tesla motors strategic issue

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Company Analysis of Tesla Motors Written by: Jacob Lueck 4/14/2015 Organizational Policy and Decision-Making Dr. Blackford Northwest Missouri State University

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In this paper I identified an issue that Tesla Motors is currently facing. I also named potential strategies to combat this problem, finally selecting one that Tesla should implement.

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Page 1: Tesla Motors Strategic Issue

Company Analysis of

Tesla MotorsWritten by: Jacob Lueck

4/14/2015Organizational Policy and Decision-Making

Dr. BlackfordNorthwest Missouri State University

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Jacob Lueck

Table of contentsBackground of Company………………………………………………………………..3

Company Research………………………………………………………………………3

Value Added……………………………………………………………………3

Customer Profile…………………………………………………………………4

Competitive Situation…………………………………………………………6

External Analysis………………………………………………………………..7

Internal Analysis………………………………………………………………...9

Analysis of Current Financial Situation………………………………………10

Situation Analysis………………………………………………………………………11

Alternatives…………………………………………………………………………….12

Recommendations………………………………………………………………………13

Implementation…………………………………………………………………………14

References……………………………………………………………………………….17

Executive SummaryTesla Motors is a growing automobile maker, who develops electric only

vehicles. The market for alternative fuel vehicles has become more competitive as environmental concerns rise. This research will overview Tesla as a company, and address the problem of extremely high costs of repairs (Santos, 2014).

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Background of Tesla Motors

Tesla Motors was started in Silicon Valley in 2003 by engineers who were out to

prove that electric cars could be better than their gasoline-powered counterparts. Their

cars would have power, torque and most notably, zero emissions. In 2008, the Tesla

Roadster was released. Accelerating from 0-60 in 3.7 seconds and having a range of 245

miles per charge, Tesla set the standard for the new electric vehicle. The powertrain for

their sports car was built around an AC induction motor, patented by Nikola Tesla, who

inspired the company name. Tesla launched the world’s first electric sedan, the Model S

in 2012. It was created to be one hundred percent electric, and seats seven. The Model S

was named Motor Trend’s 2013 Car of the Year and received a 5-star safety rating from

the U.S. National Highway Traffic Safety Administration (Tesla Motors, 2015).

Company Research

Value Added/ Value Chain Analysis

Tesla has been a successful company as they have released new products and are

looking at their Model X, a crossover that will enter into production later this year. Tesla

Motors has also created more supercharging stations, where people can charge their

vehicles to keep them on the road. It is now possible for a person to drive from one coast

to the other in a Tesla vehicle. Using the superchargers are also very affordable: free.

Tesla owners are also able to charge at home, and not spend any more money on

gasoline. Tesla adds value as much as it can, in every phase of production that it can.

Instead of building their own building, they started in a factory in Fremont California,

which was home to a joint venture between Toyota and General Motors. Tesla Motors

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brought back thousands of jobs, and is capable of producing 1,000 cars a week. Tesla

Motors has also partnered strategically with Panasonic, and have begun building a plant

in Nevada to allow the creation of a mass-market affordable electric vehicle. Tesla’s

vehicles bodies are made with aluminum reinforced with high strength steel elements.

The windshield and glass are Ultraviolet and infrared blocking, along with being

tempered (Tesla Motors, 2015).

Customer Profile

According to Forbes “those drawn to the costlier and more technologically

advanced Tesla Model S electric vehicle tend to be less interested in environmentalism

but are more passionate about business, finance and family matters, and have an affinity

for some of the finer things in life, including Ferraris, motorcycles, Maker’s Mark

bourbon, erotic dance/strip clubs, Lululemon and cannabis” (Gorzelany, 2013). The

buyer profile, according to Edmunds.com is as follows:

Buyer Profile

Male: 83.9%

Female: 16.1%

Income under $50,000: 5.7%

Income $50,000-$99,999: 17.2%

Income over $100,000: 77.3%

18-44 yrs. Old: 33.2%

45-64 yrs. old: 50.6%

65+ yrs. old: 16.2%

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Buyer Profile

Source: Edmunds.com

What is being shown through the information above is that Tesla owners are most likely

males with income over $100,000 a year who are aged 45- 64 years old. They also are

more likely to spend money on their interests, compared to other customers of close to

similar electric vehicles. The Tesla Model S is closely compared to the Chevrolet Volt

and the Nissan LEAF, as they are all electric, extended range cars. The profile of these

buyers are very different, as many people do not have the money to buy a vehicle that is

as expensive as the Tesla Model S is. The buyer profile of the 3 are as follows:

