Hult International Business School

Tesla Case Study

Claudia Loubriel

Alexander Cruz

Maximilian Kleiner

Matteo Mancini

Ghazal Farrokhyar

Oscar Ferraccioli
Table of Content

1
Question 1 - Incorporation and Initial Steps 3
Question 2 - Initial Challenges: the Roadster and Beyond 5
Question 3 - Tesla’s Shake-Up of The Traditional Value Chain 7
Question 4 - Company Financials 9
Question 5 - Gigafactory and SolarCity 10
Question 6 - What’s Next 12
 Question 1 - Incorporation and Initial Steps

Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning. 5 years later, Tesla’s

first sports car model was unveiled. With an initial price of over $100,000, Tesla was

positioning its car with other high-end car manufacturers like Porsche and Ferrari. Elon musk

adopted this strategy since he wanted to show the world that electric cars could compete with

petrol fuelled high-end vehicles. His second strategy was to launch an all-electric sedan

vehicle in the market to compete with BMW, Mercedes and Audi.

As of today, car manufacturers have been unveiling electric cars year after year, increasing

furthermore rivalry with Tesla. “The automobile industry’s high costs of entry, economies of

scale, and network effects from distribution, fuelling, and service lead many to conclude that

new entrants have no chance” (Stringham, 2015).

On the other side, Tesla has been able to overcome the majority of the barriers to enter the

industry thanks to Musk’s guidance. Due to high costs of entry in the industry as well as

expensive technology, Tesla decided to produce a limited amount of Roadster vehicles in

order to target a specific market segment. The electric vehicles industry at the time was very

hard to penetrate not only because of high costs, but also due to technological advances in

lithium batteries. Penetrating the traditional automotive industry would have meant creating a

totally different strategy.

Considering the fact that when the first Tesla Model S was launched not many all-electric

vehicles were present in the market, buyer power was not very high, and customers buying

traditional vehicles conversely had a wider product choice, especially in 2003Several car

manufacturers launched electric vehicles in the market, making it easy for Tesla customers to

easily switch to competitors. Just like in the traditional automotive industry, bargaining power

from the buyer keeps being high due to, for instance, price sensitivity. Customers buying

traditional vehicles have a much wider choice compared to electric vehicle clients.
Tesla has been relying heavily on external suppliers for different parts of its vehicles.

Technology component suppliers has never been supplying automotive manufacturers, and

this is why Tesla created a unique supply chain strategy focusing on three aspects: standard

parts, proprietary parts and battery operated powertrain. Most of Tesla's suppliers are mid-

sized companies, meaning that they don’t have too much influence in the industry.
 Question 2 - Initial Challenges: the Roadster and Beyond

As most innovative and technologically inclined projects, an electric car had many obstacles

to overcome, the leading one being that the cost of the project could bankrupt the company if

a strategic plan to overcome these initial roadblocks was not developed correctly. It was

Clayton Christensen who best described this type of ‘recipe for success.’ disruptive innovation

(Chatterjee & Terez, 2018, p. 2). Tesla Motors decided that their first product would be

designed and catered to a ‘niche’ as a luxury car, comparing in the market to Porsche, Ferrari,

and Lamborghini. As the company began to formulate strategies on how to sell to the ‘elite’

consumer, they needed to differentiate themselves from the competition. The Roadster, as

they decided to call the model, was a high performing custom spots car, that could help save

the planet.

The new focus of the company was to create an image worth buying and the design of the

supply chain was, which made buying the Roadster an experience for the customer that would

also help reduce a person’s carbon footprint. Tesla began investing in showrooms where the

customer would have the opportunity to see the car prior to purchasing. Afterwards, the buyer

could go online and customize the car to their preference and buy the car. This presented

some legal obstacles, especially considering states that prohibited direct manufacturer-to-

consumer car sales. These customers had to purchase online, the car would then be

transported by another company, registration would take place in another state, and then

contact main offices in California to activate warranties and other services (Chatterjee & Terez,

2018). This would add to the backlogs over time. Luckily, target customers did not mind a long

waitlist because the most important factor for the customer was the experience and the luxury

that came with owning the newest product in the car industry market.

Tesla Motors later changed to Tesla Inc., and due to its initial decisions and tradeoffs, had a

successful supply chain and was rapidly emerging as a company to watch, but, as Chatterjee
and Terez well explained, “it faced significant challenges in other parts of the value chain,

especially if it intended to expand to the mass market” (p. 3). Tesla had a defined product

which led to a segmented customer, and the execution of a mass market product was where

its production line ultimately failed. When it was finally cost-effective to sell affordable electric

cars, the company did not change the method of distribution. The waitlist could fluctuate to

months of delay. Backlogs also began to overwhelm the company. This produced discomfort

with new target customers. It made them feel undervalued and forgotten, thus resulting in

cancelled orders and a negative image. Tesla Inc, then, started to invest in other projects and

neglected to fix the main problem in their supply chain.

