Major Case Analysis: Tesla Motors

Chris Washburn

4/7/16

Policy Analysis and Formulation

MAN4720

Table of Contents Organization’s Industry .......................................................................................................................... 1

US Automobile Manufacturing Industry Characteristics ............................................................... 1

Political Factors .................................................................................................................................... 1

Economic Factors ................................................................................................................................ 2

Sociocultural Factors .......................................................................................................................... 2

Technological Factors ........................................................................................................................ 2

Environmental Factors ....................................................................................................................... 2

Legal and Regulatory Factors .......................................................................................................... 3

US Automotive Manufacturing Industry’s Driving Forces ............................................................ 3

US Automotive Manufacturing Industry’s Five Forces .................................................................. 4

Power of Rivalry ................................................................................................................................... 4

Power of Buyer ..................................................................................................................................... 4

Power of Supplier ................................................................................................................................. 4

Power of New Entrants ....................................................................................................................... 4

Power of Substitutes ........................................................................................................................... 5

Key Success Factors of the US Automotive Manufacturing Industry ....................................... 5

US Automotive Manufacturing Industry Group Map ...................................................................... 5

Industry Attractiveness .......................................................................................................................... 6

Tesla Financial analysis ......................................................................................................................... 6

Profitability............................................................................................................................................. 6

Operating Margin ............................................................................................................................. 6

Return on Assets ............................................................................................................................. 7

Return on Equity .............................................................................................................................. 7

Earnings per Share .......................................................................................................................... 7

Liquidity .................................................................................................................................................. 8

Current Ratio ..................................................................................................................................... 8

Quick Ratio ........................................................................................................................................ 8

Cash Ratio .......................................................................................................................................... 8

Times Interest Earned ..................................................................................................................... 8

Growth Analysis (2010-2014) ............................................................................................................ 9

Asset, Sales, and Equity Growth ................................................................................................. 9

Income Growth ................................................................................................................................. 9

Tesla’s Leverage .................................................................................................................................. 9

Debt-to-Equity and Debt Ratio .................................................................................................... 10

Financial Assessment ........................................................................................................................... 10

Tesla’s Value Chain Assessment ...................................................................................................... 10

SWOT Analysis ....................................................................................................................................... 11

Competitive Strength Assessment.................................................................................................... 12

Tesla’s Mission ....................................................................................................................................... 13

Tesla’s Current Strategy ...................................................................................................................... 13

Current Strategic Issues ...................................................................................................................... 14

New Strategic Changes ........................................................................................................................ 15

Marketing Strategy Implementation .................................................................................................. 16

Appendix .................................................................................................................................................. 19

Figure 1: Crude Oil Prices ................................................................................................................... 19

Figure 2: Strategic Group Map ........................................................................................................... 20

Figure 3: Competitive Strength Assessment .................................................................................... 21

Figure 4: VRIO Chart ........................................................................................................................... 22

Figure 5: Automotive Industry Operating Margins .......................................................................... 23

Figure 6: Automotive Industry Debt ................................................................................................... 24

Figure 7: Tesla Financials ................................................................................................................... 25

Bibliography ............................................................................................................................................ 26

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Organization’s Industry

Tesla Motors is an automotive company that was founded in 2003 by Martin Eberhard,

Marc Tarpenning, Jeffrey B. Straubel, Ian Wright, and its current CEO, Elon Musk. Tesla Motors is

named after the physicist and electrical engineer, Nikola Tesla. The company operates on Elon

Musk’s vision of transforming the world from a “mine-and-burn hydrocarbon economy towards a

solar electric economy” (Lawlor, 2016). To achieve this vision, Tesla designs and produces plug-in

electric vehicles, inventions which have zero carbon emissions and attain mileage ranges of up to

265 miles per charge. The company also provides a network of super chargers, 400 stations

within the United States and 2000 worldwide, that is free to use for Tesla customers.

As the US Automobile Manufacturing Industry goes as a whole, Tesla has been able to

capture 4.5% of the increasing market share. Although 4.5% is far behind the market shares of the

automotive Big Three (GM, Ford, and Chrysler with 18.0%, 12.9% and 6.8% respectively), Tesla is

observing the market with a long-term outlook where market share could grow to 22% by 2030.

Tesla plans to achieve this market share increase by evolving the current hydrocarbon automotive

industry into an EV (electric vehicle) controlled industry. Boundaries surrounding this market

evolution include investing in the appropriate battery technology and manufacturing, converting the

public view of electric cars, and establishing and investing into a marketing campaign.

