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Allison Saffiotti

MGMT 340: Business Strategy


Case Analysis II

History Development & Growth


The idea behind Tesla Motors originated in 2003, when engineer Martin Eberhard was
seeking an eco-friendly sports car, but found a market for this had yet to exist. Therefore,
he decided to build one himself. Eberhard collaborated with the founder of AC
Propulsion, engineer Al Cocconi, who had produced a car called the tzero. The two
worked together to create a car that could accelerate to 60 mph in 3.1 seconds and could
travel more than 300 miles, by utilizing a new technology, lighter lithium batteries for
charging. From this, Eberhard licensed the electric-drive train technology from AC
propulsion and founded Tesla Motors.
In 2004, Elon Musk, founder of PayPal, provided a major source of capital to Tesla
Motors by investing $6.3 million into the company. A partnership then formed between
Musk and Eberhard, where Musk was appointed to chairman of the company and
Eberhard served as CEO. The first prototype, called the Roadster, was in production. The
prototype was unique to the market, as it was as fast as a Porsche 911 Turbo, yet would
not create a single emission and would get 220 miles between charges. However, due to
clashes between Ebehnhard and Musk, delays and runaway costs occurred.
It was not until 2007, when Musk had invested $55 million of his own money in addition
to raising funds from others, and removed Ebenhard as CEO, that the company started to
take off. Michael Marks, the former CEO of Flextronics, replaced Ebenhard. As CEO, his
main priorities were to cut costs, and get the Roadster out on the market. But due to a
missed deadline, it was not until July of 2008 that the first seven roadsters, called the
Founders Series, were released.
The response to the Roadster was overwhelmingly positive, as the cars boasted a list of
celebrities with reservations to purchase the car. A niche market was being fulfilled of
customers in a privileged position, who were price insensitive seeking a stylish, ecofriendly car. Due to the success of the Roadster release, Musk wanted to expand the
company into the mass-market. By introducing a less expensive car, Musk hoped to
attract a higher volume of sales. He also sought to fulfill the need of the everyday
consumer, by creating an all-electric vehicle that was more cost efficient and practical.
With this idea in mind, in 2008 Tesla Motors announced the Model S. This was a highperformance all-electric sedan that would sell from $57,400 to $77,400. It would compete
with cars like the BMW 5-Series. By May of 2012, Tesla reported 10,000 reservations for
this car, with the goal of selling 20,000 per year. Though the cost of development for this
car was $500 million, a $465 million loan from the U.S. Government helped to offset
this. Additionally, Tesla Motors was engaging in side projects, creating battery packs and
chargers for other car companies to supplement income.

Though it appeared the company was in a strong position within the mass market, with
plans to continue expansion with a sports utility vehicle in 2013, there were doubts raised
about their ability to compete on a broader scale. Through an analysis of both the
company itself, and the electric vehicle industry, it will be determined if this transition
was attainable for Tesla Motors.
Internal Strengths
A key strength for Tesla Motors was the manufacturing function. Unlike competitors
within the automotive industry, Tesla used multiple eight-to-ten foot tall robots that
performed up to four tasks at once. Tasks included welding, riveting, bonding and
installing a component. The robots were able to produce 83 cars per day. This function
could also be considered a distinctive competency for the company, as this type of
advanced production and company infrastructure was unique to Tesla Motors.
Another key strength of Tesla Motors was within the research and development function.
Ebenhard, the original engineer behind this company, used innovative technology to
create a car that could sustain substantial mileage, relying solely on electric charging.
When Tesla Motors underwent new management, they continued to evolve the product to
appeal to a mass-market of consumers. This process required developing the same
product for a fraction of the cost.
The customer service function of Tesla Motors was unique to the automotive industry.
Shying away from a traditional dealership model, Tesla opened stores in upscale
shopping malls, with 35 locations in 2012 across the United States, Europe and Asia.
Their salespeople answered customer questions without using high-pressure sales tactics
often used within the automotive industry. Tesla also utilized their website for direct
selling. Since this method of selling was firm-specific, this also can be considered a
distinctive competency of the company.
Internal Weaknesses
The marketing function of Tesla Motors became a key weakness when they expanded to
appeal to the mass-market. The companys marketing department was lacking, with an
in-house team of only 7 employees in addition to an internal team that ran the company
website. In comparison to major sources of competition, Tesla Motors was spending
substantially less on what could be a key differentiator for the company. For instance,
Nissan spent $25 million in marketing for the Leaf in 2012. This vehicle in particular was
a major source of competition for the Model S. Due to this, in order to stay relevant
within the public, they needed to have contributed more funds to this department.