The traditional automobile company could now take note of Tesla’s two-prong customer

distribution strategy (Chatterjee & Terez, 2018). The fact that customers were put on a waitlist

vocalized the effectiveness of an online customization shopping experience. This posed a

competitive problem, where—from a value chain perspective—Tesla opened up the possibility

of any automotive newcomer to scale solely from an online presence, with the option to expand

vertically across the value chain after demand has been generated. However, companies that

already had competency in mass market distribution could theoretically use a similar model

for their customers, only then deliver.

It’s also worth noting that expansion across the value chain included:

1) a mass-marketed electric car

2) a solar energy leasing company

3) a fully reusable rocket

Some efforts were simple diversification, while others were clear horizontal movement.

As mentioned earlier, Tesla had a major distribution challenge when it came to states that

prohibited direct manufacturer to customer sales (Chatterjee & Terez, 2018). Any other

company not named Tesla would have had a huge issue with this service, as it almost sounds

more like a de-value step in their value chain. Yet, this unique structure endured, and allowed

Tesla to ultimately distribute their product to a fervent and patient customer base.

In the words of Michael E. Porter, “Industries are profitable not because they are sexy or high

tech; they are profitable only if their structures are attractive.” That being said, poor industry

structures can overcome the benefits of vertical integration and skills in process technology.

Compared to other automobile manufacturers, Tesla proved that a three-prong supply chain

strategy of standard parts, proprietary parts, and the battery-operated powertrain could be

utilized. Being uniquely positioned to engage in sharing, subject-matter expertise, and

synergistic value-creation helped to scale Tesla for growth. According to Porter, “Sharing can
lower costs if it achieves economies of scale, boost the efficiency of utilization, or helps a

company move more rapidly down the learning curve.” (1987, p.56)

By comparison, automobile manufacturers outsourced most of their components.

Finally, Tesla was able to infuse technology into its value chain by developing a way for

suppliers to more efficiently use certain shared services, via a website and “manufacturing

hotels” (Chatterjee & Terez, 2018). Jumping on this opportunity to link businesses together

was yet another example of a value chain shake-up. They even moved to create value in areas

where traditional automotive companies lagged: environmental sustainability, personalized

service technicians, and luxury delivery.

Currently, Tesla’s ecosystem is not formed only by cars, they want to create a new economy,

cars are a little part of the entire business, therefore, every year they heavily invested in new

technologies.

Even if Musk emphasized on making products look appealing to the costumer, the main focus

was power, for instance Tesla made super charge stations to refuel the car’s batteries all

around America, several of them in big cities, and then strategically built near highways.

The company built a network of service stations for electric cars, leading Tesla owners to

power their cars for free, in this way people saw an added benefit to buying a Tesla car and

prompted America to move towards the electric cars, specifically a Tesla model. As Tesla aims

to offer the service stations to every future electric car, the energy strategy became the main

purpose of the company.

Tesla promised to bring future profit to investors. Even if their expenses were growing year by

year, they continued to invest in strategic assets, penalizing net income, focusing on long-term

strategy. Stock prices have steadily been growing because Tesla creates value with strategic

investments in energy as their performance indicates below.

People want to buy Tesla also because

it’s a “green” company which focuses on

being environmentally friendly. During the

last year the stock price has fallen from

about $300 to $220 per share because of

permanent losses relating to operating

expenses, lost revenue, compounding

debt and reckless financial management.

Around 2016, Tesla decided to invest heavily in two different projects. The first one involved

investment in the Gigafactory project in Nevada and the second one was the acquisition of the

solar energy company SolarCity. Both investments had their advantages and disadvantages.

The Gigafactory project was based on the idea that Tesla can reduce its costs (Chatterjee

and Terez, 2018) and verticalize the value chain. Initially, they used batteries which were

produced in the far east (Chatterjee and Terez, 2018). This involved costly measurements

when it came to the distribution of core products, such as for instance batteries. According to

Tesla (2014) themselves, the Gigafactory aimed to reduce the costs for the cells, which were

needed for their cars, more rapidly than the actual status quo. Additionally, the increase of the

production of the cells is accompanied by the increased production of lithium-ion batteries, of

which the production in 2020 shall exceed the worldwide production of 2013.