US Automobile Manufacturing Industry Characteristics

Political Factors For political factors, the US Automotive Manufacturing Industry must be mindful of the taxes

and tariffs surrounding the industry’s products, such as gas guzzler taxes and tariffs on importing

and exporting the vehicles. These taxes can impede on sales if customers deem that purchasing a

luxury or foreign vehicle is not a priority. A benefit for the customers of environmentally-friendly

vehicles can include government incentives that can diminish the overall price of the vehicle.

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Economic Factors The US Automobile Manufacturing Industry contains a consistently growing market with an

annual growth rate between 2010 and 2015 of 5.4%. This growth rate currently attributes to

projected revenues of $107 billion for 2015. Economic Conditions that the US Automotive

Manufacturing Industry must remain wary of are volatile oil prices and the discretionary income of

the customers within the industry. Crude oil, the input for refinement into gasoline, has been a

volatile commodity in the past and is currently dropping to all-time lows. Figure 1 shows the

historical prices of crude oil, prices which create an inverse relationship between gasoline-

combustion vehicles and the EV segment. An inverse relationship also exists between low-end car

purchases and luxury car purchases when evaluating discretionary incomes.

Sociocultural Factors The sociocultural aspect within the US Automotive Manufacturing Industry may be the most

important factor when analyzing the industry’s general environment. Social movements, such as

the SUV boom in the early 2000’s to the current “green movement”, create specific markets which

manufacturers must recognize ahead of time. The current green movement is not only recognized

socially, but is influenced by governments around the world with incentives to purchase more fuel

efficient vehicles and to consume less fuel by ride sharing and carpooling.

Technological Factors Technological innovations influence the US Automotive Manufacturing Industry immensely

due to the market demanding high tech inputs in a majority of the vehicles the industry produces.

These innovations and designs include options such as navigation systems, auto start features,

proximity key FOB alerts, and lane departure warnings. Many of these technological additions

create a benefit to customers in the form of ease of use, but many provide functional safety

features to improve overall vehicle safety and reduce car-related injuries.

Environmental Factors Environmental factors are prevalent in every day operations across the US Automotive

Manufacturing Industry and can affect companies in a negative manner. Many raw materials and

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inputs to the automotive industry come from overseas and can be disrupted with inclement

weather, such as hurricanes and tsunamis. Snow fall in the US can also affect the industry by

eliminating shipping and delivery lanes for car manufacturers, both from their suppliers and to their

respective dealerships.

Legal and Regulatory Factors Legal and Regulatory mandates must be observed and monitored at all times within the US

Automotive Manufacturing Industry. Due to evolving safety regulations, such as air bag

deployments, seatbelt implementations, and frontal collision minimums, companies must recognize

and implement standards within their own products and relay that information forward to the

company’s customers. Other regulations include emission standards across each state in which

manufacturers must be within certain carbon levels for road acceptance.

US Automotive Manufacturing Industry’s Driving Forces As the aforementioned factors affect the US Automotive Manufacturing Industry heavily, the

main drivers, or assertive forces, are much more unique and direct when forecasting the industry’s

future. The first driver is new internet capabilities and innovations within and around the vehicles in

the industry. Applications such as GPS mapping of roads for auto-steering capabilities and

internet (Wi-Fi) accessibility within the vehicle. The current marketing driver within the US

Automotive Manufacturing Industry is the use of social media platforms, such as Facebook and

Twitter, to promote products and connect with customers. These social media platforms are not

only a great way to promote products to customers, but also allow for customer feedback and

problem/issue management. Another driver within the industry is the change in the long-term

growth rate, which stands at 5.4%. This would normally attract new entrants to the industry but

due to the large capital expenditure barrier, current firms remain safe. Although it does not change

the number of competitors, the annual growth rate of the industry does change the competitive

climate among the current competitors since they all must continuously innovate their products to

retain a percentage of the growth.

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US Automotive Manufacturing Industry’s Five Forces With the use of Porter’s Five Forces model, the industry’s competitive forces can be further

divulged to show the immediate competitive environment within the US Automotive Manufacturing

Industry. The immediate competitive environment will reflect the industry impacts of the future and

how firms can attain or abstain from these impacts.

Power of Rivalry Rivalry, within the US Automotive Manufacturing Industry, is very high since there is so

much diversification among products and so many companies within the industry. Although GM

leads the market share with 18%, the corporation consists of subsidiary companies (Chevrolet,

Buick, GMC, and Cadillac) that all compete against one another in the same industry. The US

Automotive Manufacturing Industry is also projected $107 billion in revenues which makes this a

very favorable market for competitors; even a mere 1% of this market would prove profitable.

