Executive Summary
This report reviews the theories of competitive advantage and their relevance to Tesla Motors Inc.’s management and overall performance. To map the company’s competitive advantages, Porter’s five factors and generic strategies have been used to assess their impact on its overall performance and increased revenue generation. The study establishes that Tesla faces various threats ranging from new entry by startup firms to the automotive industry, threats from substitutes, buyers, and suppliers, and intense rivalry among competitor firms. To understand the company’s core competencies and capabilities, the Resource-based view framework was significantly beneficial in identifying the firm’s available resources that it can strategically exploit to create a sustainable competitive advantage. The structured conduct performance paradigm identifies external industry forces as Tesla’s major determinants of implementing strategies that improve its productivity, profitability, and overall performance. This study also highlights the roles of technological investments, innovation, and internalization in creating a sustainable competitive advantage and contributing to long-term efficient organizational performance.
Introduction
Tesla is the highest-ranked automotive company in terms of performance and innovation in new technologies to transform the lives of thousands globally. The company has acquired a reputed market share within the high-end global automotive market, facilitating its growth and dominance. With the growth of globalization and technological advancements, many small and large businesses are spreading their entrepreneurial operations beyond their borders into foreign markets, resulting in high competition for market share. Tesla has been utilizing these technological advancements and applying its resource position advantage in designing and manufacturing luxurious differentiated electric vehicles, powertrains, and other renewable energy products to earn a competitive advantage within the intense industry and accelerate the world to sustainable energy. The company has strategically positioned itself in the high end of the intense industry and earned a substantial competitive advantage. According to Han (2021, p. 573), competitive advantage encompasses all the factors influencing a firm or organization’s ability to generate more excellent value in terms of sales and profitability. These factors are attributed to product pricing strategies, branding, quality and desirability of products and services, promotion, distribution, and buyer satisfaction. The company’s broad differentiation strategy and continuous technological innovation have enabled it to internalize and spread its operations into foreign markets, accelerating its brand adoption, profitability, and overall performance. This study will review the theories of competitive advantage to establish how the firm has retained dominance in the intense automotive industry and determine the effectiveness of its implemented strategies in achieving sustainable competitive advantage and improvement.
1. Sources of Competitive Advantage and their Relevance to the Management
According to Kuncoro and Suriani (2018, p. 186), firms that have gained sustainable competitive advantages have the vital agility to counter the risks and threats ahead of their rivals hence retaining dominance within the highly competitive global market. Over the years, Tesla has grown highly reputable to its loyal customers around the globe and earned a significant market share due to its mass production of unique products of higher quality hence acquiring a substantial competitive advantage. The following theories have been critically reviewed and evaluated to map the company’s competitive advantages:
A. Porter’s Five Forces and Generic Strategies
Porter’s framework offers strategic approaches to map Tesla’s competitive advantage and long-term profitability. The five forces provide a precise evaluation and an understanding of the company’s current level of competition, significant challenges, and opportunities in choosing an effective competitive strategy for future sustainable profitability (Islami, Mustafa & Latkovikj, 2020, p. 15). Porter came up with the five forces to aid in analyzing the intensity of rivalry amongst competitors within the global market and industry, industry attractiveness, and the ability to sustain long-term profitability. In evaluating the automotive company, a critical review of the five forces will offer a systematic guide to determine the competitive forces that determine its relative competitive position within the industry and influence sustainable competitive advantage.
Entry of New Competitors
One of the significant threats to the electric vehicle-making company is the entry of new competitor companies trying to switch to manufacturing electric cars. The threat of fossil fuel-powered vehicles and traditional car makers moving to electric vehicle (EV) manufacturing is accelerating, and barriers are low (Lin, Lu & Xu, 2022, p. 2174). Meanwhile, Tesla has managed to maintain a reputed position within the high-end luxury industry despite the intense competition from existing and startup companies specializing in the manufacture of electric motor vehicles and trains (Cui, Yang & Vertinsky, 2018, p. 3116). The company’s huge capital investment, high performance, consumer praise, and use of technology have gained a significant market share. Among its industry rivals are the Chinese electric vehicle startup companies such as Li Auto and BYD, which have grown significantly dominant following governmental funding, the ability to access the global consumer market, and well-developed supply chains.