Resources and Capabilities


The major resources of Tesla Motors included the inventory of vehicles, firm-specific
technology, particularly a license with AC Propulsion to use lighter lithium batteries, and
company infrastructure. This included their factory and machinery used to produce cars.
Other resources included the company reputation from Musks previous successes, and
from the positive launch of the Founders Series. It is also important to note the capital
and connections of Musk as a key resource to the company, as it allowed them to build a
strong group of investors and stakeholders for the company. The loan provided by the
U.S. Government of $465 million was a final resource of the company, as it helped to
offset the costs of production for the Model S.
A major capability of Tesla Motors was the side work they engaged in to produce battery
packs for the Toyota RAV 4 and chargers for a subcompact Daimler AG electric vehicle.
By doing this, the firm supplemented income and recognized learning curve
inefficiencies in its technologies. Another capability of Tesla Motors was Musks
management of executive staff. The company reached heightened success once Musk
took control of the company and removed Ebenhard as CEO. Additionally, the unique
selling method used for Tesla Motors was a capability of the company. (See appendix A).



Competitive Advantage
The resources and capabilities mentioned above for Tesla Motors were primarily a
source of sustained competitive advantage. Following the VRIO framework, the
resources of Tesla were valuable as they helped to increase perceived customer value by
increasing product differentiation. The resources of Tesla all contributed to the
development of a product line of electric vehicles unique to the market.
In terms of rare resources, other companies within the electric car market owned similar
resources. However, some of the resources of Tesla such as the license with AC
Propulsion and equipment for production were unique to Tesla Motors.
The resources of Tesla Motors were inimitable for smaller companies who attempted to
enter the electric vehicle market but failed, as they often lacked excessive capital.
Established automakers within the industry already had access to or the capital to create
similar resources as Tesla.
Tesla was not organized in a manner to exploit resources to capture value. Due to the
delays experienced with the release of the Founders Series, management and control
systems should have been more clearly defined in order to fully capitalize on resources.

Industry Analysis
Tesla Motors competed within the electric vehicle market of the automotive industry.
This segment of the industry was headed towards the growth stage of the industry life
style, but due to buyer unfamiliarity and relatively high production costs, it still remained
within the embryonic stage. There was a competitive landscape within this segment,
primarily consisting of established car companies beginning to capitalize on the needs of
eco-friendly consumers. Many of the electric cars being developed were created due to
government laws, like Californias CARB standard, which mandated that a portion of
automakers fleets had to be emission free. The most prevalent sources of competition for
Tesla Motors came from these established car companies with excess funds to allocate to
the development of eco-friendly vehicles. These companies could withstand the losses
that were common within this segment of the industry.
Trends within the electric vehicle market occurred, particularly to combat buyer
hesitancy and to improve product design. Established automakers, such as Toyota, Nissan
and Chevrolet, were creating hybrid electric vehicles (HEV), which switched between
electric and gasoline miles. Consumers readily adopted these vehicles, as they required
no change in usage habits.
External Opportunities
The electric car industry was deeply motivated by government-enacted programs that
promoted automakers to expand their product line to incorporate more eco-friendly
vehicles. However, many established automakers were willing to produce all- electric
vehicles at a loss in order to sell more lucrative internal combustion models. This left a
more exclusive group of automakers that produced all-electric vehicles. Also, the HEV
vehicles mentioned above had extremely limited electric range as to not limit carbon
emissions as effectively as an all-electric vehicle. This created a need for all-electric
vehicles that was only being fulfilled by a few automakers. This lack of strong rivalry
amongst competitors was an advantage for a small, relatively new company like Tesla
Motors.
Additionally, there were many complements of the electric vehicle industry, particularly
charging stations. As the industry was still within the embryonic stage, these charging
stations still needed to be more strategically developed. This created a need still to be
fulfilled, which other companies potentially could capitalize on. By growing the electric
car industry, it could stimulate success for other related industries.
External Threats
However, as this was a relatively new industry for consumers, hesitancy to adapt this type
of vehicle was common. A key factor of this was the unidentified price of ownership.