Power of Buyer Power of the buyers within the US Automotive Manufacturing Industry is low to medium

when observing individual consumers. This power is lowered due to the consumer’s low volume of

purchases along with the products within the industry being fairly differentiated. This buying power

is increased due to the consumers being well informed about the quality and prices of the vehicles,

as well as the cost of switching to a competing product being relatively low.

Power of Supplier Depending on the level of customization and quality of the vehicles in the industry, the

power of the suppliers can range from medium to high. With higher quality inputs being demanded

across the luxury segment, suppliers are able to charge a premium for items such as unique

woods and leathers. Also, products that are used across every vehicle class, such as plastics for

dashboards, can fluctuate on pricing due to their demand.

Power of New Entrants With a higher industry growth rate of 5.4% annually, the US Automotive Manufacturing

Industry could be seen as a ripe market to enter. Unfortunately, the barriers for this industry, such

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as the capital requirements, are too high for smaller manufacturers to enter. The strong brand

preferences among consumers is also a deterrent to enter this automotive manufacturing industry.

Power of Substitutes The power of substitutes varies within different geographical locations across the US. In

larger cities with successfully implemented public transit, such as the subway in New York, the

power of these substitutes would be much higher than in a rural town where vehicles and

transportation is placed on the individuals. Other substitutes to the US Automotive Manufacturing

Industry would include bicycle companies, buses within city transit, carpooling, as well as video

conference hosting companies.

Identifying the competitive environment allows companies within the US Automotive

Manufacturing Industry to assess the future of the market and the future impacts that will occur.

These impacts can be summarized as maintaining the current industry standard in technology

within vehicles and maintaining market share within a highly competitive market segment.

Key Success Factors of the US Automotive Manufacturing

Industry The Key Success Factors throughout the US Automotive Manufacturing Industry include a

mix of factors ranging from quality of the product inputs to simple marketing strategies by

competitors. Consumers also see a company as successful when the companies’ products

perform to their stated standards. An added benefit is attainable if these same company products

can outperform their stated standards. Another highly important factor is where the vehicles in the

US Automotive Manufacturing Industry are priced at among their competition. Relative pricing to

the quality of product being offered is important when increasing market share and retaining

customer satisfaction.

US Automotive Manufacturing Industry Group Map Using the inputs of price and geographic market scope, industry “players” can plot their

companies against other competitors within the US Automotive Manufacturing Industry. General

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Motors, the company with the largest market share in 2015, presents a medium price relative to

their quality but narrows their scope mainly to North America and Europe. Toyota differs from

General Motor’s approach as they offer a more low-end, basic vehicle lineup but with a broad

geographic scope over many countries and continents. General Motor’s strategy is a broad

differentiation strategy in which they aim to provide the products that their customers are trending

to and currently prefer. Toyota implements a focus low cost strategy in which they use cheaper,

more affordable inputs on the interiors of their vehicles, but still offer up superior reliability. 1

Industry Attractiveness The US Automotive Manufacturing Industry can and cannot appear attractive on both sides

of the spectrum; this spectrum being whether you are an existing company within the market or a

new entrant. For existing manufacturers, it is very attractive to be in this market for benefits such

as the amount of revenue available in the market and the low threat from new entrants. The

drawback for the existing companies is that rivalry power is very high and requires a lot of product

differentiation to succeed. For new entrants, the US Automotive Manufacturing Industry would not

be attractive due to the large barrier of entry (capital expenditures) and the level of competition and

rivalry that already exists within the industry.

Tesla Financial analysis

Profitability Within Tesla’s Income statement, shareholders and investors have the ability to assess the

profitability firm; rather, the unprofitability of the firm. Profitability ratios include Tesla’s operating

margin (ROS), Return on Assets, and the Return on Equity.

Operating Margin During 2014, Tesla recorded an operating margin (Net Income before interest and

taxes/Net Sales) of -8.90%. This negative percentage was due to the company’s continuance of

net losses from company operations. Compared to the US Automotive Manufacturing Industry

1 Automotive Industry Strategic Group Map can be found in Figure 2.

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average (8.00%) and Tesla’s competitors, such as GM (8.50%) and Toyota the highest (13.8%),

Tesla falls short and will continue its loss if operating expenses and cost of goods sold are not

controlled and diminished. 2

Return on Assets Return on Assets (ROA) and also termed as Return on Investment is poised to

illustrate to investors how profitable the company is behaving in relation to its total assets. Tesla’s

ROA (ROS x Asset Turnover) for 2014 is -5.03%. This is increased from the -9.19% profit margin

due to the company’s low asset turnover (0.55). Low asset turnover is a large factor in Tesla’s

financials due to long lead times on vehicle manufacturing and the supply chain hindrances within

the lithium ion battery market.

