Tesla Strategic Analysis: Porter's Five Forces and SWOT

Executive Summary and Company Background

This paper focuses on the problem facing Tesla, Inc. and identifies how Porter's Five Forces model can be applied to the company. It provides an examination of the company's SWOT and discusses strategic alternatives and recommendations. It assesses that Tesla must focus on production and the recruitment and retention of talent to get production where it needs to be.

Tesla, Inc. is a car manufacturer in the automobile industry that specializes in the production of high-end electric vehicles (EVs). Launched in 2003, Tesla's first car was the Tesla Roadster—an ultra-luxury, ultra-sports EV targeting a specialized, niche car market. From there, Tesla moved on to the Model S and Model X, two more luxury EVs with broader mainstream appeal. With the more affordable Model 3, Tesla managed to crack the mass market and become a legitimate contender in the auto industry. However, a series of setbacks and delays caused Tesla to lose its footing and allowed skeptics and critics to question the company's ability to compete with the major players—BMW, VW, Ford, Audi, and others—all of whom are developing their own lines of EVs.

Porter's Five Forces and the Problem Statement

In order for Tesla to maintain market share and avoid bankruptcy, it must sell more Model 3s. However, the Model 3 has been plagued by production problems, and the brand is not living up to its potential due to delays in the promised roll-out of an affordable version at $35,000.

According to Porter's Five Forces, this problem must be addressed because the five forces Tesla faces are:

1. Competition in the industry. Competition is heating up, putting pressure on Tesla to deliver the Model 3 and turn a profit.

2. Potential of new entrants into the industry. The potential for new entrants is rapidly increasing, especially in China and other markets.

3. Power of suppliers. The power of suppliers is increasing, as Tesla has had problems making payments to suppliers and they have begun to back away from Tesla—as Panasonic has signaled.

4. Power of customers. The power of customers is increasing as they begin shifting to the Chevy Bolt and other EVs, feeling that Tesla has not kept its promises.

5. Threat of substitute products. The threat of substitute products is very real. Tesla's Model 3 may still be the most distinctive affordable EV, but customers hungry for a reliable EV may settle for something less spectacular while Tesla continues to work out its production problems.

Each of these forces exerts drag on Tesla's ability to advance, making the resolution of the Model 3 production problem an urgent strategic priority.

SWOT Analysis

Strengths

The strengths of Tesla, Inc. include its brand, its focus on sustainability, its visionary CEO Elon Musk, and the fact that it was essentially first to market with an EV that had mass appeal to luxury car buyers—particularly through the Model S (Yauney, 2018). Tesla's sales also come predominantly from the domestic market (Yuying & Qingrun, 2018), indicating that the company retains strong popularity in the United States.

Weaknesses

One of Tesla's primary weaknesses is its inability to manage production of the Model 3 and deliver it at the price promised to consumers. Since its rollout, the Model 3 has been priced well above the promised base price of $35,000 because Tesla cannot sell at that price and remain profitable. Tesla is also experiencing a cash crunch as debts come due and the company is forced to pay bondholders in cash because its stock price is not high enough for notes to convert. Tesla needs to sell EVs at a profit but is struggling to do so.

Tesla delivered nearly 30,000 EVs in Q1 of 2018. While that number rose to 51,000 in Q1 of 2019, it fell well below analysts' estimates of 80,000, indicating that demand is not where it needs to be. This shortfall may be the result of repeated negative press for both Musk and the Tesla brand, as numerous public figures have taken to social media to announce their displeasure with their vehicles' mishaps. Tesla is also experiencing a high rate of managerial turnover that must be addressed.

Threats

Threats facing Tesla include rising competition, a possible economic recession, declining demand in China, and the reduction of government subsidies for EVs. Any of these could be damaging, and several together could be disastrous if the company cannot maintain brand loyalty and significantly increase Model 3 sales. The SEC has also investigated Musk over his use of social media, with critics claiming he has been manipulating the market to support the company's share price. If the SEC were to force Musk out of the company, the significant following Tesla has built around his persona could be lost rapidly.

Opportunities

If Musk were replaced as CEO, it might not necessarily be the worst outcome. It could give Tesla an opportunity to shift focus from innovation toward the business fundamentals—such as how to make the Model 3 both affordable and profitable. Alghalith (2018) notes that Tesla also has the opportunity to scale and move beyond its domestic market. With the right marketing strategy, the company could develop a strong following in Asia and build on its global brand image going forward.

Strategic Alternatives and Recommendations

Tesla must bring its Model 3 production under control. Due to high turnover, the company is struggling to retain the talent needed to accomplish this. Recruiting and retaining a capable workforce is a strategy Gamble, Thompson, and Peteraf (2015) strongly advocate. They note that "staffing the right people at all levels is required to ensure competent performance of value chain activities" and suggest that companies "find, develop, and then retain engaged employees with excellent compensation packages, opportunities for rapid advancement and professional growth, and challenging and interesting assignments" (p. 10–12). Tesla should therefore prioritize hiring the right talent to stabilize Model 3 production and reduce turnover.

Tesla will also need to repair its organizational culture to address the turnover issue and boost its brand before it loses its appeal entirely. With competitors entering the market, Tesla must stay ahead by demonstrating why it remains the best EV on the market. This means continuing to innovate and to attract customers based on its ability to push the EV space forward.

Tesla must also continue to promote sustainability as a core pillar of its brand. According to Baumgartner (2014), sustainability can be a major factor in a company's corporate social responsibility (CSR) policies. For a company like Tesla, which has made sustainability central to its values and vision, a strong CSR policy could help refocus attention on its brand and its mission at a critical moment.

References

Alghalith, N. (2018). Tesla: Innovation with information technology. International Journal of Business Research and Information Technology, 5(1), 37–51.

Baumgartner, R. J. (2014). Managing corporate sustainability and CSR: A conceptual framework combining values, strategies and instruments contributing to sustainable development. Corporate Social Responsibility & Environmental Management, 21(5), 258–271.

Gamble, J., Peteraf, M. A., & Thompson, A. A. (2015). Essentials of strategic management (4th ed.).

Yauney, R. H. (2018). Leadership development: A study of Elon Musk. Marriott Student Review, 2(2), 4.

Yuying, A., & Qingrun, R. (2018). Tesla's international expansion strategy. Retrieved from https://globalmarketingprofessor.com/teslas-international-expansion-strategy/