Sample Case Study on Tesla Strategic Analysis

Tesla Case Strategic Analysis

Consulting Letter

As a strategic analyst consultant, I am committed to providing the best services in strategic analysis for Tesla Motors Company and provide a report to the Company’s management team. The team’s interest has been to engage in production of electric vehicles that are highly efficient and eco-friendly. This strategic analysis therefore helps the Company to evaluate the industry external analysis, internal analysis as well its financial analysis based on historical data; understand its current strategies; come up with proper alternative strategies that can help the company grow and finally give a recommendation. The analysis also considers a number of key issues could be affecting Tesla strategic decisions both internally and externally.

To understand more about the industry in which Tesla Motors is operating this analysis will look at its external analysis to evaluate different factors that present either opportunities or threats. These could be environmental, social, technological, legal, economic or political trends that in one way or another have impacts on what happens in the industry.  Internal analysis will also be conducted to observe what has been happening in the Company which will assist in identifying strengthens and weaknesses that the company has such as the battery problems. A current strategies analysis is also used to identify what is being done to address various issues in the Company to assist in knowing how much the more is required to enhance Tesla’s growth. Alternation options with both their advantages and disadvantages will be provided and finally a recommendation will be given as well that can be implemented in various suggested ways and help in providing sound solutions. The strategic analysis will also contain a number of exhibits to demonstrate and support the contents of the analysis.

 

External Analysis

There is an opportunity in the social factors related to increasing concerns about the environment, consumer’s altitudes and emphasis on specific products that are eco-friendly. Car buyers are currently not having a lot of faith on gasoline fuel and the costs associated in their production, as efforts are being made to safeguard the environment. Society also judges people depending on the type of cars that they possess; therefore those acquiring new vehicles are likely to buy that which will influence their social status and owning an electric car has an effect on an individual’s social status. There is also an increase in the aging population which is a social change happening today, this implies that there is a big number of older people who are wealthy  and with a lot of saving which they are likely to utilize more to buy premium electrical cars.

Trending technology advancements provide an opportunity including the impact from more use of the internet as well as rapid globalization that has a huge effect in this industry.  A lot of research is being carried out using newer technologies in alternative energy allowing increased growth in automobiles that use alternative energy.  Over the years these advancements within the industry has brought about many changes such as the introduction of fully electrical vehicles and car computerization which has contributed to enhancing safety on the roads.  This paves way for introduction of other varieties and additional improvements in cars convenience and safety in the future.

The environmental issues is a threat to the industry such as the global warming and depleting renewable resources like oil that have brought about competitive pressures in the industry to move to production of vehicles that are eco- friendly of fuel efficient. This has made car manufactures to start adjusting their operations as well as their products because governments and consumers are more aware of the effects some products can have in the environment. The market has therefore become more attractive and it is expanding at a fast rate with more companies recently joining it with their plug in models such as the BMW. Additionally, there are other environmental friendly alternative vehicles that are being developed as each company tries to create their niche including the hybrids and bio diesel vehicles. In the future, companies will therefore have to be very innovative to come up with better cars that will be ideal for the market.

Internal Analysis

Tesla Motors Company has huge pool of resources as one of its strengths allowing it to have a competitive edge and also assist in both its domestic and global expansion. The company has access to financial resources such as capital generated from issuance of shares which includes the $ 50 million in stock that were issued to Toyota. It has a huge number of suppliers all over the world who supply more than 2,000 parts to the Company. Telsa has been ahead of its competition by being the first to market a vehicle with no green house gases emissions like the Roadster and Model S electric cars. Its intangible resource includes the presence of an excellent top level management led by the CEO Elon Musk who is also the Architect of the products. Others are the patents in extensive research and development initiatives as well as innovative technology.

Different capabilities are strength in this company. It has been able to develop batteries that are used in general consumer electronics but now applied to cars with appropriate management of power. The partnership with other great companies such as Toyota and Panasonic has enhanced research and development that supports its battery technology as well as the future innovations.

The company weakness is that it is yet to introduce diversified products in the market which allows it to gain more revenues. Currently there are only two electric car vehicles that has already been brought to the market the third type of car, which is model X will be introduced a bit later. Considering that the industry is comprised of big companies like GM and Ford that have already introduced different products in the market increasing their brand awareness and value among their consumers, Tesla falls far behind them in this area. Failure to have a wide variety of products hinders growth in different segments of the market since various target groups have different tastes and the brand is not well promoted through few products.