Return on Equity Return on Equity (ROE) measures how profitable Tesla is behaving with relation to

the money investors have pumped into the company. Return on Equity (ROA x leverage) is the

most dismal profitability ratio for Tesla, coming in at -32.25 %. When compared to the US

Automotive Manufacturing Industry average (17%), Tesla once again falls short. The large

negative percentage is enhanced exponentially due to Tesla being a highly leveraged company

(6.42), with the average leverage for the US Automotive Manufacturing Industry being 2.5.

Earnings per Share Since Tesla does not currently pay any dividends, the firm’s EPS calculation comes

out to be net income divided by the average number of shares outstanding. The diluted calculation

of this ratio extends the calculation by removing preferred stock. Tesla’s EPS for 2014 was -1.85

with a compounded annual growth rate of -6.13%. This ratio is poor in terms of profitability for

shareholders.

2 Automotive Industry EBITDA and Operating Margins can be found in Figure 5.

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Liquidity

Current Ratio The current ratio, also known as the working capital ratio, allows Tesla to gauge the

firm’s ability to pay current liabilities with current assets in a given year. Tesla’s current ratio

(Current Assets/Current Liabilities) for 2014 is 1.52. This coverage of one and half times the

liabilities for Tesla is acceptable but is still below the US Automotive Manufacturing Industry

average of 2.28 times for 2014.

Quick Ratio Compared to the current ratio, the quick ratio is a better representation of liquidity

since it removes the inventories (non-liquid assets) from the current asset category. The current

ratio for Tesla is 1.07. With the removal of nearly $955,000 worth of inventory, Tesla’s current

assets are diminished to provide a more accurate perception of their liability coverings within the

company. Comparative to the industry, Tesla actually beats the average (0.63) due to the

company not holding high amounts of car inventories on dealer lots and showrooms.

Cash Ratio The cash ratio is very similar to the quick ratio aforementioned but it further removes

accounts receivable and other prepaid expenses within the firm. Tesla, for 2014, has a cash ratio

of 90.44%. This ratio is abnormally high and raises a question to investors as to why this cash is

not being utilized elsewhere in the firm to generate higher returns for the company.

Times Interest Earned The final liquidity ratio within Tesla is the Times Interest Earned (Tie) ratio and it

allows for a firm to observe how many times it can cover its interest expenses within a given year.

Tesla’s TIE ratio comes in at a -1.85 times. This negative value is representative of Tesla’s loss (-

$186,689) from operations, thus illustrating that the company cannot generate a net profit, let alone

cover its own interest payments.

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Growth Analysis (2010-2014) For Tesla, the growth analysis and compounded growth rates, between the years of 2010-

2014, are the firms most demanding and impressive numbers. The growth analysis of Tesla

includes growth rates from the firm’s assets, sales, income, equity, and earnings per share.

Asset, Sales, and Equity Growth Assets within Tesla, including cash, accounts receivable, inventories, property,

plant, and equipment, have grown at a compounded annual growth rate of 97.29% per year. This

extraordinary growth was fueled by plant expansions (Gigafactory) as well as higher production

levels on multiple vehicle platforms which increased overall inventories. For the Sales and Equity

growth, Tesla grew at 128.78% and 44.86% respectively. Both of these large growth rates can be

attributed to overall company expansion and market emergence. These high growth rates are the

major explanation for tesla’s continued support from investors and a steep-climbing stock price.

Income Growth The compounded annual growth rate for income is an abnormality, when calculated,

due to both inputs being negative. In 2010, Tesla had a net loss of $-154,328 and a larger net loss

in 2014 with $-294,040. These two inputs create an annual rate of a positive 17.49%. Although

the growth is a positive percentage, the incomes are growing in the wrong direction, negatively.

Once again, Tesla will continue this downward slope within operating margin if operating expenses

and cost of goods sold are not controlled and diminished.

