Developing and Executing Strategy

Question 1:

Critically diagnose and analyze the current situation facing Tesla using appropriate strategic models.

Introduction

Tesla Motors was founded in 2003 by Martin Eberhard and Marc Tarpenning. In 2004, a new investor, Elon Musk, joined the company by investing USD 6.5 million in Tesla stocks during a Series A round of investment” (McFadden, 2020), thereby becoming a majority shareholder in Tesla Motors Corporation. The purpose of Tesla is “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” Currently, Tesla provides automobile and energy products to various market segments worldwide, such as North America, Europe, and Asia.

It is a corporation operating in two industries; automotive and energy generation and storage, two main Strategic Business Units (SBUs) on which we will focus our analysis.

Strategic Issue Diagnosis

Business Issues

From 2003 to 2008, Tesla was in the introductory phase, experiencing challenges regarding uncertainties related to the market not being aware of electric cars. In 2008 marked the launch of Testa’s first products; Model S and Roadster; which were high-price, low-volume vehicles targeting high-end customers. The revenue from these products was used to finance R&D, which was needed to design, develop, manufacture, and sell new models, Model 3, Model X, and Model Y, which were targeted to the mass market.

The growth stage is favored by the rising demand for environmentally friendly products. The demand for such products is triggered by rising pressure from different bodies, including governments and international organizations, that plead for climate change.

During this growth stage, Tesla maximized the use of its infrastructure to develop energy generation and storage products and systems to increase its revenue and profitability.

Cultural Issues: Tesla’s brand, technological innovation, autonomy, collaboration, research, and development as well the creative designs and the drive for different and unique products and services, constitute Tesla’s cultural web which is reflected in the rapid growth of Tesla, which is known to be the leader of electric vehicles. Tesla’s culture encourages innovation which is driven by a highly competent human capital. Tesla invests heavily in its workforce by dedicating attractive compensation and incentive schemes, including allocating Tesla’s equity to staff based on their performance to retain and nurture the best talent essential in driving Tesla’s success.

Tesla’s products and services heavily depend on control systems and procedures to ensure quality, efficiency, and compliance with rigorous operating and regulatory frameworks that govern the automotive and energy generation and storage industries at the local and global levels.

Elon Musk is the central figure of Tesla, who plays the role of techno king, shareholder, and product architect of Tesla’s products and services. Due to Elon Musk’s strong leadership and influence over the company, he has been making strategic decisions which were well reflected when he decided to join the company and invested heavily to become the main shareholder.

Political/Governance Issues: Political and governance issues arise from conflicting interests of different stakeholders. Mr. Elon Musk himself concentrates on numerous roles that may create conflict if not managed well. As the majority shareholder, techno king, and CEO of Tesla, he represents a concentration risk that may cause damage to Tesla’s operations and reputation.

The legal proceedings involving Tesla and its policy organs may harm Tesla’s business if handled poorly. Tesla’s image suffers negative criticism relating to different issues, including poor working and compensation, misleading financial statements, environmental issues, lack of independence of its board as well as regulatory issues in different parts of the world.

External Analysis.

Macro Level Issues

The PEST analysis highlights macro issues that affect Tesla’s business operations, as discussed below:

Political: The countries where Tesla operates are politically stable, representing a favorable factor for Tesla’s business. Such countries promote policies that drive Tesla’s operations. Trade agreements existing in the countries where Tesla operates favor its automotive and energy products and services. Tesla operations in some jurisdictions which experience fluctuating regulatory changes may negatively affect Tesla’s business.

Economic: The ongoing disruptions caused by the Russia-Ukraine war at the global level affect Tesla’s operations in different ways. This crisis has caused many fiscal and monetary issues, including rising inflation, interest rates, and currency fluctuations, negatively affecting consumers’ purchasing power and demand for luxury goods. This has led to decreased sales of Tesla’s products and services. Tesla’s operations are still recovering from the negative impact of the Covid-19 pandemic, which highly affected the supply of critical raw materials, such as lithium-ion, cobalt, Nickel, and aluminum, sourced from different parts of the world. Tesla currently operates in high-income countries like the USA, China, and Germany, which offer government programs and incentives which are favorable to Tesla’s electric vehicles and clean energy products.

