Tesla Inc. Corporate Strategy and Competitive Advantage

Comprehensive Analysis of a Fortune 500 Company: Tesla, Inc.—Corporate Strategy and Competitive Advantage
Introduction: Background
Tesla, Inc. was launched in 2003 in California as a niche market luxury carmaker that specialized in electric vehicles (EV). The Tesla Roadster was its first product. The Roadster was a high-end EV and not a mass market car. Today, Tesla offers the much more affordable Tesla Model 3, which is a mass-market EV designed for the common man. Its other products include the Tesla Model S and the Tesla Model X. Tesla sells its cars in North America, Europe and in Asia. It has recently obtained financing to build cars in China, where its vehicles are already being sold, and is currently poised to enter Japan’s market. Tesla’s focus on sustainability and its CEO Elon Musk’s use of social media has made Tesla a favorite among investors who view sustainability as the future and Musk’s innovative leadership as a major factor in Tesla’s growth. Baumgartner (2014) has shown that sustainability is a major factor in the corporate social responsibility policies of companies, and Tesla’s is vital to its success. Its vision for the future of technology and energy has made Tesla the leader in the EV market around the world (Hardman, Shiu & Steinberger-Wilckens, 2015).
Tesla is also involved in green energy through its SolarCity subsidiary. Tesla produces the Powerwall which is supposed to harness solar power for residential homes. By having this business, Tesla has shown to consumers and investors that it is serious about the green energy revolution. However, SolarCity is buried under a mountain of debt and Tesla’s purchase of SolarCity was questionable among many as the company was actually owned by a relative of Elon Musk’s. While green energy is the latest trend among tech companies, Tesla has been able to capitalize on the trend so far by merging green energy technology with luxury car manufacturing. However, competition is heating up in the industry, and Tesla will need to move more vehicles to keep ahead of competitors.
The industry overall is still heavily involved in producing cars that rely on fossil fuels. This means that Tesla is still very much a unique manufacturer. Nonetheless, the industry has taken notice of Tesla’s appeal among consumers. Hybrids have already come to market, but Tesla offers something different—a fully electric car—and companies have begun to design their own to compete with Tesla. Nissan, BMW, Jaguar, Audi, Ford, Infiniti and many others are working on EVs now. As Tesla noted in its 10-K from February of 2019, “a significant and growing number of established and new automobile manufacturers, as well as other companies, have entered or are reported to have plans to enter the alternative fuel vehicle market, including hybrid, plug-in hybrid and fully electric vehicles, as well as the market for self-driving technology and applications” (Tesla 10-K, 2019, p. 23). Still the car industry overall may be in decline as recent reports indicate stagnant sales (Gardner, 2018). As Gardner (2018) notes, in many parts of the world borrowing is becoming more expensive as central banks raise interest rate levels, which means that taking out a loan to buy a new car is not as affordable as it once was. Rates are rising in the U.S. and in China, which is a major market for the auto industry. In order for Chinese consumers to buy new cars, they need good low-cost loans—and rising rates will put a damper on the auto market in China and kill the growth story there. As Ferris (2019) reports, auto sales in China have fallen for the first time in two decades with a 3% drop in sales in 2018, and there is likely to be an even further drop for 2019. This paper will focus on how Tesla can develop a corporate strategy to increase its competitive advantage.
SWOT Analysis
Strengths
Tesla’s value is mainly in its mission and vision statements. It appealed to environmentally-concerned consumers who wanted to buy from and be loyal to a company that cared about the environment and that held the same values they did. Tesla aimed to be a sustainable company and to help make the green energy the focus of the future. Plus, in Elon Musk Tesla had a CEO who was widely considered a visionary and who could relate to the average young person (Yauney, 2018). Musk was innovative and seen as the man who made Tesla cars so unique and technologically impressive. As Yuying and Qingrun (2018) note, most of Tesla’s revenues are generated by sales in the United States, which means that its main focus till now has been building its market share domestically. However, the company is looking to ramp up marketing in foreign markets to become a truly global player. If Tesla can do this, its value will rise exponentially.
Weaknesses
Now that Musk is under fire and may be suspended as CEO by the SEC, Tesla could be without its main value driver. It does not help either that political conditions are changing or that Tesla’s tax break incentive is being phased out. Additionally, the demand for the Model 3, which Musk identified as the car that would make or break Tesla (Crothers, 2018), is drying up (Engle, 2019). Tesla delivered nearly 30,000 EVs in Q1 of 2018. While that number rose to 51,000 in Q1 2019, it was well below analysts’ estimates of 80,000, which indicates demand is not where it needs to be. This may be the result of repeated bad press for both Musk and the Tesla brand, as numerous celebrities have taken to Twitter to announce their displeasure with their vehicles’ mishaps, including most recently Sheryl Crow.