Model S Chevy Volt Nissan LEAF

Starting Price: $71,070 $34,995 $28,800

Male Buyers: 83.9% 75.9% 71.2%

Buyers 18-44 yrs. old: 33.1% 37.9% 46.3%

Income Under $50,000: 5.7% 12.9% 13%

Source: Edmunds.com

The tables above show data from Edmunds.com, from registration and search data

from June of 2012 to June of 2013; looking only at the Tesla Model S and luxury

vehicles and electric vehicles; as reported by CNBC (LeBeau, 2013).

Another reason Tesla Motors has been so successful is that it has customers who

are extremely brand loyal. Tesla has things unlike traditional carmaker manufacturers, in

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that it relies on word of mouth marketing and showrooms to sell; not using large budgets

that span over multiple nations; and this has created a cult-like following. Tesla has done

followed Apple closely, in the fact that Apple advertised to create an enemy of the

completion. Tesla has done this by placing itself in the minds of consumers as the answer

to the typical big business bad guy who drives combustion engines that run on fossil fuels

and pollute the Earth (Rutter, 2014). Tesla has differentiated itself as being just plain

different; from their vehicles, to the way that they sell said vehicles. Tesla uses company

owned retail outlets, which goes against typical auto dealer associations, whose

manufacturers do not sell directly. Tesla also has said that it would never want to make

servicing vehicles as a profit center, as it sees dealerships making the bulk of their money

from service. This against the traditional approach has strengthened consumer support.

Customers are also able to openly communicate with Tesla, who is very transparent.

When media outlets were reporting that the Model S was prone to fire, the CEO Elon

Musk took to Twitter and Facebook to dispel the rumors; along with posting the emails

back and forth from the customer to the company (Rutter, 2014).

Competitive Situation

Tesla Motors main competitors are General Motors, the Honda Motor Company,

Toyota Motor Corporation and Ford Motor Company (Investopedia, 2015). The major

players are multinational automakers that have large budgets and have been around for

years. Tesla has the highest stock price of the companies listed, but has been falling,

while others have rose. General Motors has the Chevrolet Volt. Honda had the Fit

Electric Vehicle but searching through their website, it has been uncovered that it is not

available any longer. Honda has some of the most economical cars with great miles per

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gallon, and if they were to come out with an electric vehicle to compete on the global

market, people should not be surprised. Toyota is in the process of creating a Fuel Cell

Vehicle called the Mirai. Even though this vehicle is not electric, it is a clean running

vehicle that will compete with Tesla. Ford enters this category with the iconic Focus

electric vehicle. All of these large companies have around one true offering to an electric

vehicle, whereas Tesla is an electric vehicle company.

External Analysis

Tesla keeps it’s suppliers classified, but there are twenty-six known companies

that contribute the Model S Sedan.

Researching the companies involved, they are as close to environmentally friendly as can

be, which is why Tesla Motors has them as their suppliers. Of the twenty-six, five are

listed in the New York Stock Exchange (Anderson, 2014). The biggest factors that can

threaten Tesla Motors are laws about how they are able to sell their vehicles. At this point

in time, Tesla sells its cars from company owned dealerships, which in some states and

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due to certain auto dealership agreements; are illegal (Rogowsky, 2014). In years past,

automakers have had independent dealers sell their cars, keeping competition fair and

balanced. Unfortunately, many states that have legislation passed that prohibits and

makes illegal selling vehicles directly to consumers (Gilbert, 2014). However, some

states are going through debates that would eliminate some of these laws. Right now,

New Jersey, New York, Texas and Arizona are working on repealing laws that limit

Tesla from selling in their state. But, many car dealers and dealers associations are in

congressional districts, and they fear that if these bills pass, the companies they sell cars

for will open up their own showrooms and dealerships, and be able to sell cars at a lower

price directly to consumers; effectively putting them out of business (Rogowsky, 2014).

