This "Tesla in 2015" case study discusses the company's competitive advantage and its strategies amidst the onslaught of competitors.
Lynda M. Applegate and Arnold B. Peinado
Harvard Business Review (817081-PDF-ENG)
December 09, 2016
Case questions answered:
- Describe Tesla’s strategy.
- What are the sources of Tesla’s competitive advantage?
- What are the main challenges faced by Musk now and what possibilities he has?
- What should Musk do now to strengthen its company positioning and survive the following years to come?
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Case answers for Tesla in 2015
Description of the strategies of Tesla in 2015
To understand the strategies of Tesla in 2015, an analysis of the automotive industry is undertaken.
How and why is the automotive industry changing in these years? How these changes affect competitors?
Traditionally, the automotive industry has been characterized by vehicles based on internal combustion engines fuelled by oil-derivatives. This paradigm led the automotive industry to employ more than 3 million people in the United States, together with 7 million people worldwide used by suppliers.
This industry, ever since Ford’s first innovations, has been one of the main contributors to capitalist expansion and growth and had never been challenged until the beginning of the 21st century.
The (r)evolution of this industry as of today has undeniably started traces to two main elements: Internet revolution and sustainability as part of Corporate values.
The first element refers to a new generation of customers, Millennials, and new technologies. Indeed, car manufacturers need to reinvent their products to meet the needs of a new class of customers, with radically different ways of thinking and consuming behaviors.
Millennials that by 2020 will account for 40% of US revenues, will spend hours online choosing their car, will have a lesser probability of opting for buying a car, and will instead prefer purchasing a “mobility service”. They will select a vehicle based on the quantity and quality of the IoT (internet of things) integration of the vehicle and connection services (MP3, Bluetooth, Navigation Systems, and Mobile connectivity).
Very different selection criteria from the older “Baby Boomers” or “Generation x” customers that spent hours with the retailers discussing other -more mechanical- characteristics.
The second element refers to the upright positioning of well-established firms that, as of the 2010s, must take into consideration the environmental impact they have. After what has been the most significant scandal of this industry, Volkswagen’s diesel gate, global attention has shifted to consumption and pollution KPIs, making the new hybrid and electric alternatives much more appealing.
Giving a further look to this industry macro-environment, the PESTEL framework shows that:
- Under a Political perspective, the industry is a victim of government’s constraints, since interests by national (Washington) and regional regulators are always prone to safeguard job places. Some glaring examples are the fine that Trump would have imposed on Ford when willing to relocate its production to Mexico. Also, the obligation he imposed on General Motors to produce ventilators for the COVID-19 outbreak, the lawsuits against Tesla when they cut off car dealers selling directly to customers.
- Under the Economic perspective, the industry of the US does not present concrete drawbacks. Being one of the world most robust economies, inflation is well-managed. Additionally, there is a disparity between classes of customers. Still, the majority of the population can borrow money to buy a low-level car, even in case of low disposable income. The purchasing power considerably limits the access to high-end vehicles.
- We have already addressed the socio-cultural issue rising from the shift of customer generation. In general, the industry is experiencing a change driven by the internet and the purchasing attitude towards “mobility services” rather than “cars” paired with the sustainability issue gaining the spotlight.
- The Technological environment is being profoundly transformed both by the IoT systems to be embedded in the vehicles, by automation of production plants and by a new cleaner, hybrid or electric, engines. The incoming (r)evolution of this segment is also testified by the increasing amount of R&D expenses of the Tier 1 supplier in preparation for a future rise of electric vehicles market share.
- The Environmental issue is tied to the technological one. As a paradigm of the 21st century, year after year, companies are becoming more aware and invest more in sustainability. More and more manufacturers are presenting electric models to the public.
- The legal perspective presents the typical labor-intense industry characteristics, mainly focused on employer rights. Furthermore, safety regulations imply huge costs for testing and standards compliance.
Considering the life cycle of the industry, this traditional fossil-fuel-based industry faced inevitable aging after a maturity stage reached probably at the end of the 20th century, after the entry of foreign competitors during the ’80s, without being able to enter the decline phase. This peculiar characteristic traces to the virtual impossibility of exit opportunities. This is due to the problematic conversion of highly engineered plant, meant to produce cars, to other products, and, as mentioned before, social employment interests.
Indeed, employing more than 3 million people in the US, stakeholders’ interests in keeping those job places span from those of the federal to the country governments’ level. This may also explain why some carmaker firms, slowed by overwhelming external interests, have not been able to yield high returns.
In 2016, Tier 1 supplier had higher returns than the relatively supplied traditional carmakers. The supplier is predicted to earn the more upper portion of the investments that the carmaker will be obliged to do to avoid inevitable strategic shifts ($90 billion out of $110 billion between 2019 and 2025 only for fuel-saving technology).
These general considerations are…