What

  were   the   industry   characteristics   when   Tesla   was   first   incorporated?   Which   were   the  
important  forces  prevalent  in  the  industry  in  that  time?  Be  sure  to  focus  on  both:  the  perspective  
of   a   player   in   the   traditional   automotive   industry,   as   well   as   focus   on   the   perspective   of   an  
electrical  cars  company.  

Prior   to   the   arrival   of   Tesla,   gasoline   cars   dominated   the   automotive   industry.   Gasoline   cars   were  
cheaper  to  produce,  held  very  high  standards  of  quality  control  but  consumed  a  lot  of  fuel.  On  the  
other  hand,  due  to  the  high  cost  of  lithium,  electric  cars  were  expensive  to  produce,  including  the  
ones  that  were  targeted  at  the  low  end  like  Nissan  Leaf,  which  was  priced  at  $40,000.  
 
As   a   result,   automobile   manufacturers   made   only   token   investments   in   the   lithium   battery   power  
train  and  waited  for  the  production  cost  of  the  battery  to  reduce.  
 
The  important  prevailing  forces  from  the  perspective  of  a  traditional  automaker  are:  
 
1. Cost    
Since   the   traditional   automobile   companies   largely   produce   gasoline   cars,   they   can   sell   cars   at   a  
more  affordable  price.  
 
2. Image  and  Quality  Concern  
For   traditional   automobile   companies,   brand   image   is   everything.   In   today’s   world   where   bad   of  
mouth  can  do  unrecoverable  damage  to  a  brand,  it  is  expected  of  companies  to  maintain  the  highest  
standard  of  quality  control.  While  Tesla  customers  might  overlook  the  fit  and  finish  of  Model  S,  and  
production  delays  in  exchange  for  an  environmentally  friendly  car,  it’s  not  an  option  for  customers  
of  BMW,  Mercedes  or  Toyota  cars.  
 
3.        Distribution  model                                                                                                                                                                                                                                                                                                                                                  
The  traditional  automotive  companies’  distribution  model  allows  customers  to  only  buy  cars  from  
franchised  dealerships  as  allowed  by  the  State  laws.  While  dealerships  have  increased  the  revenues,  
the  total  gross  margins  have  decreased  due  to  expenses  in  areas  like  advertising,  rent,  and  payroll;  
and  this  cost  is  added  to  the  customer.  

The  important  prevailing  forces  from  the  perspective  of  an  electric  cars  company  are:  
 
1.      Cost  
Since  electric  car  companies  use  lithium  batteries  that  are  expensive,  electric  cars  are  priced  higher  
than  gasoline  cars.  It  was  estimated  that  the  lithium  battery  cost  needed  to  fall  to  $100/kWh  to  be  
comparable  with  the  cost  of  gasoline  engines.  
 
2.      Recharging  Network  
Before   Tesla   created   its   solar-­‐powered   charging   network,   electric   car   companies   faced   two   major  
issues:  

a) Electric  car  users  weren’t  able  to  find  charging  stations  as  easily  as  gasoline  car  users.    
b) Electric  car  companies  claimed  to  be  environmentally  friendly  but  electric  cars  recharged  by  
electricity  generated  from  coal  lead  to  more  pollution  than  gasoline  cars.  
 
 
 
What   were   the   initial   challenges   of   the   business   model   as   Tesla   ideated   the   Roadster?   Which  
conscious  initial  decisions  and  trade-­‐offs  did  Tesla  take  to  surpass  these  challenges?  
 
By  developing  a  new  kind  of  product  such  as  a  fully  electric  car,  Tesla  had  to  embrace  challenges  to  
turn  them  into  opportunities  to  successfully  launch  its  first  model,  the  Roadster.    
 
At   the   beginning,   they   were   struggling   with   the   expenses   of   developing   new   technologies   for  
producing   a   unique   kind   of   product.   Lithium   batteries   were   one   of   the   most   important   and  
expensive  parts  of  the  car  and  it  did  not  help  to  lower  the  final  price  of  the  car  initially.  They  had  to  
balance  attractiveness  and  had  the  opportunity  to  work  on  making  it  affordable  to  the  customer  by  
saving  in  other  parts  of  the  chain  of  distribution.    
 