The five forces Tesla is currently facing is that there is very large threat of new

entry. With the competitors being multinational automakers, they will be able to come

out with their own electric vehicles. The supplier power is low, as the automakers have

massive deals on the table as they already are obtaining resources for their non-electric

cars. The threat of substitution is growing larger, as more products, and more affordable

products are being created. Tesla is creating their mass produced affordable electric

vehicle, but has been delayed, only giving more time for competitors to enter the

affordable all electric vehicle market. Buyer power is currently low, but growing as there

are more substitutes entering the market. Buyers may also be very price sensitive, and as

previously stated. Tesla does not yet have a “reasonably” priced electric vehicle.

Competitive rivalry is low, as there are many competitors, but high switching costs, and

those who own a Tesla are very brand loyal. Right now, Tesla is still in the growth stage

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of the market life cycle, as they are building more models of vehicles and entering

different pricing markets in the near future.

Opportunities are opening up for Tesla, as laws that forbade the sale of vehicles

directly to the consumer are starting to be repealed, and support for the company is

growing within governments. Tesla supports and supplies Mercedes’ Smart car, and can

offer a strategic partnership in passenger cars. Lastly, quality control processes are

improving lowering costs in this area and defective products. Some threats that Tesla is

facing is that it has recently open sourced their patents, meaning that competitors are able

to use their patents on their vehicles (Musk, 2014). Tesla has done this to advance the

electric vehicle movement, but some competitors may take advantage of this generosity.

Another threat is that Tesla is using price-skimming strategy, which is relatively new to

the automotive industry. Tesla is fighting technology that has been around since the

automobile was created. It is not just fighting other carmakers, but the oil industry as

well. Lastly, Tesla is creating technology that may take time to be to optimal standard use

for the mass market.

Internal Analysis

Internally, Tesla has more strengths than weaknesses, but their weaknesses are

daunting to overcome. Tesla’s strengths are that they are a strong supplier to rivals such

as Toyota. Tesla developed the first fully electric sports car, and have trickled down into

making products that are more readily available for the mass market. Tesla is able to

develop vehicles completely in-house, streamlining part manufacturing and assembly.

Some weaknesses of Tesla are that since all assembly is done in-house, it is the victim of

higher costs of production. Another weakness is that Tesla has higher prices than their

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competitors, and the raw materials used are more expensive than their competitions; as

Tesla uses lightweight aluminum, and the competition uses steel. A problem with

aluminum is that it is not as easily workable than steel, and repair prices are exorbitant.

For example, a ding to the front and rear bumper cost $23,000 to repair through an

authorized repair shop (Santos, 2014).

Analysis of Current Financial Situation

Shown below are Tesla Motors filings with the Securities and Exchange

Commission:

Year Ended December 31,

2013 2012 2011 2010 2009

(in thousands, except share and per share data)

Consolidated Statements of Operations Data:

Revenues:

Automotive sales $1,997,786 $385,699 $148,568 $ 97,078 $111,943

Development services 15,710 27,557 55,674 19,666 —

Total revenues 2,013,496 413,256 204,242 116,744 111,943

Cost of revenues (1):

Automotive sales 1,543,878 371,658 115,482 79,982 102,408

Development services 13,356 11,531 27,165 6,031 —

Total cost of revenues 1,557,234 383,189 142,647 86,013 102,408

Gross profit 456,262 30,067 61,595 30,731 9,535

Operating expenses (1):

Research and development (net of 231,976 273,978 208,981 92,996 19,282

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development compensation of $23,249

for the year ended December 31, 2009)

Selling, general and administrative 285,569 150,372 104,102 84,573 42,150

Total operating expenses 517,545 424,350 313,083 177,569 61,432

As it stands Tesla is making money, but really hurting on expenses including research

and development and their general expenses. In the Annual Report, Tesla names risk

factors that may affect the company (Tesla, 2014). It states “We may be unable to sustain

our current level of production and deliveries of Model S or increase production and

deliveries in line with our plans, both of which could harm our business and prospects”.

At the time of filing of it’s annual report, Tesla states that it may be unable to meet

demand, because it cannot produce enough vehicles (Tesla, 2014). This is from a variety

of factors, from suppliers not sending enough quality material timely, to their own

processes while keeping high standards. I think that Tesla has built something that will

take a long time to fail, but if it is able to act quickly enough to establish itself not just

domestically, but globally, it will be the new standard for vehicles. It will push the

combustion engines into obsoleteness, and usher a new era of personal transportation.

