Tesla and Its CyberTruck Production

Tesla Business Strategy Analysis

Generic Business Strategies

Tesla’s generic business strategy is broad differentiation, with a view toward integration of the various components of its business canvas. Its key businesses are automotive and energy generation and storage. It has key resources in terms of intellectual property (IP), engineering teams, and battery/solar production plants.

Cost

Tesla’s cost structure consists of the following: “equipment 20%, body 12%, chassis 7%, drive 15%, battery 35% and other 11%” (Li et al., 2021).

Differentiation

Tesla has multiple brands that service multiple customer needs and price points. It began with a very expensive, ultra-niche Roadster, before broadening production with the Model S—but this still too expensive for the average consumer. It then went into the electric SUV market with the Model X, later displaced by the Model Y. The Model 3 was developed to be a low-cost EV for the average person. Tesla has also offered solar panels and solar cells to customers looking for more green energy solutions to their lifestyle demands.

Focus

Tesla has focused on creating a green energy identity linked to an innovative approach to production. It has relied on government subsidies around the world to promote sales and reduce costs, but it has also helped to spark the EV revolution in the automotive industry. More than that, Tesla has helped to steer the world’s leaders toward adopting a more green energy infrastructure—at least that is the goal. How it will actually come about given the degree to which rare earth minerals and resources are in demand to make it all happen is another story. Currently, Tesla is relying on its brand and its success as the first-to-market EV manufacturer of the 21st century.

Business Strategy in Its Marketplace Approach

Tesla’s business strategy in its marketplace approach has been to apply focused differentiation to achieve profitability. Tesla entered the automotive industry with a view of bringing a new product to market—the electric luxury vehicle. However, to scale, Tesla had to make that product affordable, which it attempted to do with the Model 3, a cheaper, smaller version of the Model S. The Model 3 was meant to take Tesla out of a narrow market segment by being an Everyman car for the 21st century. To do this, the company has relied upon the social media influence of CEO Elon Musk, who has 71 million followers on Twitter, and is a celebrity-style CEO. Musk has been able to drum up demand for the Model 3 by promoting a green energy mission and a tech-driven aesthetic (Kozinets, 2019).

Business Model

Core Products

The core products of Tesla are the Model S, the Model Y, and the Model 3. It has introduced a CyberTruck to that line-up, expected to go into production soon. Tesla’s other core products include energy storage systems and solar panels through its acquisition of Solar City.

How the Organization Makes Money

With the Model S, Tesla was able to keep its margins high and ensure profitability in spite of selling few cars. But with the Model 3, Tesla’s margins are slimmer, and the company has had to rely on the sale of carbon credits to non-EV companies in order to ensure profitability from quarter to quarter (Kolodny, 2020). Tesla’s solar energy division is not very large, and shareholders have sued CEO Elon Musk for acquiring Solar City, which was deep in debt at the time of the acquisition and allegedly did not make sense from a shareholder perspective. Solar City was operated by Musk’s brother Kimbal, however, and it is alleged Musk used Tesla’s equity to take on the company’s debt to save his cousin and himself (a shareholder) from financial ruin (Kolodny, 2021).

Customer Value Proposition

Tesla’s customer value proposition is that it offers a green energy solution to automobile pollution while simultaneously providing high-performance with unique design features and curb appeal at a low cost to the consumer. The company, however, is notorious for its poor customer service, and Consumer Reports has not viewed the company’s cars as favorable in the light of safety concerns and less than stellar manufacturing quality. Still, Musk has done well in promoting a value proposition based on environmental ideals and tech-attractiveness. The key driver in Tesla’s value proposition is innovation: in EVs, in battery development and production, and in infrastructure.

