Porter's Five Forces Analysis of Tesla Motors

Introduction to Porter's Five Forces

The concept of Porter's Five Forces is rooted in the idea that five key forces determine whether an industry or company can be profitable. When formulating strategy, a company will seek ways to shift and manipulate these forces in order to achieve sustainable profitability. As Porter (2008) elaborates, the five forces that shape competitive strategy are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes, and the intensity of rivalry within the industry.

About Tesla Motors

The company to which the five forces will be applied is Tesla Motors, the electric car maker. Tesla is a relatively new player in the industry with a tremendous reputation for product quality. However, it has yet to turn a profit, maintains a high burn rate, and cannot produce vehicles fast enough to meet demand. It is a reasonable question whether a company in this situation should continue independently or be acquired. This analysis examines how viable Tesla's position is within the automobile industry, the electric car niche, and the broader competitive landscape.

Bargaining Power of Buyers

The degree to which a company can set prices in the marketplace is closely related to the relative bargaining power of its buyers. Buyers gain power in several different ways. One source of buyer power is volume purchasing — but this does not apply in the automobile market, where buyers typically purchase only one car. Buyers therefore derive no power from volume purchases in this context.

Buyers may, however, be able to bargain by playing sellers off against one another. There are several firms in the electric car business, and there is a reasonable degree of differentiation among them. This differentiation actually enhances Tesla's bargaining power over buyers, because buyers have fewer opportunities to substitute one product for another. In conventional automobiles, there are typically three or four strong competitors in most categories, and these are not always clearly differentiated. While some segments of the electric car market are similarly undifferentiated, Tesla has increased its relative bargaining power over buyers through a superior level of product differentiation. Consumers are not in a position to drive down the price of a Tesla by opting for a competing electric vehicle — indeed, buyers inclined to do so would not be willing to wait on a multi-year waiting list.

Tesla has positioned itself in the luxury segment as a highly differentiated option. The company has actively pursued this positioning to attract a specific target market, and its products are just as distinct from the typical luxury vehicle as they are from the typical electric vehicle. To that extent, it has successfully used differentiation to claim a leadership position in the luxury vehicle market (Winton, 2016). This strategy has effectively allowed Tesla to set its own prices. While it prices roughly within the range of competitors — generally at the higher end — its waiting list demonstrates that even at the highest price points in the category, Tesla sells more vehicles than it can produce. The company can therefore be said to have strong bargaining power over its buyers, who are effectively price takers.

Bargaining Power of Suppliers

Tesla's high burn rate is largely attributable to the need to scale its business rapidly. However, burn rate is also influenced by the relative bargaining power between Tesla and its suppliers. Suppliers with high bargaining power can dictate prices, and their ability to do so depends on how critically Tesla needs their inputs as well as how much the supplier values Tesla's business. As an automaker with relatively low production volumes, Tesla is in a weak position relative to suppliers that serve larger manufacturers — tire companies, for instance, are well positioned to set prices with Tesla.

To minimize supplier bargaining power over time, Tesla has pursued several unconventional strategies. First, the company maintains a much higher-than-average degree of vertical integration. While it has partners for key inputs such as batteries, Tesla has taken on responsibility for developing its own battery technology and other critical components. This approach not only allows Tesla to focus purchasing on raw materials — where it has stronger bargaining power — but also enables a higher degree of vehicle customization, which in turn reinforces its bargaining power over buyers. Additionally, many of Tesla's suppliers come from technology industries rather than traditional automotive supply chains. With these non-traditional suppliers, Tesla's purchase volumes are actually meaningful, giving Tesla a more favorable negotiating position (Tao, 2014). On balance, while supplier bargaining power is not yet fully favorable for Tesla, it is closer to neutral than it is disadvantageous.