Tesla’s Leverage Included within Tesla’s ROE calculation and company analysis, ratios such as debt-

to-equity and the debt ratio are important in measuring the firm’s overall risk and leverage position

within the market. 3

3 Automotive Industry debt averages can be found in Figure 6.

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Debt-to-Equity and Debt Ratio The Debt-to-Equity ratio (D/E), a formula which is total liabilities divided by equity, is

a tool used to gauge how much debt is being used to finance asset purchases as opposed to

funding them with shareholder’s equity. Tesla’s D/E ratio is 5.35 times within the company itself, or

5.35 debt purchase dollars to 1 purchase dollar of equity. The debt ratio, or consumer’s leverage,

for Tesla is 83.42% and can be compared against the D/E ratio. The debt ratio is characterized by

calculating how much of the company is financed by debt. With 5.35 times more debt being used

to finance rather than equity, there is no doubt that the debt ratio of 83.42% is accurate.

Financial Assessment Within Tesla’s financials, the major areas of concern are the continued losses due to high

operating expenses and cost of goods sold and the low liquidity ratios across the company when

compared to the industry. Areas for praise and continued exploitation include the exponentially

high growth rates within assets, sales, and equity. 4

Tesla’s Value Chain Assessment As Tesla continues to operate in the US Automotive Manufacturing Industry, company

resources and competencies that need to be exploited and improved become aware. The addition

of Elon Musk to Tesla must be seen as a sustainable competitive advantage, due to Musk’s

accelerated vision of the world’s transition to a solar electric economy and his engineering

background. Musk not only creates an intangible visionary gap between other companies, but

provides a marketing icon for the company to base future sales off of. A competency that is more

of a competitive parity within the industry but highly valuable to Tesla is the company’s geographic

positioning of its headquarters in the tech-heavy Silicon Valley. Silicon Valley allows for Tesla to

“access some of the most innovative companies and skilled talents [in the world]” (Lawlor, 2016)

and to recruit excellently trained and highly ambitious workers. As far as the company’s products

go, the superior vehicle performance that Tesla presents to its customers is a temporary

4 Tesla Motor’s Financials sheet can be found in Figure 7

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competitive advantage. With aspects pertaining to handling, acceleration, interior detail, and

overall design, Tesla has a product that could remain a competitive advantage for as long as they

continue to innovate their product to the consumer’s preferences. A competency for which Tesla

has a competitive disadvantage is their minimalized marketing campaign throughout the US

Automotive Manufacturing Industry. This lack of marketing is apparent in their ad space

throughout social media, telecommunications, and tangible billboards. A major reason, for this

diminished marketing, is that Tesla relies on the superior reviews from customers and magazines

to promote the company through word of mouth and praise. 5

SWOT Analysis Strengths – The competitive assets that Tesla has configured to work in favor for the

company are its strong technological innovations, appealing design techniques, strong upper

management and division of engineers, and a backwards integration of batteries along the

company’s supply chain.

Weaknesses – A few competitive deficiencies within Tesla Motors is that the company

has a high costs of goods sold to consumers, as well as high capital expenditures for the

supercharging network; an asset that returns no profits to the company as of yet.

Opportunities – The major opportunity for Tesla moving forward is their movement into

the price sensitive, middle-income segment. With the Model 3 being offered at a starting price of

$35,000, Tesla will have a large advantage attaining a larger market share within the US

Automotive Manufacturing Industry.

Threats – The current threat to Tesla is the looming gas price diminishment and volatile

oil market that the US is currently experiencing. This oil threat hinders the “green movement” from

5 Tesla’s value chain assessment can be found in Figure 4.

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being an immediate requirement for consumers and also changes their customer preferences

(lower gas prices leads to larger vehicles in the US).

Competitive Strength Assessment Within the CSA (Competitive Strength Assessment), Tesla Motors is benchmarked against

key competitors within the US Automotive Manufacturing Industry. The competitors being

benchmarked include General Motors, Ford, Toyota, and Fiat Chrysler Automobiles. The strength

measures being benchmarked between Tesla and its competitors are the Key Success Factors

(KSF) mentioned previously.

When assessing the first measure, quality/reputation/image, Tesla far exceeds (Score: 10)

the other competitors due to the current vehicle lineup being made up of high end inputs such as

carbon fiber dashboards and suede seats. The zero emissions from Tesla’s vehicles also

contributes to a favorable score within the image factor due to the “green movement” around the

world. The most heavily weighted measurement in the CSA, Product Performance, garners a 30%

weight and is a driving force behind customer preferences and customer satisfaction. Tesla once

again garners a max score against the other competitors due to the 3.8 second 0-60 mph time

from the Model S. Not only is acceleration attributed to this product performance category, but

ease of use, comfortability, crash safety, as well as lane departure, auto-driving assist, and the

instant power.