Due  to  its  high  price,  Tesla  had  to  search  for  clients  in  the  Luxury  sports  car  market,  already  owned  
by  brands  such  as  Porsche,  Ferrari,  and  Lamborghini.  This  market  had  the  potential  clients  that  were  
wealthy   enough   to   pay   for   the   Roadster   and   had   a   passion   for   fast   cars.   To   create   its   niche,   Tesla  
targeted   customers   that   were   environmentally   conscious.   This   made   Luxury   sports   cars   segment  
even   smaller   making   it   an   opportunity   that   was   not   exploited   by   any   brands   in   the   past.   The   only  
thing  to  do  was  to  convince  the  customers  to  purchase  the  vehicle.  One  of  the  things  that  Tesla  did  
to  convince  the  customers  was  making  them  perceive  that  the  Roadster  was  a  symbol  of  status  and  
performance  and  added  more  value  to  the  product  with  a  unique  technology  that  let  its  customers  
monitor  their  own  consumption  of  fuel  while  driving  the  vehicle.    
 
Also,   one   of   the   problems   that   Tesla   had   to   work   on   was   the   development   of   a   wide   range   of  
charging   stations   and   to   break   the   paradigm   of   the   customers   fearing   that   they   would   run   out   of  
energy   in   the   middle   of   any   road,   making   the   Roadster   look   like   an   expensive   toy   that   could   only   be  
used   around   places   that   had   charging   stations   nearby   and   not   have   the   freedom   that   most   sports  
cars   running   on   gasoline   did.   In   this   situation,   Tesla   had   to   convince   the   customers   about   the  
capacity   of   their   batteries   and   offered   them   personalized   customers   services   and   support   that   could  
relieve  any  complications  related  to  the  product.  
 
How  did  Tesla’s  entrance  to  the  car  market  change  the  value  chain  of  the  traditional  automobile  
company?  How  was  this  helpful  in  their  success/lack  of?  
 
Tesla’s  disruptive  business  model  and  its  drive  for  innovation  have  helped  it  to  position  itself  in  the  
automotive   industry   and   standout   against   traditional   automobile   companies.   Tesla’s   business  
strategy   addressed   the   changes   in   most   areas   of   value   chain   management   lifecycle   from   research  
and  development,  material  sourcing,  sale  and  distribution  and  lastly  in  after-­‐sales  services.  

Tesla   entered   the   automobile   industry   with   a   distinctive   high-­‐performance   design   that   focused   on  
environmentally   conscious   customers.   This   strategy   led   Tesla   to   become   a   leading   innovative  
automobile  company  with  clear  market  positioning  comparing  to  other  traditional  companies  as  this  
customer   segment   was   new   in   the   industry.   Tesla's   development   team   invented   a   tool   to   monitor  
energy   consumption.   This   brought   investor   interest   and   increased   customer   confidence   in   the  
product.   The   tool   helped   customers   truly   believe   that   they   have   the   potential   to   help   the  
environment.  Traditional  automobile  companies  would  have  avoided  investing  in  such  a  tool  due  to  
an  intangible  ROI  value.  

Since   lithium   battery   is   a   significant   material   for   Tesla   car,   sourcing   for   this   materials   across  
countries  lead  to  big  challenges  to  the  company  considering  the  high  transportation  cost.  Tesla  came  
up  with  an  idea  of  battery  cost  optimization  by  inventing   lower  cost  battery  in  a  production  plant  in  
Nevada   called   'Gigafactory’.   Accordingly   to   "Evolving   from   value   chain   to   value   grid   (2006),   MIT  
Sloan   Management   Review"   [2]   that   examined   various   dimensions   that   company   shall   consider  
applying,   Tesla   applied   the   non-­‐linear   value   chain   management   (instead   of   traditional   value   chain)  
which  reduced  lead  time  in  delivering  end-­‐product,  solved  part  shortage  issues  by  building  supplier  
network  creation  to  exchange  and  share  parts  with  Daimler  and  Toyota.  
 
