Tesla Inc. Global Strategy: PESTEL, VRIO, and Competitive Analysis

Introduction: Tesla's Business and Industry Overview

Tesla, Inc. was launched in 2003 in California as a niche market luxury carmaker specializing in electric vehicles (EVs). The Tesla Roadster was its first product—a high-end EV aimed at affluent buyers rather than the mass market. Today, Tesla also offers the much more affordable Tesla Model 3, a mass-market EV designed for the everyday consumer, alongside the Tesla Model S and Tesla Model X. Tesla sells its cars in North America, Europe, and 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 CEO Elon Musk's use of social media have made the company a favorite among investors who view sustainability as the future and Musk's innovative leadership as a major driver of growth. Baumgartner (2014) has shown that sustainability is a major factor in corporate social responsibility policies, and it is similarly vital to Tesla's success. Its vision for the future of technology and energy has made Tesla the leader in the EV market around the world.

Tesla is also involved in green energy through its SolarCity subsidiary. Tesla produces the Powerwall, which is designed to harness solar power for residential homes. By pursuing this business, Tesla has signaled to consumers and investors that it is serious about the green energy revolution. However, SolarCity carries substantial debt, and Tesla's acquisition of SolarCity was viewed skeptically by many, partly because the company was owned by a relative of Elon Musk. While green energy is a prevailing trend among technology companies, Tesla has so far capitalized on it by merging green energy technology with luxury car manufacturing. Competition is intensifying, however, and Tesla will need to move more vehicles to stay ahead of rivals.

The auto industry overall remains heavily oriented toward fossil-fuel-powered vehicles, which means Tesla is still a distinctive manufacturer. Nonetheless, the industry has taken notice of Tesla's consumer appeal. Hybrids have already come to market, but Tesla offers something different—a fully electric car—and other manufacturers have begun developing their own EVs to compete. Nissan, BMW, Jaguar, Audi, Ford, Infiniti, and many others are now working on electric vehicles.

The broader car industry may be facing headwinds, as recent reports indicate stagnant sales (Gardner, 2018). As Gardner (2018) notes, borrowing is becoming more expensive in many parts of the world as central banks raise interest rates, making auto loans less affordable. Rates are rising in both the United States and China—a major market for the global auto industry. In order for Chinese consumers to purchase new cars, they need accessible, low-cost loans, and rising rates are likely to dampen the auto market in China and undercut growth expectations there. As Ferris (2019) reports, auto sales in China fell for the first time in two decades, with a 3% drop in 2018, and a further decline was anticipated for 2019. This could signal serious trouble for the industry as a whole.

External Environment: PESTEL Analysis

Political factors include the ongoing trade war between China and the United States, as well as government tax incentives in North America and Europe that support EV sales. The trade war could be detrimental to Tesla: although the company is American-based and sells in China, Beijing is actively promoting domestic brands over foreign ones, placing Tesla under significant competitive pressure in that market.

Economic factors include the erosion of tax incentives in Europe and North America that previously encouraged consumers to purchase EVs. Interest rates are also rising in North America and in China, two regions where Tesla needs to grow sales. The higher rates climb, the more buyers will be deterred from financing a new vehicle purchase.

Social factors include Tesla's ability to market itself through Elon Musk, who has enjoyed celebrity and near-cult status owing to his vision, charisma, and public persona. However, Musk's public behavior has recently become a concern even for many of his supporters, and his social capital has diminished. Societal enthusiasm for green energy remains strong globally, which continues to favor Tesla's positioning.

Technological factors include the reality that Tesla no longer holds a monopoly on EV technology. Other manufacturers are now developing battery systems and drivetrains capable of matching Tesla's torque and range. Technological competition is therefore expected to intensify considerably in the years ahead.

Environmental factors include the global policy shift toward green energy driven by international agreements such as the Paris Accord. Electric vehicles are thus likely to enjoy a growing market over the coming decades, which bodes well for a company whose entire focus is on sustainable, renewable energy.

Legal factors include Tesla's CEO repeatedly coming into conflict with the Securities and Exchange Commission (SEC). The company is also under investigation in the United States following several fatal crashes involving its vehicles (Reuters, 2019). These legal pressures could result in a large-scale recall and expose Tesla to significant consumer litigation.