Additionally, companies within the United States and Europe, including Ford Motors co. and GM, are likely to transition to all-electric by 2035, which is a significant threat to Tesla’s quest to retain dominance (Islami, Mustafa & Latkovikj, 2020, p. 15). However, being the originators of electric vehicles, Tesla motors have the advantage of using economies of scale to upsurge the barrier of new entry and remain the dominant mass producers (Distanont & Khongmalai, 2020, p. 15). Tesla’s leadership should strive to apply autonomous technology and provide more differentiated products and matchless integrated offerings to lower the threat to startups and transitioning competitors. The company’s management should strategize on minimizing costs to increase reliability and attract and retain the loyalty of more buyers.
Suppliers Power
The bargaining power of suppliers is the degree to which suppliers control the availability of materials to their purchasers. For Tesla, supplier power is high due to a limited supply chain network (Han, 2021, p. 573). German suppliers are the company’s leading source of most of its vehicle parts. Disruptions in this supply chain caused by external factors could negatively affect Tesla’s performance. The company can, however, lower this supplier power by constructing Gigafactories in various parts of the world to shorten its supply chain network. This strategy improves production efficiency and minimizes shipment costs (Kuncoro & Suriani, 2018, p. 186). In addition, Tesla’s leadership team can diversify its sourcing bases to mitigate shortages and delays in supply and production. Developing vertical integration and leveraging technology will help the company’s management lower the bargaining power of suppliers and gain a competitive advantage in the highly competitive automotive industry.
Bargaining Power of Buyers
Wang & Peng (2020, p. 386) state that customers possess the power to influence firms and organizations into providing them with higher quality products and services at a relatively lower cost putting more pressure on profit margins. For Tesla, buyers’ bargaining power is relatively low since the company specializes in manufacturing high-end premium-priced electric vehicles. The company, therefore, gained this competitive advantage for competing in the intense global luxurious, producing and offering unique products and services that its competitors cannot create (Islami, Mustafa & Latkovikj, 2020, p. 15). By following the differentiation strategy, the company has established a reputed position and is enjoying economies of scale in the high-end market, hence not competing in the intense low-end market (Chen, 2022, p. 758). However, the absence of switching costs from Tesla products to those of competitors significantly increases the bargaining power of its customers. In addition, with the rapid transition of traditional carmakers to all-electric vehicles, customers are becoming price sensitive due to the availability of alternatives forcing Tesla to review its pricing strategy. To lower customer influence on their business and gain even more dominance in the industry, Tesla’s leadership team should differentiate and diversify its electric vehicles and other products in the prevalent sectors like large SUVs. Distanont & Khongmalai (2020, p. 15) notes that manufacturing and offering a wide range of unique, differentiated products and services that competitors cannot replicate within the industry can increase the company’s sustainable competitive advantage and growth.
The threat of Substitutes Products
The substitution threat is high for the company due to the low switching cost of acquiring alternative products at a lower price. Chen (2022, p. 758) argues that these threats force Tesla’s management to consider slightly minimizing its premium prices to retain its influential buyers, which significantly affects its profitability. With a solid customer base, a company can acquire a larger market share within the automotive industry and increase its competitive advantage (Lin, Lu & Xu, 2022, p. 2174). Its chief executive officer, Elon Musk, has managed to achieve brand loyalty and counter the risk of substitutes through premium pricing and effective marketing and promotional strategies. Elon’s contentious presence on social networking sites has contributed to Tesla’s expansion and increased its attractiveness and popularity. The cost of producing electric vehicles in today’s advanced technology limits the threat of substitutes, an opportunity for Tesla to enjoy its economies of scale in the mass production of its automobile products.
The Intensity of Industry Rivalry among Competitors
Cui, Yang & Vertinsky (2018, p. 3116) note that competition within the automotive industry is intense due to technological advancement. Startup firms, existing aggressive companies, and other prominent automotive companies are putting Tesla under pressure restricting its market penetration and high revenue generation. According to Islami, Mustafa & Latkovikj (2020, p. 15), its competitors are striving to switch to all-electric vehicle manufacturing and earn their market share within the industry by implementing differentiation and pricing strategies. Moderate substitute availability and performance is an external force for Tesla Company.
Sukaatmadja et al. (2021, p. 45) note that Intense rivalry forces negatively influence the attractiveness of the company’s products, limiting its profitability growth. The management can, however, counter this threat by differentiating its core marketing strategies (products, location, pricing, promotion, and people), continuously innovating and integrating its services to retain its dominance within the highly competitive industry and increase its profitability. The company’s leadership has the power to influence brand adoption through advertisement and product promotion which is a competitive advantage despite the intense rivalry within the industry.