Profit Proposition

Tesla achieved a profit for the first time annually in 2020, but it was only 721 million USD (Li et al., 2021). However, this profit was largely driven from a non-core product source: carbon credits. As Li et al. (2021) point out, “from the perspective of profit structure, it gained 1.58 billion US dollars from selling carbon emission credits, far exceeding its annual net profit, and its main business was still in a net loss” (p. 31). This is not a solid profit proposition, and Tesla needs to work on reducing costs. Li et al. (2021) argue that this can be done: “Tesla can effectively promote cost reduction, quality improvement, and efficiency increase of the whole industrial chain” as Tesla produces all essential parts of its products in-house: battery modules, solar panels, and power devices. Essentially, Tesla must realize “the interconnection, digitalization, and intelligent collaboration of the whole value chain, making production, operation, and asset management minimalist, intelligent, and efficient” (Li et al., 2021, p. 31).

Corporate Strategy

The corporate strategy of any company is to gain competitive advantage (Hitt et al., 2013). Up to this point, Tesla has focused on market penetration and differentiation to gain competitive advantage in the marketplace. It has opened production in China, and it has promised to produce electric semis and the CyberTruck as well as an autopiloted robo taxi fleet. Whether any of these promises will come true is uncertain, but it shows that Tesla is at least predicating its growth story on bold new ideas that will further shake up the sector.

By establishing a new production facility in China and starting one in Germany, Tesla is set to establish itself throughout North America, Europe and Asia. By focusing on the Model 3, it aims to penetrate the car market with an affordable luxury EV. Its next step is to produce new products that will attract more buyers.

Still, Tesla has a problem of servicing the cars it produces, and this is a problem because it is not a profitable aspect of the business but more of a way to keep everything in-house and to prevent consumers from going elsewhere, which they sometimes do as wait times for service can be quite long: “Tesla currently has fifty [service stations] that operate with the following instructions from Musk: ‘What I've told the Tesla Service Division is their job is never to make a profit’” (Stringham et al., 2015). Tesla’s bold approach to focusing on growth instead of profits worked in the early stages of the company, especially since the growth narrative has enabled it to capitalize on a tremendous increase in its share price; but now it must turn to focusing on profits as shareholders see competitors entering into the market, particularly Ford and Rivian as well as numerous others. Tesla cannot rely on its first-to-market status forever, and its corporate strategy needs to do more in terms of expanding its product scope and bolstering its vertical scope.

Diversification (Product Scope)

The company has promised to expand from its original product line, but currently its product scope is limited due to supply chain issues and development snags. The company teased the CyberTruck more than a year ago, and allowed buyers to reserve a place in the pre-order line for as little as $100. However, production has yet to commence. As of now, the company has the Model 3, the Model Y and the Model S. The cars are similar but range in price. The company also offers its solar panels and energy storage systems.

Geographical and Vertical Scope

Tesla’s geographical and vertical scope are solid enough that the company has been able to grow and become profitable (to a degree). Its geographical scope stretches from North America to Asia to Europe. Its vertical scope includes controlling the supply chain both forwards and backwards: Tesla controls supply toward the customer through its own website and retail outlets (forward vertical integration); it also controls much of the supply of raw materials needed for its production, which has enabled Tesla to control a lot of its design features. Tesla has focused on battery development so as to be able to design products to its own liking. However, it still has to source the raw materials needed in battery production as Tesla does not own any mines. Yet, it has become a partner of Goro mines, which is a nickel miner that also mines lithium, which Tesla uses for battery production (BBC, 2021). Goro has pledged to sell a third of its product to Tesla, which will help relieve supply side issues on the lithium front.

Corporate Structure

Tesla’s corporate structure and key management systems are fluid to say the least. Tesla has experienced high turnover among high level managers for years. Elon and Kimbal both sit on the Board. Zack Kirkhorn is the company’s CFO since 2019 and has also been given the title of Master of Coin, a nod to Tesla’s foray into cryptocurrency speculation. Since 2019, Andrew Baglino has served as Tesla’s Senior Vice President. Elon Musk is described as Tesla’s Technoking on its website, which should give an indication of the level of seriousness in Tesla’s culture.