Factors such as “boosting range and reducing charging time are huge engineering challenges”

(Wood, 2019). The Gigafactory offers the opportunity to embrace such research and

development, rather than struggling to deliver efficient servicing (Boylan, 2019). In recent

years, there were several complaints about Tesla’s service. Customers had to think of other

transportation possibilities as they waited for their order to be fulfilled.(Boylan, 2019). The

construction of the Gigafactory is supposed to reduce this time. Not only would it support the

speed of repair or reducing costs for the batteries, it would reduce cost along the whole value

chain (Chatterjee and Terez, 2018).

Also in 2016, a company named SolarCity was acquired by Tesla. It “had the largest market

share (32 per cent) of the U.S. residential solar market” (Chatterjee and Terez, 2018).To an

average consumer, it might not seem like an ideal investment. However, if examined in detail,

the acquisition offers many competitive advantages for Tesla. Electricity is essential for Tesla.

Even so, the demand for renewable energy is growing steadily, and with the acquisition of

SolarCity, Tesla was able to target both concerns mentioned in the case study. Chatterjee and

Terez (2018) state that Tesla and SolarCity have three products in common. One is solar
power; the second is the storage of energy itself and the third electric vehicles. Even if there

were more differences, Tesla decided to “formally [change] its name to Tesla, Inc. – dropping

the word ‘Motors’” (Chatterjee and Terez, 2018), after joining another industry. Just like the

Gigafactory, SolarCity allowed Tesla to restructure the value chain

Both investments included risks, but the advantages which would arise for Tesla were offering

great opportunities for reducing costs and facilities along the value chain. Not only would these

investments be beneficial for Tesla, but everyone else as well.

The world is scaled towards a company like Tesla, where much of what can tend to be in the

way is policy. We believe that if the global economy keeps pushing towards a greener future,

then Tesla can thrive. In Terms of Tesla’s relative position in the market, they should conserve

their cash flows and focus on profit. They have invested so much that, as a result, they have

gone cash-negative. Poor operations management can also be attributed to their expenses. If

we look at Tesla’s SG&A expense from 2016 to 2017, we can see a clear jump of $1M USD.

Notwithstanding, if Tesla engages in synergistic value creation across their supply chain,

business units should be able to become more lean and move lower down the learning curve,

thus reducing costly SG&A expense. Another alternative would be to cut jobs, which would

only be a last resort, because that action could potentially trigger a PR nightmare for the

company. In the beginning, Tesla was essentially protected against competition because their

innovative ideas differentiated themselves from the rest. Now, they are market leaders, just

without a profit.

Regarding mass market automotive products, there were years worth of supply backlogs. This

is a classic example of misattribution of resources both on a leadership aspect, and a material

aspect. They have to focus on the long-term, and stabilize. The money that Tesla makes could

be positioned towards reassuring their customer base, like improving the time of their car

charging.

Tesla makes financing decisions like it has free cash flow, which it does not. This - from an

R&D perspective is wonderful, but from an immediate shareholder value perspective this is

not what people want. If Tesla can keep convincing the market that it’s a viable long-term

investment, then they can survive off of the issuance of common stock and the acquisition of

low-cost debt.
References

Boylan, C. (2019, March 21). Tesla Service Struggles To Keep Up With Sales Volume.

Retrieved from https://cleantechnica.com/2019/03/21/tesla-service-struggles-to-keep-

up-with-sales-volume/

Chatterjee, S. & Terez. D. (2018). Tesla: Testing a Business Model at its (R)evolutionary

Best. Ivey Publishing

Desjardins, J. (2016, May 29). This infographic shows Tesla's rivals in the electric vehicle

industry. Retrieved from https://www.businessinsider.com/teslas-rivals-in-electric-

vehicle-industry-2016-5

Donaldson, K., Ishii, K., & Sheppard, S. (2006). Customer Value Chain Analysis. Research

in Engineering Design, 16(4), 174-183. Retrieved from

https://www.academia.edu/17078233/Customer_Value_Chain_Analysis

Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business

Review, 65(3), 43. Retrieved from

http://search.ebscohost.com.hult.idm.oclc.org/login.aspx?direct=true&db=bth&AN=41

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Stringham, Miller, J. K., Peter, E., & Clark, J. R. (2015). Overcoming barriers to entry in an

established industry: Tesla motors. Overcoming barriers to entry in an established

industry: Tesla motors. Retrieved from

https://cmr.berkeley.edu/search/articleDetail.aspx?article=5799

Tesla. (2014, February 26). Gigafactory. Retrieved from

https://www.tesla.com/en_GB/blog/gigafactory
Wood, B. (2019, June 24). Opinion: Gigafactory in Nevada is critical to Tesla’s future.

Retrieved from https://www.marketwatch.com/story/gigafactory-in-nevada-is-critical-

to-teslas-future-2019-06-22