Continuing through the CSA, Tesla begins to slip away from market dominance in the

marketing and distribution category. Tesla is unable to distribute vehicles as quickly as General

Motors or Toyota due to supply chain inefficiencies and lack of dealerships with lots full of unsold

cars. The marketing strategy is also subpar to the competition due to its lack of advertising

through mediums such as social media, telecommunications, and physical billboards in susceptible

markets. Another struggling measurement for Tesla, compared to its competitors, is the relative

cost position for the company’s current products. The Model S and the Model X both soar above

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$100,000 USD when optioned slightly above the base model. With this price position, many of the

middle income customers of the US Automotive Industry are out of reach. With Tesla’s launch of

the Model 3, they will barrage into this middle income segment and increase the company’s low

cost position to that of its competitors. 6

Tesla’s Mission Tesla’s present mission is ““to accelerate the world’s transition to sustainable transportation

[by] bringing compelling mass market electric cars to market as soon as possible” (Lawlor, 2016).

This current mission does fit and mesh in with the current market forces of new internet capabilities

within vehicles and the continued growth of the automotive industry growth rate. The last driving

force of the market, the social media marketing driver, has not been met by this mission statement.

Although this mission does not encompass the marketing driver, the “compelling electric cars” are

intended to speak for themselves and draw customers to the company and product through word

of mouth and internet “buzz”. Changes to this present mission should include defining “as soon as

possible”; the time horizon in which the company plans to have a widespread market share on its

sustainable transportation around the globe. Identifying this ambiguity will not only streamline

efficiency for the firm, but solidify shareholders in their investments.

Tesla’s Current Strategy Tesla’s present generic, or business, level strategy is a focus differentiated one with a

corporate level strategy revolving around a transnational design. This strategy encompasses

being completely different than the competition, which they are, but still setting the bar for EVs into

the future. This is a daunting task when following this mission of building a “sustainable

transportation” (Lawlor, 2016) model throughout the world. Tesla also uses this focus

differentiated strategy to implement their manufacturing of the Powerwall, a device used to store

energy within private households through the use of solar panels. The present strategy correlates

6 Tesla’s full Competitive Strength Assessment can be found in Figure 3.

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well with the current market forces, that of increasing internet capabilities within vehicles and

continuing the growth throughout the automotive industry. Tesla differentiates its vehicles to meet

the market forces by implementing features such as auto piloting, Car Summoning from within a

garage, and OTA (Over-The-Air) Software Updates. The previous downfall with the marketing

driving force is minimally covered by this focus differentiation strategy because the product surges

popularity through internet buzz and implies the “build it and they will come” concept.

Supporting strategies surrounding Tesla are to implement overall sustainable competitive

advantages within the EV market, the lithium ion battery production market, and the management

of supercharging stations around the world. Controlling the EV market will not only supply users to

the supercharging stations, but these same customers will be purchasing said EVs containing

batteries produced by the same company. This backwards integration design and strategies by

Tesla are currently producing promising signs for sustainable advantages now and into the future.

Tesla’s focus differentiation strategy also shows a long-position in the market and a belief that the

future of the US Automotive Manufacturing Industry is truly electric vehicles.

Current Strategic Issues Apart from the industry specific problems and issues, Tesla has firm specific issues that

must be addressed if the firm wishes to remain competitive within the US Automotive

Manufacturing Industry. The initial problem for Tesla is that the company has not been profitable in

back-to-back quarters since the company’s inception. These net losses are being caused by large

operating expenses throughout the company. These large operating expenses stem from high

R&D costs within their vehicle technology and information systems, as well as the large capital

expenditures connected to the Gigafactory in Nevada. Another strategic issue which is being

ignored by the company is the lack of marketing throughout the firm. Marketing is a massive tool

within the US Automotive Manufacturing Industry and has become a necessity if firms, such as GM

and Ford, want to remain successful within the industry. Further issues stemming from supply

chain activities highlight supplier reliability and quality for Tesla’s focus differentiated products.

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High-end materials, such as carbon fiber and suede upholstery, are used throughout Tesla’s

vehicles and are held to higher standards by Musk and the founders of the company. Along with

the high cost of materials for the firm, Tesla’s customers are also affected by high prices in relation

to the necessary equipment that the firm’s products require, such as wall adapters for the cars and

home charging conversion kits.