Sociocultural: –There is a growing concern for global climate change, which could positively impact Tesla’s business in the electric automotive and clean energy industries. Consumers’ tastes and preferences towards Tesla’s electric vehicles may be slow, given that some consumers may take long to adopt Tesla’s environmentally friendly products at the expense of traditional products. There is a big category of consumers with high social standards and status in the initial markets of the USA, Germany, and China which may positively influence their choice of Tesla’s luxury electric cars and boost its sales and profitability.

Technological: The advanced technology in the developed markets where Tesla operates positively influences Tesla’s technological innovation and digital capabilities needed to design, manufacture, and sell its products. However, the high speed of technological change may also negatively affect Tesla’s business by requiring consequential updates of its design requirements in automotive and energy products. This may significantly affect the manufacturing costs and decrease its profitability.

The rapid technological change may also affect Tesla’s competitive advantage by having new entrants develop electric vehicles.

Legal and Environmental: Tesla’s operations are subject to complex legal, regulatory, and environmental frameworks and laws, which may negatively affect its current and future operations in different jurisdictions. Tesla has faced several labor issues on poor working conditions from its former employees (Hawkins, 2020). Such lawsuits negatively affect Tesla due to public confidence loss and Trade Unions.

Market and Industry Analysis

Porter’s Five Forces are used to analyze Tesla’s market and industry as demonstrated below:

The threat of new entrants:Low to moderate

The industry requires large investment capital, safety, and other regulatory requirements, which constitute entry barriers. Tesla is well positioned to face competition from traditional and prospective electric vehicle manufacturers because the company is the first mover in this industry and has already achieved economies of scale. The company has invested heavily in Research and Development, design and engineering expertise, human capital, brand recognition, and other infrastructure for charging batteries and maintenance, giving Tesla a competitive advantage.

Existing competitor rivalry: Moderate

The automobile industry is highly competitive. However, Tesla is the first mover in the electric automotive industry. It has established its infrastructure, digital and technological capabilities, and strong brand identity, which allows Tesla to have a competitive advantage compared to other electric automakers who are new in that industry and still must invest a huge capital. It would be costly for customers of Tesla’s products to switch to a new brand.

Bargaining Power of Tesla’s Customers/Buyers (Moderate Force)

Porter’s Five Forces Analysis considers how customers affect businesses and the environment surrounding the electric automotive and energy industries. Tesla’s income is directly generated by the sales made to its customers. The high switching cost

prevents Tesla customers from buying products from other suppliers. Since Tesla is the dominant manufacturer of electric cars, the customers who are willing to shift to electric cars do not have many options to get them from other suppliers at the cost offered by Tesla, which already has economies of scale. That is why the buyer’s threat is moderate.

Bargaining Power of Tesla’s Suppliers (Moderate Force):

Tesla depends heavily on tits various suppliers of components needed for its electric automotive and energy products. Tesla is not highly affected by the threat of suppliers because it has many alternatives when it comes to its main components like lithium, cobalt, aluminum, etc. Tesla’s plan to manufacture its own components will continue to reduce this threat and allow Tesla to produce affordable products, thereby minimizing the intensity of this force to make it low to moderate.

The threat of Substitutes or Substitution (Moderate Force):

There are limited alternative manufacturers of electric vehicles currently. Although there are alternatives to electric vehicles, including hybrids, flex fuels, hydrogen, diesel, and natural gas, these do not constitute a big threat of substitutes to Tesla’s products given the pressure to shift to electric vehicles to fight against climate change which in turn creates demand for environmentally- friendly cars. The threat of substitutes is, therefore, moderate.

Environment-Organisation Fit

Tesla uses big data and analytics to collect toughly analyzed data to detect any issues in the electrical vehicle safety and performance and make necessary improvements. Big data and analytics are also used to manage Tesla’s clean energy products and systems to optimize their performance.

Internal Analysis

Tesla Analysis

Using VRIO Analysis to assess Tesla’s resources and capabilities enables it to develop a sustainable competitive advantage.

Value- Tesla has invested a lot in technology, innovation, and in R&D in electric vehicles. Such moves have immensely created capabilities in resources that provide value to the company’s production line.

Rarity- Tesla ventured into the electric vehicle industry as a major player. For an instant, the company invested in charging polls that were rear and unique in the automobile industries. This technology gave the company an edge over its competitors.

