumers who purchase an EV only helps EV manufacturers. Prerequisites for success come from two questions composed of analysis of demand and analysis of competition. The first question asks what do customers want while the second questions ask how does the firm survive competition. Within the first question it asks who are our customers and what do they want. Within the second question lies the analysis of competition composed of: what drives competition, what are the main dimensions of competition, how intense is competition, and how can we obtain a superior competitive position. Answer these two questions through there analysis will lead to Tesla’s key success factors.
Tesla’s target market are middle to upper class who value the environment, fuel efficiency, and technical savviness. Therefor Tesla already meets these expectations of their consumers. There consumers have already rated the Model S with the highest award and since Tesla has already announced the Model 3 they have had their demand increase. The industry competition is through the roof considering the size of the industries market.
The dimensions of the competition are that of existing manufacturers fighting over their market consumers thus looking to maximize profits. The industries barriers of entry deter any small competitors and sometimes the large manufactures are only still in business by being saved by the government. The competition is so intense that manufacturers will attempt to discredit one another through every media channel available including social media. Tesla already has obtained a competitive position through their production of EV. They have created a EV that has the longest electrical range and the most technically advanced interconnectivity interior.
Through a consumer’s cell phone, they are able to update their EV with new software and even find out what is wrong with a consumer’s vehicle without being physically present. With both analysis’s, demand and competition, complete they reveal Tesla’s key success factors. Their innovation to create and continue to develop technology accelerant vehicles. Having designed their vehicles from the ground up surrounded by technology has set a benchmark for the industry to attempt to emulate them. Continuing with their Research and Development(R&D) to improve their current vehicles and create new innovations through there employees. Strategic Alternative 1Tesla can improve its competitive position to increase its power via the competitive forces that depress industry profitability by increasing production of their niche models and mass producing and EV towards the middle to lower class consumers.
Tesla’s vehicles have always set a new industry standard rather it be the sleek look of the Roadster or the technological advanced Models S. Never have they target the largest consumer market that all countries have to offer. The middle to lower class are not able to purchase an EV for $60,000 let alone $109,000. The profit generated from the top niche EV can be re-invested towards the mass production of a car that is sold for $30,000 or less.
Tesla will have to continue being tough on their suppliers, so they can cut costs even further along with the continued technology developed for their EV batteries. Overall this will lead to an increase in the automobile manufactures industry market allowing for deeper market penetration.Analysis 5: Analysis of the Firm’s Internal EnvironmentValue Chain AnalysisInbound LogisticsTesla has made plans to create the Gigafactory in collaboration with their partner Panasonic. This factory will feature a fully vertical integrated production of their battery packs.