B. The Structured Conduct Performance Paradigm
Scholars of the SCP Paradigm argue that external factors determine a firm’s performance within any given industry globally. According to Zahra (2021, p. 1841), the industry’s structure influences how a company acts, its choice of strategies, and overall performance. Tesla Company operates in the intense automobile industry, which is highly competitive. The company faces rivalry threats from new entrants, startup firms, and other established vehicle manufacturers switching to producing all-electric cars and power trains due to technological advancements (Lin, Lu & Xu, 2022, p. 2174). These factors significantly impact Tesla’s conduct, performance, and profitability. This theory examines the influence of the industrial organization, market structure, and behavior in determining a firm’s choice of strategies to increase competitive advantages (Maury, 2018, p. 100). Tesla has implemented differentiation, pricing, and focus strategies to respond to opportunities and threats and thrive in a highly competitive environment (Han, 2021, p. 573). The company specializes in producing unique automotive products that its rivals cannot, which has escalated its profit margins.
Tesla’s earned differential competitive advantage has enabled it to utilize advanced technology in the mass production of electric cars and other technological innovations that its rivals cannot replicate (Wang & Peng, 2020, p. 386). The structure of the automotive industry has thus significantly shaped Tesla Motors Inc. and influenced its formulation of effective strategies for achieving its substantial competitive advantage (Chen, 2022, p. 758). Although the company implemented a premium pricing strategy, it has attracted and retained a solid customer base in the high-end global market and earned a substantial market share. According to Lelissa & Kuhil (2018, p.76), the willingness of customers to acquire Tesla’s products is proof enough that the brand has been adopted due to the high quality of products and services and attractiveness of products within the market, effective promotional strategies, and pricing strategies. Tesla focuses on the high-end market segments increasing barriers to entry and limiting competition.
C. Resource-Based View (RBV)
The RBV theory is essential for firms seeking to recognize and exploit both tangible and intangible resources available, enabling them to implement strategies that ensure long-term profitability and growth. Firms within an industry tend to be similar regarding their available resources and choice of strategy in achieving long-term competitive advantage (Assensoh, 2019, p. 143). These resources are assessed and exploited to add competitiveness to a company allowing it to use opportunities, neutralize threats and create barriers for imitation. In addition, this approach views strategic resources developed within the industry as highly mobile since they can be purchased and sold.
To create a sustainable competitive advantage, Tesla’s management should exercise control and exploit its resources (particularly its highly mobile resources) to ensure they create value even when no longer in their possession. Other resources that create long-term competitive advantage for the company include patents, intellectual property, its brand reputation, unique value creation for its customers, trade secrets, mutually beneficial alliances, supplier-based relationship, and advanced computer soft wares (Zahra, 2021, p. 1841). RBV theory assumes that all companies have the power to access, retain and align their resources and capabilities strategically to achieve long-term high performance. The management should align these resources strategically and exploit them separately to improve value generation and long-term performance.
2. Firm’s Strategy and Strategic Position
Organizational Resources
Different firms employ the Resource-based view theory to assess and exploit their organizational resources for sustainable competitive advantage (Maury, 2018, p. 100). An internal analysis of Tesla will help determine its strategy and strategic position to achieve a comparative and competitive e advantage in the industry. RBV theory assumes that all companies have the power to access, retain, and align their resources and capabilities strategically to achieve long-term high performance (Assensoh, 2019, p. 143). According to the Resource-based approach, firms within an industry tend to be similar regarding their available resources and choice of strategies. In addition, this approach views strategic resources (those developed within the industry) as highly mobile since they can be purchased and traded. Further, RBV substitutes the assumption that heterogeneously strategic resources are unlikely to last long or are perfectly mobile. According to Wang & Peng (2020, p. 386), Tesla controls a wide range of valuable resources and capabilities which are homogenous and significantly promote the firm’s strategic position and efficiency within the global market.
Tesla has amassed over five hundred and eighty patents, most of which revolve around its electric power train components and battery. Its high investment in batteries (packs and cells) is among its core competencies, which are flexible in terms of battery cell mechanism, capacity, and improved energy storage for future enhancements (Chen, 2022, p. 758). This core competence has contributed to low pricing, safety, and durability and motivated further technological advancements in energy management and storage like Powerpack. Further, Tesla has achieved its competitive advantage through its unique energy solutions, battery packs, battery cells, and renewable energy generation and storage, among its core competencies. Its products are equipped with adequate software and engineered using up-to-date technological advances, creating a competitive advantage and improved performance.