Imitability- Tesla invested a lot in technology for its brand and reputation. Competitors find it difficult to imitate Tesla’s sources and capabilities due to the higher investment cost associated with developing the same technology and building the same brand that matches Tesla’s products.

Organization- Tesla has positioned itself to take advantage and make optimal use of its resources and capabilities. Elon Musk as a major shareholder, has a clear and precise vision, mission, and strategic approaches that have enabled the company to maximize the usage of its resources and capability to accelerate the company’s growth and sustainability in the industry.

The use of Value Chain analysis- Tesla created a good working relationship with suppliers of their raw materials to produce its electric vehicle. The relationship has helped ensure that suppliers deliver quality raw materials on time. Tesla has further enhanced its direct-to-customer sales marketing, which has helped the company be ahead of traditional dealer networks. Tesla offers after-sales services for its products to its customers, which has helped the company build customer loyalty, leading to a volume of sales, sustainability, and profitability.

Organizational Architecture

Tesla uses synergy in its technological and manufacturing infrastructure, systems, processes, and resources to support its production of both the electric vehicles and clean energy products. The company leverages the same innovative technology to boost its production efficiency. Tesla continues to make major improvements in technology and innovation, giving the company a competitive advantage. The company has created a culture of innovation that empowers its employees to design continuously. This approach has helped Tesla to develop strong techniques in the industry that has facilitated and helped the company to withstand any competition in the industry.

Financial Resources

Ratio analysis

Using the financial statement from Form 10k, I have calculated the following ratios to determine Tesla’s financial performance and capabilities.

1. Profitability ratio: The gross margin ratio recorded in 2020 is 21 % compared to 25%, which was recorded in 2021.

This indicates that there was an increase in the gross margin ratio from 21% in 2020 to 25% in 2021. This clearly indicates that Tesla’s profit after paying the cost of goods sold increased in 2021 compared to 2020. This puts the company in a favorable financial position.

2. Liquidity ratio: The current ratio recorded for 2020 was 1.875 compared to 1.375 recorded in 2021. The drop in the current ratio indicates that Tesla will face challenges in paying off its short-term liabilities from its cash and cash equivalents.

A higher current ratio tells us that the company is more likely to repay the creditors without any problems.

Efficiency ratio: The asset turnover ratio for 2020 was 0.55, while it was 0,94

for 2021, which clearly indicates that Tesla recorded an improvement in the generation of sales from its assets.

Leverage ratio: debt ratio: Tesla’s debt ratio was 0.54 in 2020 compared to 0.49 in 2021, which indicates that Tesla has significantly reduced the relative amount of the company’s assets that are provided for debt.

Integrative Internal Analysis

Using capability analysis, Tesla has highly invested in its innovative technologies and capabilities, its EV manufacturing infrastructure, R&D, human capital, data collection, analytics systems, and its brand image. This has helped the company to maintain its competitive position in the Electric Vehicles automobile, and clean energy products. It has also enabled the company to continuously improve its products to respond to customer needs and drive growth and its financial performance.

SWOT Analysis

Tesla Inc. has its strengths, weaknesses, opportunities, and threats in the operating environment based on its internal and external analysis. The main purpose of SWOT analysis is to develop strategic approaches to enable a company to outperform its competitors by leveraging its corporate strengths and managing its weaknesses and threats to minimize losses. As Tesla seeks to grow its EV automobile and energy product market, the company can benefit greatly from a SWOT analysis.

In conclusion, based on the above, Tesla has a great potential for growth due to its strengths and capabilities and favorable macro conditions, which the company can leverage to overcome the weaknesses and threats to stay in a leading position in the electric automotive and clean energy sectors.

Question 2:

Considering the scenario presented above, set out a strategy for Tesla regarding its strategic intent, available options, and how they might be executed.

Proposed Tesla’s Strategic Statement

“To continue being the leading player in providing environmentally friendly products and solutions in electric automotive and clean energy by deploying our superior, innovative technologies and resources to fight against climate change in line with the global call for a sustainable future for all.”

The following are proposed Tesla strategic options using option configurators:

Aim– Tesla currently operates in a few markets in Europe, Asia, and the USA. Looking at its technological capabilities and financial resources, Tesla could expand (Growth option) its business to other markets and emerging countries.

Tactic- Tesla should adopt market penetration for its products, Model S and Model X. Since these are premium vehicles, they should target Tesla’s existing market. On the other hand, Tesla should adopt market development for model 3 and model Y since they are small, medium premium, and targeted to the mass market.