Electric vehicles often were more expensive than internal combustion models. It was also
unclear to buyers the price of maintenance and repairs as well as the resale value as
opposed to owning a standard model. Though car companies, like Tesla Motors
attempted to clarify this to buyers, confusion still existed which limited buyers desire to
purchase an all-electric vehicle.
Range anxiety was also an important fear of consumers, where people were concerned
about driving to places where charging was unavailable. This was often due to the long
charge times associated with vehicles, such as the Nissan Leaf, which took up to four
hours to recharge. Other product lines, such as Tesla Motors, used stations for recharging
but these had few locations. In order to make charging more feasible to consumers,
automakers needed to expand these stations to places more relative to users.
Producers of hybrid electric vehicles were a threat to automakers of all-electric vehicles,
as consumers more readily accepted these types of cars. There was less of an unknown
when purchasing these vehicles, as the ownership habits of consumers did not have to
change. Buyers could better understand the value they received for the type of car they
were purchasing. Sales of HEV cars were indicative of this, such as the Chevrolet Volt.
This vehicle was a plug-in hybrid that could travel 40 all-electric miles per charge, plus
an additional 340 miles on gasoline. This vehicle retailed for $35,000 and sold over
20,000 units in the United States.
Porters 5 Forces
Barriers of entry for new firms existed primarily because of high costs associated with the
electric vehicle market. More established automakers were a more prevalent source of
competition as they had a large amount of capital and industry expertise. Also, many had
established brand loyalty with consumers due to their prevalence within the automotive
industry. Economies of scale had yet to play an important role, as automakers were still
producing all-electric vehicles on a smaller scale.
The intensity of rivalry was less of an important factor, as this was still a relatively new
segment of the industry for most automakers. Therefore, with a growing demand,
companies were able to sell more without taking market share away from other
companies.
Buyers within the all-electric automotive industry were dealerships that had low
bargaining power. The price to purchase inventory for their stores was set by the
automaker and was non-negotiable. The dealerships did not have much choice of who to
buy from, so they were set with industry standards of prices.

Suppliers had low bargaining power as well as they relied heavily on automakers to
purchase their product. This was largely because the product they were producing was
not highly specialized, so many of these car companies had the capital to create these
parts themselves if need be.
A prevalent substitute for the electric vehicle market was the traditional internal
combustion models, which was a significant competitive threat. Other substitutes
included the motorcycle, motorbike, and bicycle. However, there was no downwardspricing pressure from these substitutes as they were less of a source of competition.
Complementors existed within the all-electric vehicle industry, and were a determinant of
demand. A major complement within this industry was charging stations. If charging
stations were to become more prevalent, this could simulate demand for all-electric
vehicles.
Implications of Industry Analysis
Based on the above analysis of the all-electric segment of the automotive industry, in
order for Tesla Motors to succeed they needed to be aware of the following
market conditions. A key opportunity and threat to this industry was the potential growth
of complement products. For Tesla Motors, this meant the development of charging
stations in widespread geographical areas. In the beginning of 2013, only six Tesla
Supercharging Stations were open in the world. Though they cost $250,000 to install and
required close proximity to a heavy-duty electricity transformer, they were necessary if
all-electric cars were to become accepted within the mass-market.
Potential buyers were also very hesitant about the pricing of all-electric vehicles.
Although Tesla attempted to address this with messages like charging is free and
promising price protection guarantees, there was still much skepticism. This was in part
due to the vast amount of benefits Tesla promised with the Model S. Potential buyers
needed greater reassurance about purchasing an all-electric vehicle as this was still
relatively new to the market.
In order to provide this reassurance, and capitalize within the mass-market to eco-friendly
consumers, Tesla could explore HEV vehicles as mentioned previously. As these vehicles
used both electricity and gasoline, they eased the transition of a changing car model.
Many automakers that were creating this type of vehicle were capitalizing from it.