New Strategic Changes Within Tesla’s strategic concerns, there are major and minor changes amidst the firm that

would increase its profitability and increase market share.

The first recommendation begins with preventing further profit losses from supply chain

inefficiencies. Tesla must identify quality suppliers of goods and raw materials, such as carbon

fiber and the suede upholstery, and assist them in retooling their own production for both firms to

succeed. If this is not attainable by either company, Tesla then has the ability to vertically integrate

with a merger or acquisition. This acquisition would have to be positively correlated with Tesla’s

current company culture to fit in correctly. This strategic change will decrease supply chain lead

time and ultimately, decrease operating costs overall.

The next strategic change Tesla should implement is a move towards a stronger marketing

campaign. This first way this campaign can be executed is to increase attendance at auto shows

and car meets where customers can test drive the firm’s vehicles. This strategy not only increases

the word of mouth marketing system already in place, but allows more hands-on experiences for

interested parties. Another angle of attack for a marketing campaign is through the use of social

media platforms and suppliers. Partnering with Facebook to launch a “green initiative” campaign

would promote both companies, their products, and the environment as a whole. The final

marketing implementation is to create a nostalgia-based television and print campaign, similar to

Coca Cola’s techniques, and would be the most “in your face” type of marketing. This strategy

involves a psychology route to delve into customer’s feelings and thoughts.

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As part of Tesla’s Master Plan, the financial situation of net losses has been completely

predictable and calculated. The issue at hand is that net income was supposed to become positive

at the start of commercialization within the electric car segment. The final situation has not

improved and this situation is where the final recommendation intervenes. Due to the massive

expansion phase coming to a close, Tesla must now cut back on R&D costs and begin to convert

these innovation ideas and products into profits. This recommendation goes in part with the above

stated marketing campaign: reduce R&D funds by transferring them into an international marketing

campaign and process reengineering.

Marketing Strategy Implementation

Although Tesla’s top management is appropriately lead by the key visionary, Elon Musk,

recruiting employees with strong intellectual capital and technical skills for future projects will

continue to be a requirement for the company. With a move to more marketing-based strategy,

prospective sales employees would need to possess greater personality skills, as well as having a

background in a sales-based position. This added priority to skilled employees will increase overall

sales of vehicles, thus increasing Tesla’s revenues. With current sales employees, Tesla will

develop training programs internally to increase knowledge-based capabilities which will increase

performance in “strategy-critical value chain activities” (Thompson, p.291). All of the above

employee implementations require a matching organizational structure to operate efficiently and

successfully. By delegating a majority of the marketing authority to sales employees and

showroom managers, top management can focus on psychologically swaying customers into

showrooms through international marketing.

Tesla’s next step is to allocate the appropriate funds, from the correct sources, to the new

marketing strategy effort. To accomplish the strategy, a 10% decrease in R&D annually since the

early expansion of the company is phasing out. The current R&D expenditure for 2014 was

approximately $465 million and the equivalent advertising expenditures were $48.9 million (Tesla –

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2014 10-K). The 10% decrease/transfer of funds would double the marketing efforts of Tesla. By

transferring funds into the marketing strategy, new policies can be created to provide top-down

guidance on how sales employees should carry out actions when interacting with customers.

These policies would include being well-groomed in the work place, maintaining eye contact and

attentiveness, and promoting the company culture to potential clients.

For a quick, quantum improvement into the new marketing strategy, Tesla will implement a

one-time process reengineering system within their sales and management division to convey

improvement to total customer satisfaction. This reengineering will utilize the aforementioned

policies to streamline the work flow for employees. After the initial launch of the marketing

campaign, employees will use the new process reengineering practices to adopt TQM (Total

Quality Management) strategies in which to convey enthusiasm and commitment to the customers

and potential clientele. As a customer gets closer to accepting a purchase of a new product from

Tesla, sales employees will require mobile (tablet) software with which to present focused options,

such as paint colors, to the customer. This software provides a hands on benefit for the customer

and a view in real-time of what they can expect upon delivery of their vehicle. As a sale is

completed, employees must be provided with an incentive to continue providing superior service,

as defined in the new marketing policies. This incentive must not be able to be abused, but rather

be attainable by hard work and repeat success within an employee’s scope of responsibilities. A

tiered incentive system will be built with the following steps: monetary bonuses for twenty-five

exceptional compliments received from customers, along with increasing benefits such as Tesla

headquarters and production facility tours for superior customer service.