Threats
For a time, Tesla had first mover market advantage. That time is now over as other big name competitors are set to enter the EV space. Chevrolet, Volkswagen, BMW, Jaguar, Toyota, and virtually every other car company is now working on or already has an EV model on the market. The resources and capability that were once unique to Tesla are now gone. Tesla now is relying on brand name and reputation, and both are rapidly declining. Consumer Reports has dropped its Tesla recommendation because of unhappy user reports from consumers (Olsen, 2019). This shows that Tesla’s brand is suffering at a time when other companies are imitating its EV idea and are preparing to take Tesla’s market share.
Tesla appears to be facing many challenges currently in terms of organization. It recently had to pay back approximately $1 billion in debt as notes came due in March. Now Tesla is facing a severe cash crunch. It has announced the closing of all its brick and mortar retail locations in the U.S. in what analysts have called an effort to cut costs. However, the lease terms for these retail locations will still need to be paid and cost approximately another $1.6 billion (Durden, 2019). This will destroy Tesla’s cash flow and potentially lead to a death spiral for the company.
As the CEO of Tesla, Elon Musk has also come under fire from the SEC for violating rules regarding giving false information to investors among other things. He claimed via Twitter that he would take the company private at $420 per share at a time when the stock was still in the $300-value range. The stock pumped on the news and dumped on the realization that Musk actually had no such ability to take the company private. He was fined and put on probation, which the SEC has since claimed he has violated. He is regarded among supporters of the firm as the genius driving force behind the company’s innovation and rise to fame. However, his business decisions of late have been viewed skeptically by analysts who believe Tesla’s days may be numbered because of Musk’s mismanagement of the company. Musk’s days as CEO of Tesla may be coming to an end.
Opportunities
If Musk were to be replaced as CEO it would give Tesla an opportunity to focus less on innovation and more on business and scalability, which Alghalith (2018) notes is one area Tesla must focus. Tesla has the chance to be the leader in the EV market but only if it maintains its ability to address issues with its production. It still has the best brand of all the EVs and with some focus it can maintain its lead.
External Stakeholders
Competitors
Competitors include every other auto manufacturer creating EVs today and they range from Chevrolet to BMW.
Industry
The industry itself is flagging as sales are down in China and in the U.S. Manufacturers have resorted to fleet sales, which eat into margins, to boost sales numbers.
Vendors
Vendors do not apply to Tesla as it does not use them. It recently announced too that it would close its own brick and mortar locations and shift all sales to online. All other manufacturers use vendors so that consumers can come in and kick the tires, so to speak.
Customers
Customers of EVs are not the typical car buyers: they are cost conscious and eco-friendly. They want a car that will give them good distance on minimal charge and they also want style and affordability.
Governmental Entities
As Barmore (2013) notes, government regulation could be a problem for Tesla in the future, especially if government entities begin to deny permits for self-driving autonomous vehicles. The autonomous concept has been a major selling point for Tesla, but with the technology now being questioned by journalists, there is a considerable issue with whether governments will continue to allow Tesla’s boldest marketing ploy to continue (Dainow, 2017).
Communities
The eco-friendly community is the big market for the EV, and it is unclear at this point whether this community will grow to become more mainstream or if energy for EV will become the dominant source to overtake gas-powered engines.
Internal Stakeholders
Shareholders
Shareholders have helped make Tesla one of the most profitable stocks in the market today. However, down from all-time highs in 2018, investors are beginning to show worries about Tesla’s ability to maintain profitability.
Board of Directors
Tesla’s Board has an interest in seeing the stock price climb, which Musk himself has made no secret about. Musk is personally heavily invested in the company and the Board has noted that “Tesla has an insider trading policy that prohibits all of our directors, officers and employees from, among other things, engaging in short sales, hedging of stock ownership positions, and transactions involving derivative securities relating to Tesla’s common stock” (Tesla DEF-14, 2018, p. 24).
Management
A veritable exodus of managers at all levels has been plaguing Tesla for more than a year. The turnover rate for top level executives in all departments is very high, which leaves Tesla with a talent crisis at a time when it is trying to maintain its vision and its credibility with investors.
Employees
Employees are micromanaged by Tesla’s Musk, which makes it difficult for many of them to feel good will towards the company. A number of whistleblowers have come forward recently to raise awareness about some questionable tactics within the company.