Business-Level Strategy
In order to gain competitive advantage, Tesla Motors followed a differentiation strategy
where they distinguished themselves from rivals through various factors. This included
superior function and features, as the Model S had a much higher range of miles per
charge than competitors. While the Model S could travel 300 miles between charges, the
Nissan Leaf, a competitors all-electric vehicle, could only travel 90 to 100 miles. This
meant Tesla offered innovative technology other firms had yet to capitalize on. In
addition, Tesla provided superior and unique point of sales service to potential buyers.
Using less-traditional selling methods, they sought a new way to sell a car of superior
quality to consumers. The cost structure of Tesla Motors was reflective of a
differentiation strategy, as their product was more expensive than that of competitors.
While the cost of the Model S ranged from $57,400 to $77,400 competitors such as the
Nissan Leaf and Chevrolet Volt sold for $35,000.
In terms of the market segmentation strategy for Tesla Motors, a focus strategy was
followed where only one segment of the market was being served. Unlike established car
companies, which served many segments by producing different offerings for these
different segments, Tesla sold exclusively all-electric vehicles. They sought to
exclusively fulfill the need of eco-friendly, wealthy consumers. In terms of a generic
business-level strategy, Tesla followed a focus differentiation strategy where they
targeted a specific segment and customized its offering to fit those needs. By building a
product line of a high-performance sedan and later a sports utility vehicle, Tesla remained
focused on the creation of all-electric vehicles, but differentiated the product provided to
appeal to a greater quantity of consumers.
In regards to building competitive advantage, by focusing on a niche market and
customizing product offering to that segment, Tesla Motors had the ability to out sell
established car companies that sold to a broader market. Since Tesla Motors focused on
the improvement of innovation and quality, to be superior to that of rivals, they attained
competitive advantage within the industry.
Market Demand
Since the all-electric segment of the automotive industry remained within the embryonic
stage of the industry life cycle, Tesla Motors needed to have aligned strategies with the
specific market demands of this stage. Typically, companies within the embryonic stage
face slow growth in market demand. For Tesla Motors this was attributed from customer
unfamiliarity with the new product, a lack of complementary products to increase value
and high production costs due to small volumes of production. Though this segment of
the industry was apart of the mass market, technological advances still needed to occur
for these vehicles to become better accepted by consumers.