The allocation of resources to the higher-priority marketing fund and new employees

operating on proficient policies will produce a corporate culture, or “organizational DNA”

(Thompson p.343), that continues to propel the execution of the marketing strategy through the

years. Not only will this improved corporate culture be reflected on customers, but employee’s

satisfaction and commitment will be increased so that a continuous improving circle is created

Washburn 18

between the customer and the market. To begin these improvements, strong leadership must

believe in the value of the strategy being instilled and implement it without regrets. By creating an

esprit de corps, Tesla will continue to increase its market share, win emotional commitment of

employees, and improve overall satisfaction of current and potential customers.

Washburn 19

Appendix

Figure 1: Crude Oil Prices

Washburn 20

Figure 2: Strategic Group Map

Washburn 21

Figure 3: Competitive Strength Assessment

Key Success Factor Weight Tesla GM Toyota Ford FCA

Quality/Reputation/Image .20 10 7 9 7 6

Product Performance .30 10 7 8 7 7

Raw material access/cost .10 6 10 9 10 8

Manufacturing capability .10 7 9 10 10 7

Marketing/distribution .10 5 10 9 10 8

Relative cost position .20 4

8 10 8 7

Overall Strength Rating 1.0 7.6 8 9 8.1 7

Washburn 22

Figure 4: VRIO Chart

Competency or Resource Where on value chain

Valuable Rare Difficult to imitate or substitute

Org to Exploit

Type of Advantag

e

18650 Form-Factor Lithium Ion Cell Battery (Superior Mileage Battery on

the Market)

Product R&D, Technology

Y Y N Y TCA

Silicon Valley – Geographic Positioning Human Resource Management

Y N N Y CP

Volatile Crude Oil Market Supply Chain Management

N N N N CD

Elon Musk Operations, Sales and Marketing

Y Y Y Y SCA

Domestic and International Supercharging Network

Service, Technology, Systems Development

Y Y Y Y SCA

Superior Customer Service (Sell directly to customers. No dealers)

Marketing, Sales, Distribution

Y Y N Y TCA

Panasonic Partnership Supply Chain Management, Product

R&D

Y N N Y CP

Nevada Gigafactory (Increased Production and Supply Chain

Efficiency)

Supply Chain Management, Product

R&D, Technology

Y Y Y Y SCA

Company Diversification (Powerwall) Sales, Marketing, Operations

Y Y N Y TCA

Superior Vehicle Performance (Handling, Acceleration, Design, and

Detail)

Product R&D, Technology, Sales

Y Y N Y TCA

Minimalized Marketing Campaign Marketing, Sales, Operations

N N N N CD

OTA (Over-The-Air) Software Updates Service, Operations, Technology

Y Y Y Y SCA

Washburn 23

Figure 5: Automotive Industry Operating Margins

Washburn 24

Figure 6: Automotive Industry Debt

Washburn 25

Figure 7: Tesla Financials

STRATEGIC PROFIT MODEL RATIOS WORKSHEET

CURRENT DATA DUPONT FORMULA

YEAR 2014 -294040 3198356 -294040 5849251 -294040

NET PROFITS (294,040)$ 3198356 5849251 5849251 911710 911710

NET SALES 3,198,356$

TOTAL ASSETS 5,849,251$ NET PROFIT NET SALES NET PROFITS TOTAL ASSETS NET INCOME

NET WORTH 911,710$ NET SALES TOTAL ASSETS TOTAL ASSETS NET WORTH NET WORTH

* In thousands

-9.19% x 0.55 = -5.03% x 6.42 = -32.25%

LIQUIDITY ANALYSIS COMPOUND ANNUAL GROWTH RATES

CURRENT RATIO Period ( 2010 - 2014 )

CURRENT ASSETS 3198657 = 1.518 ASSETS 5849251 => 97.29%

CURRENT LIABILITIES 2107166 386082

QUICK RATIO 953675 SALES 3198356 => 128.78%

C/A - INVENTORIES* 2244982 = 1.065 116744

CURRENT LIABILITIES 2107166

CASH RATIO INCOME -294040 => 17.49%

CASH 1905713 = 90.44% -154328

CURRENT LIABILITIES 2107166

TIE EQUITY 911710 => 44.86%

EBIT -186689 = -1.85 207048

INTEREST 100886

EPS -2.36 => -6.13%

ROS = -284636 -8.90% -3.04

3,198,356$

Debt/Equity Ratio 4879345 5.35 Debt Ratio 4879345 83.42%

911,710$ 5,849,251$

Washburn 26

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