The company’s single manufacturing system has also significantly contributed to the overall firm’s performance and development. Tesla monitors its performance and offers remote services at a reduced price to ensure a constant flow of resources and retain dominance in the intense market (Zahra, 2021, p. 1841). In addition, Tesla exploits technology extensively, which has created a resource position advantage for future sustainable competitive advantage. This technological advantage can be exploited to capture value by manufacturing products to retain the resource position advantage and create even more affordable products (Leung & Sharma, 2021, p. 81). According to Assensoh (2019, p. 143), the Resource-based approach highlights the importance of balancing between exploiting available resources and capabilities for developing new products and using the same cycle to promote long-term improvement and development within differentiated markets. Tesla applies its resource position advantage in designing and manufacturing electric powertrains. Subsequently, the company has strategically positioned itself as a proficient premium mass electric vehicle engineer.
Tesla’s electric vehicles are manufactured in the Fremont factory based in California. The automotive plant has enough capacity to hold about half a million cars which are moved using robots and automated vehicles. The flexibility of the engineering design facilitates more straightforward and faster processing and manufacturing of high-tech vehicles, which are expensive to imitate by competitor firms (Wang & Peng, 2020, p. 386)—being the only company which an all-electric plant, Tesla enjoys economies of scale in its mass production of electric vehicles and powertrains. Its plant is strategically located, ensuring more accessible access to technical expertise and labor hence its competitive advantage.
Finally, Tesla uses strategic alliances to acquire non-marketable resources and retain its leading position in the market (Leung & Sharma, 2021, p. 81). These resources include varied competencies and capabilities in EV production, manufacturing capacity, technological developments, and innovations (Maury, 2018, p. 100). Sharing these resources with partners and competitors promotes learning and facilitates growth in the long run. The company has formed and engaged in effective strategic partnerships such as supplier, R&D, and OEM alliances with its competitors, which has contributed to the creation of high standards, enabling Tesla to retain its dominance in the industry.
External Environment
According to Sukaatmadja et al. (2021, p. 45), analyzing a company’s external environment is vital in discovering opportunities and threats. To understand Tesla’s external environment, the five force theory is a helpful tool to determine the level and intensity of competition and other external factors that are likely to affect its performance. First, the automotive industry is rapidly transforming, with traditional vehicle manufacturers and fossil fuel-powered vehicle makers switching to all-electric vehicles (EV) due to solid external forces brought about by low switching costs (Leung & Sharma, 2021, p. 81). This threat significantly impacts the external automotive environment and can determine Tesla’s long-term performance. In addition, the rate at which EV startup companies enter the global automotive industry is high, resulting in high competition.
Porter’s five factors stress the influence of external rivalry forces in determining Tesla’s choice of strategy and its effect on performance. Lelissa & Kuhil (2018, p.76) note that these forces intensify when more aggressive companies switch operational strategies and enter the automotive industry. Tesla operates in an intense automotive sector resulting from the severe external threats of competition. The company is also facing a moderate threat from its buyers, suppliers, and substitutes. Since the company moderately relies on its suppliers, who substantially influence the automotive industry by regulating the availability of supplies needed for production (Leung & Sharma, 2021, p. 81). On the other hand, buyers shape the sector by demanding high-quality products at relatively low prices, affecting the company’s profitability.
Tesla is also influenced by political (governmental subsidies) and legal factors. The company has developed a reputed position and gained favor from the government since it specializes in manufacturing zero-emission, environmentally friendly vehicles (Maury, 2018, p. 100). In addition, the rapid growth in technology is shaping the automotive market for many companies. Tesla has the vital agility to respond fast and exploit advancing technologies to make innovations that increase the rate of revenue and increase value for its buyers. Technological factors are thus external forces influencing the firm’s performance greatly (Sukaatmadja et al., 2021, p. 45). For instance, Tesla has applied battery cell Nickel chemistry in upgrading its batteries by 100 kilowatt-hours and AI computing platform to improve autonomous driving, GPS, and ultrasonic monitoring. Since Tesla manufactures luxurious high-end electric vehicles, the company implemented the direct sales strategy through self-owned showrooms. Its influential buyers belong to the financially advantaged class who significantly shape its market and determine its profit rate (Lin, Lu & Xu, 2022, p. 2174). The company’s strategy also revolves around product differentiation and low pricing to improve its performance and maintain its competitive advantage.