Elon Musk essentially has free rein to market the company, make promises to the public, and promote the brand as he sees fit. He is also known as a notorious micro-manager—hence the title Technoking on the company’s website. This may not be in Tesla’s best interests, however, considering the years of “production hell” that the company endured under his guidance. The key management systems are similarly opaque at Tesla, as everything flow through Musk, and he not only oversees Tesla but also SpaceX, the Boring Company, and Neuralink. That Tesla, a company with a market cap greater than the big three automakers combined, is overseen by a single individual operating on so many business fronts at once should be a red flag—but investors so far have shown little concern about the company’s corporate structure; Musk has been able to keep the growth narrative going with promise after promise, in spite of production delays and debacles.

Diversification, Vertical Integration or Globalization

The company does employ diversification, vertical integration and globalization: it has diversified in terms of production and offerings, with the main focus being on EV production and solar panel operations. Yet, production in the latter is not nearly as stellar as it could be, and customer service in the former is woeful.

The company is vertically integrated from battery production to electric motor production, and it has a strong central control system in place that allows it to be less dependent on suppliers and more autonomous in terms of controlling the planning of production. Still, Tesla’s latest report on guidance signaled that production of new models would be delayed due to supply chain issues, so its vertical integration is not entirely complete and it is not really in much different of a position than any other car manufacturer. The one thing Tesla has going for it is the perception of being in control, and as that perception wanes, its stock price will fall, and credit will become a serious issue for the company going forward.

In terms of globalization, Tesla has sought to penetrate new markets in Europe and Asia, and its plant in China has been successful in establishing a foothold for the brand there. However, China is notoriously nationalistic, and the state promotes domestic brands over foreign brands. This may make it difficult for Tesla to stay relevant for long in China once the initial enthusiasm for the Western brand has worn off among novelty consumers.

Are Global Alliances Part of the Corporate Strategy?

Tesla has numerous global alliances that are part of the corporate strategy. As Lienert et al. (2021) point out, “Tesla has battery production partnerships with Panasonic, South Korea’s LG Chem and China’s Contemporary Amperex Technology Co Ltd (CATL) that are expected to continue.” These alliances are crucial to Tesla’s ongoing production needs, but the company is also looking to more fully control its battery cell production all by itself. This control is being established at its plant in North America and at the currently in-development plant at Germany. Panasonic, for its part, insists that it is not a supplier for Tesla but rather a partner (Lienert et al., 2021).

Strategic Fit

How well do the business strategy and the corporate strategy of Tesla align? Tesla’s corporate strategy for years has been to focus on growth. Now it needs to shift to focusing on stability. Tesla is facing competition on numerous fronts, and the barrier to entry for competitors is low when it comes to developing EVs—all the major manufacturers are doing it now—or even solar panels. Tesla’s main dominance in these sectors has been only because no other company entered into these markets in the past. Now they are all entering into them, and this will weigh upon Tesla’s market cap at some point in the future. It needs to stabilize itself before it sinks under the weight of its own expansion. If Tesla is unable to keep up demand for its products or is unable to meet demand because of a mismanagement of resources, the company’s growth narrative will dissolve overnight.

Tesla has been able to create an original value proposition for consumers, and its marketing advantage has been superbly executed thanks to Musk’s use of social media and the zero-cost marketing approach that the company has taken. The company relies on word-of-mouth and does not engage in any marketing except through Musk’s social media account. It has seized market share, but that market share is not securely held, as new competitors are coming for it—from Ford to VW to BMW and all the other major car brands, all of which have promised to produce electric fleets in the coming years.

Tesla’s business strategy has been to focus on broad differentiation and its corporate strategy has been to sell a growth story to investors and a green energy/sustainability/innovation story to consumers. Yet other manufacturers are producing products that rival Tesla’s and Tesla’s only real key to differentiation is the fact that it has Elon Musk, the celebrity CEO as its head. Musk enjoys as many followers on social media as former President Trump, and he has a loyal fan base that keeps Tesla relevant for that reason.