Financial Analysis

The return on assets ration and return on equity ratios are both negative due to the trending net losses up to the year 2012. This implies that the company is yet to make profits and does not manage to cover most of their operating expenses. It also implies it at its first phase of growth, which will take time before investments bring about returns. The management is also trying to manage its assets and investments from shareholders due to the significant decrease of the negative ratios from that was obtained in 2008 meaning that there is a little bit of growth.

The current and quick ratios that are above 1 or close to 1 indicate the company is increasingly growing financially from the year 2008 to 2010 but in 2012 the ratios have dropped again indicating there was a financial crisis that has taken place.

The debt to asset ratio is high in 2008 and 2012 indicating less flexibility financially in those years; it is very low in 2009, considerably low in 2010 and 2011 indicating more flexibility in its finances. The debt to equity ratio is increasing over the years, which reduce the financial attractiveness of the company due to high amount of debts compared to company’s equity.

 

Current Strategy

Tesla has focused on a differentiation strategy by introducing expensive high end products that has targeted customers who mainly range in between middle and upper levels of income. They corporate strategy involves their objective to penetrate the market whereby they plan to influence the current market with their current product whose focus is ensuring eco friendliness and also sell some components to other car manufacturers. International level strategy Although Tesla is focusing on the domestic market it is also continuously growing their markets globally. They seek to achieve efficiency in their goals as well as get good responses locally. Tesla has a cooperative strategy which has seen creation of partnerships with various firms including Panasonic where both companies’ research and development departments are working together to develop batteries that are more efficient.

Key issues

One key issue identified is the high cost associated with the Lithium- ion batteries that are used for the electrical cars. Although one of its strategies has been forming a partnership with Panasonic to assist in developing technologies that will be used to produce the batteries, more innovations are needed in this area. This is because if electric cars market is going to continue growing in the future, batteries will play a key role.

The other issue is limited infrastructure in the area of super charging stations that can charge variety of cars unlike the gas fueling stations all over the world. Introduction of more of the stations all over the world is necessary to ensure success of the cars.

Finally, the issue of Tesla Motors having less number of products in the market is a limitation for the growth of the company. The industry’s competitors are well established with a wide range of products in the market that have increased brand awareness and value.

Alternatives

One alternative is development of new markets, which is an effective idea that will promote its growth. Tesla Motors will have access to more customers; it will be able to sell additional products while still concentrating on its main line of business. Targeting new markets can be done through strategic relationships with major leaders in electronic and automobile industry, target additional and bigger metropolitan areas and add about 50 more stores worldwide.

The second alternative is using lower prices for their products to compete effectively within the industry. To do this, Tesla will have to scale its production levels to at least one million units of their products per year. This will introduce large economies of scale to Tesla and allow selling of more units to the market hence increasing revenue.

Evaluation of alternatives

There are different gains and losses that will arise from adoption of each of the alternatives. These are described as the advantages and disadvantages associated with each one of them. The advantages of the strategy to develop new markets include that Tesla will become pioneers at their specialization, building a global brand name which not only has an impact on sales through recognition but leads to local employees recruitments, adding more distributors and taking effort to market through various platforms like media in those countries. This strategy also allows risk diversification since different markets have different types and levels of risk. New market development disadvantages involve making Tesla to be vulnerable to shifts in the industry or external environment. Global expansion will require proper monitoring for efficient crisis management. Huge capital is also required to begin the expansion.

Introduction of competitive prices strategy advantages include ensuring the Company’s internal operations are efficient and effective to reduce costs of production; gaining a huge number of customers from the market, increasing brand loyalty due to low prices and quality products and eventually increase in revenues. Disadvantages in setting competitive prices include the pressure from already established companies that have already gained large economies of scale to allow lower prices for their products and huge capital investments required to increase the level of their operations.