Tesla’s   product   has   visibility   in   the   market   in   spite   of   having   no   dealer-­‐based   distribution.   The  
company   also   moved   their   sales   directly   to   the   consumer   utilizing   online   purchasing   strategy.   This  
helped   Tesla   in   saving   expenses   on   operating   and   managing   dealership   considering   space   renting,  
advertising,   inventory,   staff   management,   and   payroll   etc.   Besides   the   sale   and   distribution,   Tesla  
also  offered  special  after-­‐sales  services  such  as  valet  car  and  house  calls  support,  increased  warranty  
period   and   announced   three   years   buyback   guarantee   from   customers.   For   traditional   automobile  
companies,  these  additional  services  are  generally  considered  as  add-­‐on  services  through  which  they  
can  make  revenue  however,  all  these  value-­‐added  services  were  offered  for  free  by  Tesla.    
 
Tesla  has  successfully  adopted  a  non-­‐linear  value  chain  as  compared  to  the  traditional  automotive  
companies   who   are   following   a   linear   value   chain.   The   company   has   proved   their   ability   to  
encounter  the  obstacles  and  overcame  them  with  stability.    
 
Tesla  has  historically  invested  heavily  in  technologies  that  promise  to  bring  future  revenues,  and  
investors   had   believed   in   that.   This   is   shown   in   the   financial   statements.   Look   at   the   net   loss  
experienced  and  analyze  other  important  metrics  compared  to  sales  and  assets,  pay  attention  to  
the   stock   price.   How   can   you   explain   that   the   stock   price   has   steadily   been   going   up,   while   the  
company  constantly  reports  losses?  
 
The   analysis   of   Tesla’s   financial   information   can   lead   to   incorrect   conclusions   if   the   analysis   being  
performed   does   not   include   other   factors   that   make   the   company   one   worth   investing   in.   Tesla  
experienced  an  increase  of  net  losses  of  38%  to  USD  757  million  from  USD  568  million  in  the  same  
period   of   the   previous   year,   as   well   as   an   increase   on   the   deficit   of   net   cash   used   in   operating  
activities   of   171%,   comparing   same   period   of   the   previous   year.   This   information,   along   with   the  
poor   financial   performance   as   measured   with   typical   financial   ratios   (Debt-­‐to-­‐Equity:   3.52;   Quick  
ratio:  0.79;  Inventory  Velocity:  288  days  approx)  can  lead  to  imprecise  or  misleading  conclusions.    
 
It  is  no  coincidence  that  in  April  2017,  Tesla  overtook  its  competitors  on  market  capitalization,  even  
when  the  big  players  of  the  automotive  market  had  been  experiencing  better  sales  than  Tesla  (GM  
sold  10  million  cars  on  2016;  Tesla  sold  only  76,000);  or  that  the  company  had  455,000  reservations  
for  the  Model  3,  even  when  the  company  had  a  history  of  production  delays.  The  reason  why  Tesla  
has   enjoyed   great   credibility   with   its   suppliers,   customers,   and   investors,   is   definitely   not   found   in  
the  financial  information.    
 
According   to   Michael   Hergert   and   Degian   Morris   in   their   1989   article   “Accounting   Data   for   Value  
Chain  Analysis”  [3],  the  use  of  accounting  information  to  identify   the  critical  activities  that  create  or  
have  the  potential  to  develop  a  competitive  advantage  may  not  be  useful  when  there  is  no  physical  
attribute   responsible   for   creating   value   (Hergert,   Morris,   1989).   This   is   because   what   Tesla   lacks  
from   financial   performance   it   makes   up   in   brand   reputation.   The   key   activities   that   Tesla  
incorporated  in  its  value  chain  are  positive  synergies  with  significant  subsidiary  SolarCity;  increased  
battery   lifespan   and   buy-­‐back   guarantee;   direct-­‐to-­‐customer   distribution;   and   premium   customer  
care,  among  many  others.    
 