The first step I see Tesla needing to complete needs to come out with an affordable,

mass-produced vehicle, to reach lower priced markets. Then, Tesla needs to increase the

Supercharger network so customers are able to take long trips without worrying about a

dead battery.

Situation Analysis

In the political sense, Tesla operates in 17 countries, and in these countries it is

dealing with political patterns that change business operations. Tesla deals with

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environmental protection and emissions laws. Tesla also gets loans and credits from

researching new vehicle technologies.

Some economic factors are growth in the alternative energy industries would

increase the cost of using other cars due to rising oil prices developing from less people

driving combustion engine vehicles. This may affect GDP and inflation of certain

countries, along with customer purchasing power.

Socially, Tesla is at the forefront of factors drawing more attention to

environmental concerns and emphasis on green products. People’s social standing will

also be changed, as people may view driving an environmentally friendly car.

Technological advancements are making cars safer to drive, with automated

parking, and soon, a driverless car.

Alternatives

A few of the alternatives that Tesla can use to lower costs of repairs is switching

the body of the vehicle from aluminum to a heavier, more resilient steel. This will drive

cost of the car down, as steel is generally cheaper (Hornbacher). Aluminum is more

malleable, but for a car that may get bumped and scraped, steel is able to keep its shape

much easier and has memory of what it was before the dent or abrasion. Unfortunately, a

drawback of steel is that it is much heavier than aluminum, about 2.5 times heavier

(Hornbacher). This would make the models that Tesla manufactures much heavier, and

drive down the range the vehicles will be able to travel. Changing all models to steel

would drive down the cost of production and raw materials, but, Tesla would lose the

lightweight flash of aluminum.

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The second strategic recommendation is creating company owned service

stations, where people could have their vehicles worked on by trained Tesla repair

people, and the cost of parts would be lower than having vehicles worked on by other

service shops, as the parts would be direct. Needing to repair your vehicle is something

that is necessary, and sometimes accidents do happen, being able to drive down repair

costs will keep people happy. The con of this is that Tesla has come out against service

departments in dealerships, as they want to make money just by selling vehicles.

Unfortunately, if the customers say it must be so, Tesla may relent in their opinion on this

subject.

The last alternative is that Tesla creates an unrivalled, self-driving system in their

vehicles that work to eliminate collisions and accidents. This technology is advancing

quickly, and the world may soon see self-driving vehicles. Tesla will need to push the

envelope to develop these systems in order to get them in cars as fast as possible. The

cons of this situation is that it would cost an incredible amount to develop this

technology, and this only helps the driver the Tesla vehicle, it does nothing for other

drivers, driving cars without these safety features. The other con is that this is incredibly

expensive and time sensitive, and would not likely be done in time to make a difference.

Recommendations

The recommendation I suggest that Tesla follow is by using company owned

service stations and repair centers. I believe that switching from aluminum to steel would

drastically reduce the distance that the vehicles could travel, and to counter this, Tesla

would have to make smaller cars that were not as sporty, and destroy the premium feeling

that one would get when driving. I also think that creating self-driving technology is too

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far out of reach, and it does not stop other drivers from driving poorly, or running into

your car while it is parked. This is why Tesla needs to directly repair their vehicles, as

parts would come cheaper, and if Tesla still felt bad about the money being made from

service, they could deeply discount the cost of the work being done. Doing this is

beneficial to the customers that they work so hard to gain, why would they deny them

service to their vehicles?

Implementation

The key to implementing this plan is by building onto existing Tesla dealerships,

where space is reserved for vehicles anyway. Tesla would have to do this soon, as people

do not want to drive around with dented, scratched cars, because the cost of body work is

too expensive to justify the repair. Tesla is working on a tipping point, as it needs to do a

lot. It needs to sell more cars, it needs to build production facilities and Supercharging

stations, develop and release a lower priced vehicle and build service centers. Some

obstacles are funding this project. A solution is going to the government for help. They

are already partially funding development of new electric vehicle parts, and if Tesla can

convince officials that it needs financial assistance to build production facilities and

Supercharging stations. Any money that is freed up can then be used to build the service

centers. Another obstacle is the time to build the service center and fill it with the

appropriate tools and training the service people. Something that can be done is while the

service centers are being built, Tesla can train in-house from their production facilities, so

when the centers are ready for clients, the service workers will be ready too. The last

potential obstacle is delivery of parts to the service centers. To overcome this, parts can

be shipped to the centers with the cars that need delivered. Tesla can also have customers

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schedule their vehicles in advance, so that they are able to bring their car in, have it

worked on as the technicians know what needs to be done and the part can be waiting, so

wait time is low and keeps customers happy.