Direction- Tesla should leverage its existing technologies, capabilities, manufacturing infrastructure, and resources to develop related products for existing and new markets. This will enhance the maximum utilization of its resources and production volume. In addition, Tesla should implement its design and components needed for electric vehicles and energy storage to minimize various suppliers, minimizing the cost of components. This move will reduce the cost of production and increase profitability.

Method-Organic growth is proposed for Tesla to enable the company to maximize the use of its current resources while increasing the market growth and competitive advantage.

Competitive Stance- Tesla should continue to compete on a cost basis for Model 3 and Model Y, designed for the mass market, and should apply differentiation for Model S and Model X, which are premium models with sophisticated and static features.

Strategic Group- Currently, Tesla competes with traditional automakers such as General Motors, Toyota, BMW, Nissan, Ford, and many more and with prospective electric automakers who have declared their plan to enter that market.

In conclusion, using A3S, the proposed strategic options are achievable because Tesla has a big untapped potential market, capabilities, competencies, and resources needed to grow its market share. The options are also appropriate given the global call to move from fossil fuels to clean energy. Furthermore, the proposed options are astute given the unique and distinct features incorporated in Tesla’s electric automotive and energy products, which give Tesla an advantage as a first mover in this industry. The options are also sustainable given the increasing global demand for electric cars and clean energy products and Tesla’s established position, resources, and capabilities to respond to that demand.

EXECUTION

Structure and Design

Using the STAR Model, Tesla should design an organizational structure and design to drive the proposed strategy. Such a structure should have the capabilities, competencies, and technological skills to drive the expected high-volume product sales, market, and geographical expansion, and technological innovations.

Currently, Tesla does not have a binding employment agreement with its workforce. There the company should design an employee pay and compensation framework. This act will motivate and inspire employees to focus and works towards the company’s goals and objectives.

Change Management

Tesla should use Burn’s model since the company is on a transformational change driven by innovation and technological advancements. Therefore, I propose that Tesla develop a refined democratic decision-making process that empowers other stakeholders to contribute their independent views; for example, Tesla should continue empowering their employees through capacity building and providing resources for them to develop new skills.

Defining and Measuring Success

Tesla should use a Balanced scorecard to align its goals and strategy across all the departments, hence ensuring everyone is focused and working towards Tesla’s common objectives and goals. Tesla’s financial success is the basis for its sustainable growth and increased customer support base. It further helps strengthen its internal processes linked to strategic goals.

In conclusion, Tesla should implement the proposed strategic options to grow its business and market share in Electric vehicles and clean energy to reach its strategic goal. The proposed structure and design, management change, and performance system will help propel Tesla in a strategic position to continue dominating the electric vehicle and clean energy industries.

Question 3

Critically discuss the differences between the value chain and value system. What is the influence of the value chain and value system when setting out a future strategy for a company? Use relevant examples of international companies to support your discussion.

The value chain majorly concentrates on the internal activities of a given organization. In contrast, the value system focuses on how multiple organizations are interconnected to enable products or services to reach the market. For instance, McDonald’s uses a value chain to help the company to understand each step in the production and delivery processes. The company also embraces a value system that helps the organization collaborate with various stakeholders, resulting in value creation.

The value chain is a strategic tool that businesses use to evaluate their internal processes and activities involved in the production of goods and services with the main objective of optimizing production processes to increase profit margins. Value chain analysis enables businesses to have a competitive edge over their competitors in terms of cost or product differentiation.

While the Value system extends the concept of the value chain by considering the broader network of organization supplies, distributors, and other key stakeholders that are involved directly in business activities, the key thing is the interlinkages and co-ordination between the activities that improve the efficiency of the company hence optimize profit margin.

The Porter’s value chain model categorizes the value chain and value system into primary and support activities, which constitute an important step in improving the processes of their value chain and systems to maximize their potential.

For instance, McDonald’s prime strategy is to offer customers with food items at low prices than other strategic groups; thus, the company identifies gaps in their production system to create value for customers.

The food company broadly looks into its value chain and system in two broad categories, i.e., support and primary activities, as discussed below.

Primary Activities

This consists of five activities, including all sub-activities that are involved in creating products and services.