What  investors  see  in  a  company  like  Tesla  are  not  the  financial  ratios  or  the  accumulating  bottom  
line   losses,   but   the   long-­‐term   benefits   of   a   company   that   is   constantly   concerned   on   looking   for  
better  ways  to  operate  in  a  more  efficient  manner.  The  stock  price  is  the  reflection  of  the  confidence  
that   the   public   investors   have   in   a   company   that   introduced   disruptive   technology   into   a   market  
that,  even  though  existed,  had  no  intentions  on  moving  forward  at  a  fast  pace.  Tesla  introduced  an  
idea   of   what   the   future   of   the   automotive   market   should   be,   much   like   Uber,   Airbnb,   Google   or  
Amazon.    
 
How   can   you   justify   the   large   investments   Tesla   has   made:   Gigafactory   and   Acquisition   of  
SolarCity?    
 
Although   Tesla’s   financial   performance   had   ongoing   red   numbers   and   unsatisfied   investors,   they  
suddenly  invested  billions  in  their  battery  production.  The  reason  for  this  is  that  Tesla  realized  that  
the  bottleneck  of  mass  manufacturing  electrical  cars  is  still  the  cost  and  performance  of  the  battery  
itself.  Like  all  major  car  manufacturers,  they  were  facing  both  supply  and  quality  problems  with  their  
batteries  from  Far  East.1  The  highly  uneconomic  and  cost-­‐intensive  process  started  with  the  mining  
of   lithium   in   South   America   or   Eastern   China,   followed   by   the   shipping   of   the   lithium   to   battery  
makers   in   Asia   and   then   shipping   the   battery   pack   back   to   the   US   for   assembly.   Therefore   Tesla  
made   the   decision   to   change   the   “entire   value   chain”   [4]   and   invest   $5   billion   in   their   battery  
production  in  Nevada  in  order  to  have  better  control  over  the  battery  production  costs.    
 
In  the  next  step,  the  Tesla  purchased  SolarCity,  which  “had  the  largest  market”  share  (32  percent)  of  
the  U.S.  residential  solar  market.  Like  this,  they  could  combine  the  production  of  solar  power,  power  
storage,  and  electric  cars.  Even  though  the  prospects  of  the  solar  power  market  might  not  justify  the  
price   of   $2.6   billion,   the   acquisition   exposes   it   to   an   increasingly   efficient   mixed   market   (solar   and  
battery)   [4]   Therefore   Tesla   is   positioned   both   as   an   energy   company   selling   solar   panels   and  
batteries  and  as  an  automobile  manufacturer.  
 
This  was  a  crucial  step  to  push  the  development  of  renewable  energy  forward  and  lower  the  cost  for  
each   of   those   three   products.   Now   they   can   “design,   develop,   manufacture   and   sell   both   high-­‐
performance   electric   vehicles   and   solar   energy   generation   and   energy   storage   products.”   [4]  
Furthermore   they   saved   “$150   million   from   combined   marketing   and   sales   operations,   and   from  
lower   corporate   expenses   and   saving   in   overhead   costs”   [4].   This   gave   Tesla   the   competitive  
advantage   in   electromobility   and   the   mass   production   of   electric   automobiles   components   they  
needed  in  order  to  enter  the  mass  market  of  the  automotive  industry.    
 
As   we   move   closer   to   Tesla’s   20th   anniversary,   propose   specific   actions/recommendations   for  
Tesla  to  continue  surviving/thriving  –  or  even  continuing  being  a  preferred  stock  in  investors'  mind  
–  regardless  of  their  lacking  financial  performance.  
 
As  we  can  observe  after  learning  more  about  Tesla,  the  company  is  widely  known  for  its  pioneering  
spirit   in   breaking   markets   barriers   and   innovation.   That   is   the   main   reason   why   Tesla   is   still   in   the  
market  despite  the  poor  financial  performance.  
 