A change in the organization is needed, as there needs to be an entire division

created solely to the service and repair of vehicles. This needs to span from top

management, like the creation of a Vice President of Service and Repair, who can

oversee all repair processes, including training and quality. There may also be the need

for extra production lines to make parts, and their own shipping and distribution

channels, which for the most part would follow the same lines as car deliveries. If the part

is small enough, there may even be a way to mail it, but I would push away from that, as

you do not know how shipping companies may take care of the packages they receive.

The main resource needed is money to make all of this a reality. After everything is built,

raw materials are needed to make the parts. People and machinery are needed to change

raw material into product parts. Allocation to this new section of business needs to be

seen as important as building products. Maintenance and service should be seen as a high

priority.

Success and failure should be measured on whether or not service costs are

brought down for customers, while keeping the business out of the red. Tesla may have to

eat some cost, but if they produce a car that is ridiculously expensive to repair, people

will flat out not buy vehicles made by them. In order to keep the high quality that this

brand has, small sacrifices need to be made in order to keep customers happy. I know that

if people had a major problem with something I made, and would stop them and others

from buying, I would do everything in my power to fix the problem.

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Tesla Motors is revolutionary. It is brand new, and something that the world

desperately needs. It is getting help and support, but it needs more. It can help itself by

building more reasonably priced products for the mass consumer market. I personally

hope that Tesla will be able to weather the storm, and come out the other side a dominant

company in a redefined automotive industry. Tesla can help usher in the new world

where there is limited use of combustion engines damaging our only Earth.

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Maka Model S Sedan. Retrieved 4 12, 2015, from Money Morning: moneymorning.com/2014/05/08/tesla-suppliers-list-these-26-companies-help-make-a-model-s-sedan/

Gilbert, B. (2014, 07 17). Why Tesla Motors can't sell car in most of the United States. Retrieved 4 13, 2015, from engadget: www.engadget.com/2014/07/17/tesla-motors-us-sales/

Gorzelany, J. (2013, 08 3). Prius Fans Love Tyler Perry, Tesla Devotees More Likely To Smoke Weed, Study Shows. Retrieved 4 12, 2015, from Forbes: www.forbes.com/sites/jimgorzelany/3013/08/05/prius-fans-love-tyler-perry-tesla-devotees-smoke-weed/?partner=yahootix

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Hornbacher, A. (n.d.). Steel versus Aluminum- Weight, Strength, Cost, Malleability Comparison. Retrieved 4 14, 2015, from Wenzel Metal Spinning: www.wenzelmetalspinning.com/steel-vs-aluminum.html

LeBeau, P. (2013, Aug 19). The young and rich snapping up Tesla's Model S. Retrieved 4 12, 2015, from cnbc: www.cnbc.com/id/100970641

Musk, E. (2014, June 12). All Our Patent Are Belong To You. Retrieved 4 10, 2015, from Tesla Motors: www.teslamotors.com/blog/all-our-patents-are-belong-you

Santos, P. (2014, 12 22). If You Own A Tesla Model S, Just Don't Dent It! Retrieved 1 25, 2015, from Seeking Alpha: seekingalpha.com/article/2774775-if-you-own-a-tesla-model-s-just-dont-dent-it

Rutter, T. (2014, 09 06). Why Tesla has the most loyal customers. Retrieved 4 12, 2015, from USA Today: www.usatoday.com/story/money/cars/2014/09/06/why-tesla-has-the-most-loyal-customers/15139377

Rogowsky, M. (2014, 03 06). Tesla Thaw? Suddenly States Are Moving On Laws Favoring The Company's Stores. Retrieved 4 11, 2015, from Forbes: www.forbes.com/sites/markrogowsky/2014/03/26/tesla-thaw-suddenly-states-are-moving-on-laws-favoring-the-companys-stores/

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Tesla. (2014, 1). United States Securities and Exchange Commission. Retrieved 4 14, 2015, from Tesla Motors: ir.teslamotors.com/secfiling.cfm?filingid=1193125-14-69681&cik=#D668062D10K_HTM_TOC

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