Corporate Strategy
Tesla’s corporate strategy is to continue to build out its production facility in China even though sales are crashing in China. The company continues to support Elon Musk as CEO, even though the SEC is pushing for his removal from that role. Its corporate strategy aimed at vertical integration, but this has turned out to be more costly than the company can afford, as the current cash crunch becomes more and more evident. Tesla’s attempts at diversification have also come up short. It acquired SolarCity with the intention of getting into solar panels and green energy for residential homes—but SolarCity continues to be a drain on Tesla’s resources as it is basically a big pile of debt that Tesla must cover. SolarCity also gives Tesla no competitive advantage and should be shed if at all possible. Competitors of SolarCity include “ Vivint Solar Inc., Sunrun Inc., Trinity Solar, SunPower Corporation, and many smaller local solar companies” (Tesla 10-K, 2019, p. 14). Tesla is also looking to diversify in terms of geographic markets, but the Japanese do not show much interest in the Model 3 (there is little demand for it there) and the Chinese have their own national EV maker. Plus, the trade war between China and the U.S. is not going to be in Tesla’s benefit. Panasonic has also stated that it will not be investing in the build out of Tesla’s factory. Tesla obviously needs to focus on essentials at this point to maintain productivity and increase its brand appeal.
Competitive Advantage
As Wright (1987) notes, “Porter reasons that firms which compete through differentiation and focus strategies would observe higher returns on investment with smaller market shares” (p. 95). Because of competitive forces, Porter suggests numerous avenues to profitability that relate to pricing: (a) the low-cost pricing strategy—the lowest cost competitor wins the market; (b) the differentiation strategy which is currently Tesla’s—i.e., the company that provides a product or service that is unique wins the attention; and (c) the focus strategy—i.e., the company that focuses on the specific target demographic while forgetting the rest of the market wins the niche. Tesla could also occupy this space to beat competitors and thus protect its margins. However, it will need to demonstrate that consumers are willing to pay more for the Tesla Brand, without tax credits.
Tesla has a competitive edge among other EV producers and that is thanks to Musk’s bold design and ambitious visions—but in order to maintain its quality and its image, the company has to make good on at least some of its promises to consumers, and that begins with getting the Model 3 issues fixed and restoring the company’s image for ingenuity and advanced technology. In order to get people interested in Tesla again, the CEO should step down or step back and allow the company to be run by someone else.
Long term Tesla has to focus on rejuvenating its image and strengthening its brand, which has taken a hit over the past year. If Tesla can restore its image and get an improved Model 3 to market along with the EV semi-truck it has been promoting, it could continue to lead the revolution in green energy auto manufacturing. Its long term focus should remain on innovation and research and design.
Tesla can create more competitive advantage by continuing to leverage its brand appeal as the leader in green energy tech (Stringham, Miller & Clark, 2015). Elon Musk’s appeal was an advantage in the past, but that advantage may now be a disadvantage. Tesla needs business sense now more than anything. It needs to create sustainable competitive advantage by fixing the problems with the Model 3 and building out charging stations and service stations around the world to support consumers.
Conclusion: Recommendations
Tesla needs to overhaul its corporate strategy and abandon for now its vertical integration plans. It needs to begin outsourcing jobs and cutting costs. While it has prided itself on being the only wholly American car producer in the world, that goal is not a viable way forward. While geographical diversification may sound like a good corporate strategy, it does not align with its internal capabilities at this point: Tesla is out of cash and notes are coming due. It is going to have to shrink just to stay solvent. It should abandon China for the time being—especially as the auto market in China is in decline with rates rising there. No manufacturers are going to prosper in China for the time being, and that means Tesla can refocus on Europe and North America.
If Tesla were to be outstripped by a competitor like the Nissan LEAF or the Chevy Volt/Bolt or the BMW i3, its brand image would become seriously tarnished. Tesla is respected because it is considered a leader in the EV market and that means it has to maintain its position as the leader no matter what. In 2015, it was only beating Nissan by a few thousand vehicles in sales, and if it is not careful, it will stop being a leader. Tesla needs to focus on rebuilding its image in Europe and North America by getting an improved Model 3 to market. Rates are still low in Europe, which means people will be more willing to buy there, so Tesla should double down in Europe before manufacturers like BMW and Audi cut into market share. In order to succeed, Tesla needs to renew its commitment to the Model 3 production, improve the design and engineering so that it is more reliable in all weather climates, and get these cars to market. Tesla has to manage its brand just as much as it manages its innovative scale of products. The problems with the Model 3 that caused Consumer Reports to drop the car from its recommendations have to be fixed so that Tesla can stay competitive in the market as newer EVs from other companies come on line. Tesla needs to ramp up sales in Europe and secure market share there before competitors take over.

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