The   truth   is   that   Tesla   is   a   unique   company   that   not   only   established   in   a   once   shy   and   almost  
inexpressive  niche  in  the  market  but  also  transformed  it  in  an  “everybody  wants”  field,  starting  an  
opened  competition  between  the  big  and  –  you  can  say  –  traditional  companies.  
 
After  almost  20  years  on  the  market,  it’s  clear  that  Tesla  needs  to  establish  itself  in  the  mass-­‐market  
and   keep   investing   in   the   development   of   its   technology   in   all   its   aspects,   especially   their   battery.  
Searching   ways   of   making   it   cheaper   and   also   lighter   will   improve   not   only   Tesla’s   capacity   to  
establish  itself  in  the  mass-­‐market  but  also  make  the  balance  sheet  positive  for  a  change.  

                                                                                                           
 
  
Moreover,   Tesla   needs   to   gain   the   confidence   of   its   investors   and   consumers.   In   other   words,   the  
numbers   have   to   “close”,   showing   the   investors   that   they   can   profit   from   their   already   existing  
innovations   and   so   continue   to   invest   in   new   technologies,   reaching   new   niche   and   markets.  
Customers  also  need  to  feel  confident  about  the  company.  Just  making  environmentally  friendly  cars  
will  not  be  able  to  compensate  for  production  and  delivery  delays,  low  performance,  and  high  prices.  
And  last  but  not  least,  Musk’s  charisma  will  not  be  sufficient  to  maintain  such  an  important  company  
on  track  for  a  long  time  –  in  our  fast  and  globalized  world  -­‐  if  it’s  not  profitable.  
 
On   the   other   hand,   Tesla   needs   to   continue   with   its   originality   and   pioneering,   expanding   the  
company   and   trying   as   much   as   possible   to   diversify.   It’s   easy   to   see   by   analyzing   Tesla’s  
consolidated   balance   sheet,   that   between   2015   and   2016,   the   company's   assets   practically   tripled  
when  they  started  investing  in  solar  energy  systems,  leased  and  to  be  leased.    Moreover,  companies  
such   as   Mercedes,   Toyota,   and   others   are   entering   this   market   and   so   are   buying   Tesla’s   technology  
and  know-­‐how  since  they  don’t  have  the  knowledge.  Therefore,  Tesla  needs  to  continue  expanding  
it  to  stay  strong  in  the  business.    
 
However,   not   only   expand   as   well   as   diversify   their   investments.   Now   that   the   big   companies   see  
electric  cars  market  as  profitable  -­‐  thanks  to  Tesla  -­‐,  it  has  to  continue  to  find  new  niches  to  continue  
as  first,  as  tech  provider  to  other  and  more  importantly,  ahead  of  the  competition.  This  way  Tesla  
will  establish  itself  in  the  mass-­‐market  once  and  for  all,  and  at  the  same  time,  it  will  stay  ahead  of  
the  competition  for  new  sustainable  energy  and  so.  
 
References:  
[1]               Sayan   Chatterjee   and   Dennis   Terez,   (2018),   “Tesla:   Testing   a   business   model   at   its  
(r)evolutionary  best”.  Ivey  Business  School  Foundation.  
[2]       Frits   K.   Pil,   Matthias   Holwag.   (2006).   Evolving   from   value   chain   to   value   grid.   MIT   Sloan  
Management  Review,  47(4),  72-­‐80  
[3]         Hergert,   Michael;   Morris,   Deigan.   (Mar/Apr   1989).   Accounting   Data   for   Value   Chain   Analysis.  
Strategic  Management  Journal,  Vol  10(2),  175-­‐188.  
[4]             Porter,   M.   (Jan   2008).   The   five   competitive   forces   that   shape   strategy.   Harvard   Business  
Review,  Vol  86  (Issue  1)  
[5]             Porter,   M.   (May/Jun   1987).   From   competitive   advantage   to   corporate   strategy.   Harvard  
Business  Review,  Vol.  65  (Issue  3)  –  AVAILABLE  ON  HULT  DIGITAL  LIBRARY  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A1:  Case  Analysis  Assignment  -­‐  Team  9