3. The Role of Innovation and Internationalization in a Firm’s Competitive Advantage
In today’s global environment, small, medium, and large business owners strive to expand their enterprises beyond their countries’ borders by designing products and services to appear attractive and gain adoption within the international markets. According to Distanont & Khongmalai (2020, p. 15), companies are exploiting new opportunities and investing in developing and launching new products and services to gain a competitive advantage and excel in the highly competitive global market. The global market expansion and technological advancement have influenced Tesla to invest in innovative practices to increase its productivity and achieve a long-term strategic advantage (Kuncoro & Suriani, 2018, p. 186). The company has succeeded in spreading across borders due to its established brand reputation, acquisition of customers globally, and its ability to exploit its resources effectively. The company’s leadership team has acquired knowledge through data mining and formed strategic alliances with other firms, which it activates to gain a competitive advantage in the international markets (Lelissa & Kuhil, 2018, p.76). The company manufactures incontrovertibly innovative products and has not only succeeded in shifting the auto industry towards electric vehicles but also increased its profit generation (Wang & Peng, 2020, p. 386). In addition, the company ranks as the highest performing automotive manufacturer with high return rates due to investing in innovative technologies. Being the inventors of electric vehicles, tesla motors has the advantage of using economies of scale to upsurge the barrier of new entry and remain the dominant mass producers.
Established brands such as Rivian Automotive Inc. and GM create intense rivalry for Tesla in their pursuit of earning market shares and thriving within the competitive international markets (Maury, 2018, p. 100). Despite the solid external forces and threats, Elon Musk is determined to continue investing in innovative technologies to strengthen its brand position and build an electric future. Among the company’s recent innovations is the solar roof tiles that have been uniquely designed, allowing homeowners to harness solar energy to generate electricity for their homes (Lin, Lu & Xu, 2022, p. 2174). The company has also produced a supercharger network, power wall, and megapack to generate, store and manage renewable energy. Elon Musk commercializes changing technologies to accelerate the world’s transition and create higher value for its high-end consumers (Distanont & Khongmalai, 2020, p. 15). To him, innovation does not only entail the launch of new products but also implementing differentiated business models. Tesla’s innovative business model intends to create different customer experiences and deliver value propositions (Leung & Sharma, 2021, p. 81). The company eliminated dealerships and adopted a direct sale strategy to improve its sales performance and revenue generation margins (Wang & Peng, 2020, p. 386). These innovations have accelerated the company’s productivity and contributed to a sustainable competitive advantage. Unlike its rivals, the company has invested in order and reserve strategy, referral advertising, and marketing strategies to create a positive impression and increase product attractiveness.
Internalization has created a new opportunity for Tesla to access external financing and acquire resources that can be significantly activated to accelerate innovation processes (Sukaatmadja et al., 2021, p. 45). The company has formed mutually beneficial alliances and partnerships with other automotive producers and investors by spreading its operations beyond its borders. Through its internalization strategy, Tesla’s management has acquired substantial knowledge from foreign markets, rivals, and technological operations, which has positively impacted its performance and increased its competitive advantage (Kuncoro & Suriani, 2018, p. 186). In addition, although the company implemented a premium pricing strategy, it has attracted and retained a solid customer base in the high-end global market and earned a substantial market share. The leadership team better understands the company’s business operations through its sourcing and export activities. By exploiting this knowledge, the company’s management can influence an improvement in sales performance, productivity, reliability, and profitability (Sukaatmadja et al., 2021, p. 45). In addition, internationalization strategies enable enterprises to benefit significantly from returns on scale and assets. Tesla has improved the efficiency of its premium pricing strategies and positioned its capabilities towards creating difficulties in replication or duplication hence attaining competitive advantages and enhanced performances.
Conclusion
This study established the sources of competitive advantage for Tesla that have influenced the firm’s ability to generate more excellent value in terms of sales and profitability. Based on the analysis of theories that promote a firm’s competitiveness, it can be concluded that the automotive company has the vital agility and leverage to respond to threats and opportunities faster than its rivals within the industry. The company has acquired a loyal customer base and created a substantial competitive advantage through its continuous investments, retaining dominance in the automotive industry. Tesla has implemented effective strategies, including differentiation, integration, innovation, pricing, excellent advertising and marketing, and customer care that have significantly contributed to its performance. Although the company operates in an intense industry in terms of competition from new entrants, startup firms, established firms, and threats of suppliers, buyers, and substitutes, it has managed to mitigate these forces and retain dominance within the high-end luxury niche market. The company continues to utilize technological advancements to accelerate the world to sustainable energy.
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