Additionally, in order to forecast market demand Tesla Motors needed to have looked at
the customer groups who had entered this segment of the market. For all-electric vehicles
this consisted of innovators and early adopters. Those who were purchasing these
vehicles sought to either experiment with the product based on new technology or were
able to grasp the importance of this new technology and found it outweighed any
heightened costs. Because these two groups had already entered the market, it was
indicative of the beginning of a major growth phase. The next group to enter, the early
majority, would form the leading wave of the mass market.
However, it is important to note the difficulty of an industry to develop from the
embryonic to the growth stage, as the needs of innovators and early adopters are
extremely different from the early majority. Since innovators and early adopters are
technologically advanced, they do not mind the limitations that accompany early models
of a product. However, the early majority values ease of use and reliability. For
companies like Tesla, this meant enhancing product development to ensure quality before
producing for the mass market. Also, as all-electric vehicles were still relatively new, it
required new marketing and sales strategies to reach and appeal to early majority
consumers. Tesla motors was not investing in this as sufficiently as rival companies were.
Finally, to serve the mass market a lower cost structure needed to be in place to serve
large-scale production. Tesla Motors was unequipped to begin serving a rapidly growing
mass-market.
Technological Environment
In terms of the technological environment of the all-electric vehicle market, a technical
standard had yet to be established. This meant there had yet to be a set of technical
specifications that automakers needed to adhere to when producing this type of vehicle.
The different mile ranges and ways to charge various all-electric vehicles was indicative
of this. By setting this standard, automakers would benefit from increased sales.
Typically, when setting a technical standard a result is reduced consumer confusion,
reduced production costs, and the development of complements, all qualities automakers
wanted. Because there had yet to be a set technical standard, a format war was occurring,
where companies were fighting to establish a dominant standard for all-electric vehicles.
In order to combat this, a realistic strategic approach for Tesla Motors would have been
to license the format to competitors. The technology the company was using, lighter
lithium batteries, was far more advanced than other automakers. But due to the lack of
necessary complements this was not a strong enough source of competitive advantage.
By licensing this technology, Tesla would financially gain from the licensing fee and

enlarged supply of the product would simulate demand to therefore help accelerate
market adoption.
Geographic Location
As Tesla Motors had increased demand overseas, approximated 10,000 vehicles sold in
Europe and 5,000 in Asia in 2012, the company needed to strategize effectively to target
a new global market. When entering these markets, they needed to have recognized
differences in infrastructure, consumer preferences, and distribution channels. Host
government demands might also need to have been addressed. Following a global
strategy, Tesla Motors should have used a localization strategy, with increased
profitability by customizing the product to the tastes in different national markets. As this
company was based off superior innovation and quality, it would be logical to continue
this high standard overseas.
In terms of the choice of entry mode to sell on a global scale, Tesla Motors should have
engaged in a joint venture. This partnership would provide cultural knowledge and
understanding, as well as access to new technologies and management skills. As Tesla
was still a relatively new company within the automotive industry, this would also help
lower the costs and risks of developing the company overseas.
Analysis of Decision
Through the analysis of Tesla Motors and the all-electric industry, Tesla Motors was
unprepared to enter the mass-market. Though in 2013 they had announced their first
quarterly profit, actions needed to have been taken to strategize for entering a major
growth phase.
When shifting towards selling to the early majority, new marketing and sales tactics
needed to have been explored to appeal to a larger consumer base. For Tesla, this meant
either hiring a larger internal marketing department or outsourcing this function. There
also was an issue of a non-existent technical standard within the all-electric market. If
this were to have been established, complements for the industry would have been
developed resulting in less buyer hesitancy. Charging stations in particular needed to
have been standardized throughout the all-electric industry so that this product would
become a feasible vehicle for consumers. Another way to face buyer hesitancy was for
Tesla Motors to develop an HEV vehicle for their product line. This would have been a
way for the company to continue profiting, while complements of the all-electric vehicle
were being developed.

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The idea behind Tesla Motors, an all-electric automaker, had the ability to reach success
in the coming years. However, within the immediate future other factors needed to have
been addressed before the company headed towards selling to the mass-market.





































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Appendix A: Resources & Capabilities Table


Resources of Tesla Motors
Capabilities of Tesla Motors
Inventory (Roadster, Model S,
Side work for Toyota and Daimler
Model X)
AG
Technology (License from AC
Management of executive staff
Propulsion)
(firing Ebenhard)
Equipment (Machinery for
Unique customer service method
production)
Company reputation
Capital and connections of Musk
Loan provided by U.S.
Government

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