Inbound Logistics: This analyses the acquisition of raw materials from suppliers before the final product or service can be developed. E.g., Mcdonald’s has low-cost suppliers of their food and beverage items.

Operations are activities that are directly involved in the transformation of raw materials into end products or services. Mcdonald’s looks at the cost of running your chain lines franchise globally.

Outbound Logistics: This describes the delivery process once a product has been produced.shipping costs, delivery costs…etc. e.g., the company has counter services or Drive through services instead of sitting down approach of restaurants

Marketing and Sales: This is the approach of selling the product to the target market. Mcdonald’s uses billboards, social media, and other advertising platforms.

Services: A business’s support is instrumental to retaining and consolidating the customer base. Mcdonald’s achieves this by training their staff and giving them benefits to assist customers.

Support Activities

The principal activities’ ability to gain an advantage over rivals is aided by support activities. They consist of the following:

Firm Infrastructure: This refers to all the management, financial, and legal frameworks that a company has in place to conduct business and efficiently allocate resources. McDonald’s, for instance, has regional presidents who manage operations in various regions and a legal counsel who handles legal issues.

Human resource management (HRM): HRM includes all procedures and techniques used in hiring and managing the workforce. Job searchers can log in to a page maintained by McDonald’s to submit their applications.

Support activities help the primary activities in creating an advantage over competitors. They include:

Firm Infrastructure-This encompasses all the management, financial, and legal systems a business has in place to make business decisions and effectively manage resources. For example, McDonald’s has regional presidents who oversee their operations in different regions and a legal counsel who deals with legal matters.

Human Resource Management: Human resource management encompasses all the processes and systems involved in managing employees and hiring new staff. Mcdonald’s maintains a page where job seekers can log in and apply for jobs.

technology Development: This helps businesses innovate and embrace technology to increase efficiency and reduce costs. Mcdonald’s has online shops that enable customers to order their food items.

Procurement: This is the process of resourcing raw materials for a product and identifying the suppliers. The goal is to find quality supplies at a friendly business budget and without favoritism. Mcdonald’s has a digital procurement program that enables suppliers to apply from all over the world.

The value chain and value system are tools that are vital in shaping the strategy of an organization. They provide a framework for understanding the various activities and relationships involved in creating, delivering, and capturing value in the marketplace. Considering the influence of the value chain and value system when setting up a future strategy is essential. Here is how they impact strategy development:

Value Chain Analysis: McDonald’s has a highly efficient value chain that enables the company to design, produce, market, deliver, and support its products or services. By analyzing the value chain, the organizations can identify opportunities for cost reduction, process optimization, and value creation. This analysis helps determine critical activities and where competitive advantages can be gained or enhanced.

Competitive Advantage: Understanding the value chain enables organizations like McDonald’s to identify the unique strengths of their food and beverages, giving them a low-cost advantage over their competitor in the market . By focusing on activities where they excel, organizations can differentiate themselves from competitors and create value for customers.

Value System Analysis: Due to the strong value system embraced by McDonald, the company has built a strong network with its suppliers, distributors, and other partners involved in delivering their products and services. By analyzing the value system, the organizations have identified dependencies, opportunities for collaboration, and potential risks. It also aids the company in understanding the broader market dynamics and the impact of external factors on the organization’s strategy.

Collaboration and Partnerships: The value system analysis can uncover strategic partnership opportunities. By identifying complementary activities or capabilities within the value system, organizations can leverage their partners’ strengths to create a more comprehensive and integrated value proposition. Collaborations can enhance efficiency, expand market reach, share resources, and create new customer value.

Customer-Centric Approach: Both the value chain and value system analyses emphasize the importance of understanding customer needs and preferences. McDonald’s goal is to deliver top-notch customer service and offers forums where consumers express their demands and grievances. In-depth training and benefits are offered by the organization to its thousands of employees so they can best serve their consumers.

Adaptation to Change: The value chain and value system analyses enable organizations to identify potential disruptions, emerging technologies, and evolving market trends. For example, McDonald embraced an online shop approach during covid 19 also, the food chain has been advocating for sustainable growth by being environmentally sensitive and hence working toward this goal.

In conclusion, the value chain and value system provide valuable insights for strategy development by helping organizations understand their core activities, competitive advantages, market dynamics, collaboration opportunities, customer needs, and adaptability to change. By considering these influences, organizations can align their future strategies to create and capture value effectively in the marketplace.

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