Recommendation

The recommended strategy is the introduction of lower prices for their products which will lead to profitability due to the high number of customers that will be gained. The bigger companies like Ford, Chrysler and GM are offering their electronic vehicles to the market at much lower prices than Tesla which causes the customers to shy away from their products. To implement this strategy the company will utilize its existing resources maximally and look for additional resources that will allow it to expand its operations with an aim to achieve its target of  manufacturing at least one million electronic cars. Tesla will work with strategic partners and suppliers to help in continuous improvements in supplied components and necessary technologies that will allow a fast and efficient process of producing the increased output level. Research and development departments will be involved fully in coming up with appropriate technologies.

Finally evaluation of implemented strategy which can be using a number of ways like peer benchmarking where the R&D performance is evaluated by comparing the intelligence function of the company with industry peers. Finally, a NPV is calculated for the project implemented or investment undertaken to see whether a positive or negative NPV is obtained and develop a different strategy. In case the NPV is negative, the investment is not a proper strategy, if it is zero the Tesla can decide to remain indifferent but if positive, it implies it was wise after all to make the investment.

Limitations in the Recommendation

The major limitation in the selected strategy is that the possibility of lack of enough funding for the strategy and lack of advantage of large economies like the already established companies that can manage to reduce their prices to lower levels and gain more customers than Tesla Motors.

Exhibit 1 – Porters 5 Forces/PEST Analysis

Five Forces Level Of Intensity (High/Moderate/Low) Justifications
1. Risk of Entry by Potential Competitors High At the start up in the year 2003 , Tesla faced various financial challenges unlike other manufactures who are already well established with an economic power considerable to enter this market including large economies of scale. Huge initial capital is required for investments in both physical and intangible assets like factories and patents.
2. Rivalry Among Established Companies Moderate There are still a few competitors in the electronic vehicle market. However, the market is expanding fast due to its attractiveness. Companies are also moving to other alternatives that are friendly economically hence a high possibility of intense rivalry in future.
3. The Bargaining Power of Buyers Moderate Tesla is reliant on Dalmler and Toyota relationship since they supply these companies with their cars, which form a high share of their profits. But they also get individual customers who receive government incentives in form of tax credit deductions.
4. The Bargaining Power of Suppliers High Tesla depends heavily on its suppliers and faults in the components supplied will lead to disruptions in production hence making their suppliers very critical.
5. Substitute Products Low There are few substitutes in the automotive industry since substitutions for a vehicle are biking, walking and public transit which people find inconvenient.

 

Exhibit 2 – VRIO Table

Value Chain

Activities

Specific Attributes Along the Value Chain V R I W/S/DC/SDC O Competitive Implication: Likely to have
Inbound Logistics. -Production of components in house as well as delivery from numerous suppliers.

– Just In Time suppliers

Yes

 

 

 

 

Yes

 

 

 

 

No

No Strength

 

 

 

 

Strength

Yes

 

 

 

 

Yes

Competitive advantage.

 

 

 

Competitive advantage.

Operations Innovated and automated operations easily programmed to produce different types of cars. Yes   No Strength Yes Competitive Advantage
Outbound Logistics Ensures distribution to other countries through established stores and online reservations and showrooms. No Yes   Weakness No Competitive parity
Marketing and Sales No money is spent on either traditional or ad agency marketing  and instead network stores are developed and located in prime areas to ensure brand awareness Yes No Weakness No Competitive

Disadvantage

Service Tesla has their own service centers in various locations that offer free charging services to their customers and also has warranty policy that increases the confidence of the customers.            
Infrastructure Flat or horizontal organizational structure with a small team of management and strong leadership Yes Yes Strength Yes Competitive advantage
Procurement There exists good relationship with strategic suppliers like the Panasonic partnership that brings gains to both parties Yes Strength Yes Competitive advantage
Human Resources Has a strong management team, outsources recruitment and close relationship among staff and managers Yes   No Strength No Competitive parity
Technological Development Has reinvested in R&D and has leading technology that reduces costs, ensures excellent products designs and patents Yes Yes Strength Yes Competitive Parity

 

Exhibit 3 – Financial Table

Profitability Ratio 2008 2009 2010 2011 2012
Returns on total Assets -1.5994 -0.4272 -0.3993 -0.3559 -0.3555
Returns on Shareholders’ Equity 0.84012 -0.84838 -0.7454 -1.1355 -3.1773
           