In terms of threats and opportunities, Tesla faces intensifying competition as new entrants join the EV market. However, the company retains strong brand appeal and a degree of technological leadership. It must leverage that brand recognition to buy time with consumers and investors while resolving the known issues with the Model 3. 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). Porter's framework identifies three key avenues to profitability: (a) the low-cost pricing strategy, in which the lowest-cost competitor wins market share; (b) the differentiation strategy—Tesla's current approach—in which a company wins attention by offering a uniquely compelling product or service; and (c) the focus strategy, in which a company targets a specific demographic niche and dominates it. Tesla could adopt the focus strategy to protect its margins, but it will need to demonstrate that consumers are willing to pay a premium for the Tesla brand even in the absence of tax credits.

Internal Analysis: VRIO Framework

Tesla's value has resided primarily in its mission and vision. It appeals to environmentally conscious consumers who want to buy from—and remain loyal to—a company that shares their values. Tesla has positioned itself as a sustainability-driven enterprise committed to making green energy central to the future. In Elon Musk, Tesla has had a CEO widely regarded as a visionary who could connect with younger consumers. Musk was seen as the creative and technological force that made Tesla's cars both distinctive and impressive.

Now that Musk is under regulatory scrutiny and faces potential removal as CEO by the SEC, Tesla risks losing its primary value driver. Compounding the problem, political conditions are shifting and the tax incentives that boosted EV sales are being phased out. Demand for the Model 3—which Musk himself identified as make-or-break for Tesla (Crothers, 2018)—appears to be declining (Engle, 2019). Tesla delivered nearly 30,000 EVs in Q1 2018 and needs to do even better going forward to sustain its valuation. As Yuying and Qingrun (2018) note, "while a majority of Tesla's revenues are generated in the United States (up to 60% in 2016, according to Thomson Reuters), its domestic market, the company has renewed efforts to expand internationally, aiming to tap a rising transnational demand for electric vehicles (EVs)." If Tesla can execute on international expansion effectively, its value could rise substantially.

When Tesla first entered the automotive business, there was no commercial EV market to speak of. Electric vehicles were not considered reliable, and the infrastructure to support them did not exist. Tesla built that infrastructure for its EV lineup, and in doing so created a rare competitive resource. It secured a critical supply contract with Panasonic for lithium batteries and established a global network of charging stations. Since then, other companies have developed their own EV infrastructure, and what was once a rare advantage is no longer. European and Asian manufacturers are now building EVs and installing their own charging networks, meaning the rare resources Tesla once commanded are now shared by competitors.

For a period, Tesla held a first-mover advantage in the EV market. That period has effectively ended. Chevrolet, Volkswagen, BMW, Jaguar, Toyota, and virtually every other major automaker is now working on or has already released an EV model. The resources and capabilities that were once unique to Tesla have been replicated. Tesla now depends heavily on brand name and reputation—and both are under pressure. Consumer Reports dropped its recommendation of the Tesla Model 3 following a pattern of negative owner feedback (Olsen, 2019). This erosion of brand trust is occurring precisely when established competitors are preparing to capture Tesla's market share with their own EV offerings.

Tesla currently faces significant organizational challenges. It recently had to repay approximately $1 billion in debt as notes came due. The company is now experiencing a severe cash crunch and has announced the closure of all its brick-and-mortar retail locations in the United States—a move analysts have characterized as a cost-cutting measure. However, existing lease obligations for those retail sites will still need to be honored, amounting to approximately an additional $1.6 billion in liabilities (Durden, 2019), which threatens to severely strain Tesla's cash flow.

Elon Musk has also come under fire from the SEC for allegedly providing false information to investors. He claimed via Twitter that he would take Tesla private at $420 per share at a time when the stock was trading in the $300 range. The stock spiked on the announcement and then fell when it became clear Musk lacked the means to follow through. He was subsequently fined and placed on probation—terms the SEC has since alleged he has violated. Although many Tesla supporters regard Musk as the genius behind the company's rise, his recent business decisions have drawn skepticism from analysts who believe Tesla's continued viability is at risk due to his management style. Musk's tenure as CEO appears increasingly uncertain.

Demand for the Model 3 is weakening as tax credit incentives expire and competitors introduce their own EVs. Tesla has been conducting significant layoffs, further indicating organizational stress. Musk has also issued guidance suggesting that upcoming quarters are unlikely to be profitable—a stark reversal after what appeared to be a turning point when the company posted its first profitable quarters. Declining stock prices suggest that investor confidence may be wavering, which would make raising new capital more difficult going forward (Langlois, 2019).