Liquidity Ratio          
Current Ratio 0.88811 0.80129 6.21274 5.58134 0.81688
Quick Ratio -0.2857 0.62324 4.6521 4.68926 -0.0682
           
Gearing Ratios          
Debt to Asset Ratio 1.0719 0.00613 0.18733 0.38008 0.88808
Debt to Equity ratio -0.5624 0.01218 0.34931 1.21031 7.93496

 

Exhibit 4 – NPV Market Expansion

 

  2012 2013 2014 2015 2016  
Sales 413.256 619.884 929.826 1394.739 2092.109 Assume an increase in sales by 50 %
COS 354.364 460.6732 598.875 778.5377 1012.099 Assume an increase in COS by 30%
Gross profit 58.892 159.2108 330.951 616.2013 1080.009  
Selling, general and administrative expenses 424.35 466.785 513.464 564.8099 621.2908 Assume a 5% increase in expenses due to the expansion
Operating income -365.458 -307.5742 -182.51 51.39144 458.7186  
Tax -127.9103 -107.651 -63.879 17.987 160.5515 Assume 35% tax rate
Net Income -237.5477 -199.9232 -118.63 33.40444 298.1671  
Depreciation 25 25 25 25 25 Assume Straight line depreciation
Free cash flow -212.5477 -174.9232 -93.633 58.40444 323.1671  
Cost of Capital 1 1.2 1.44 1.728 2.0736 Assume cost of capital is 20%
Present Value of cash flow -212.5477 -209.9079 -134.83 100.9229 670.1193  
Capital Investment 100 100 100 100 100 Assume capital investments are made each year for the expansion
Net present Value -312.5477 -309.9079 -234.83 0.922868 570.1193  

 

 

Exhibit 5 NPV Decrease in selling prices

 

  2012 2013 2014 2015 2016  
Sales  (units) 2560 21000 42000 84000 105000 Assume the units produced increases by 50%
Selling price 0.1614281 0.1452853 0.13076 0.117681 0.105913 Reduce the selling price by 10% per year.
Sales 413.256 619.884 929.826 1394.739 2092.109 Assume an increase in sales by 50 %
COS 354.364 531.546 797.319 1195.979 1793.968 Assume an increase in COS by 50%
Gross profit 58.892 88.338 132.507 198.7605 298.1408  
Selling, general and administrative expenses 424.35 339.48 271.584 217.2672 173.8138 Assume cost decrease by 20% due to economies of large scale production
Operating income -365.458 -251.142 -139.08 -18.5067 124.327  
Tax -127.9103 -87.8997 -48.677 -6.477345 43.51445 Assume 35% tax rate
Net Income -237.5477 -163.2423 -90.4 -12.02935 80.81254  
Depreciation 65 65 65 65 65 Assume Straight line depreciation
Free cash flow -172.5477 -98.2423 -25.4 52.97065 145.8125  
  1 1.2 1.44 1.728 2.0736 Assume cost of capital is 20%
Present Value of cash flow -172.5477 -117.8908 -36.576 91.53327 302.3569  
Capital Investment 120 144 172.8 207.36 248.832 Assume a 20% Increase in capital investments per year
Net present Value -292.5477 -261.8908 -209.38 -115.8267 53.52489  

 

 

Exhibit 6 Action Plan

Action Starting Time Duration Ending Time
Promote planning and investments in electronic vehicles infrastructure in the existing and new markets. January 2013  1 months February 2013
Promote investments in research and development departments to increase efficiency in production. March 2013 3 months May 2013
Increase resources required for additional production required in meeting the target such as new skilled people and intangible assets like patents June 2013 1 month July 2013
Track and report progress in the one million production target. August 2013 2 months September 2013
Promote availability and effective marketing of electronic vehicles in existing and new markets. September 2013  1 month October 2013
Track and record the number of electronic vehicles that have been sold. November 2013 2 months December 2013
Evaluate whether the objective to increase customers through price reduction has been achieved January 2014 1 month February 2014
Evaluate whether the revenues are increasing. January 2014 1 month February 2014
Establish areas that require improvements to ensure targets and objectives are meeting. January 2014 1 month February 2014
Prepare a documented report to about the strategy achievements. January 2014 1 month February 2014