For every firm to achieve its objectives and maximize its profits, it must have appropriate strategists and be competitive. However, increased technological innovation and a competitive business environment have made firms face several strategic challenges that require appropriate considerations. These challenges include the disruptive development of new technologies and changing market conditions, and as a result, firms need to evaluate their strategic position. Therefore, this paper will evaluate Tesla Inc.’s strategic challenges using strategic management concepts and frameworks such as PESTEL, VRIO Analysis and Porter’s Five forces analysis.
1.1 Company Background
Tesla is a leading multinational electric vehicle designer and manufacturer founded in 2003 by Marc Tarpenning and Martin Eberhard in San Carlos, California (Mangram, 2012). The company founders connected with the current CEO, Elon Musk, in 2004 after its initiation to aid in venture capital funding. In the same period, Elon Musk contributed the most significant percentage of the funding, enabling him to become the board of directors chairman (Motors, 2015). With successful funding, the company grew to become the leading developer of high-performance cars currently known to have no pollutant emissions (Motors, 2015). Besides, Tesla has ensured they have met their target market needs by developing the sedan Model S and sports utility vehicle Model X which are affordable and more straightforward.
Furthermore, Tesla produces other products, such as solar panels and energy storage systems, which align with its mission of transitioning the world to sustainable energy. Besides the company’s sustainability, Tesla has intensely focused on technological innovation, driving its popularity. This was evident in 2019 when Tesla experienced a rapid increase in their car sales which increased its market share to 17% and a rise in market capitalization to $400 billion.
2.0 PESTEL Analysis
The automotive industry has faced a large set of challenges due to their ability to operate in the international environment. These issues include high regulation and this paper will use PESTEL Analysis to evaluate these challenges.
2.1 Political Factors
One essential factor that has impacted Tesla is political stability, especially in Congo, where the company sources cobalt. According to studies, the Democratic Republic of Congo produces 58% of the world’s cobalt, and Tesla uses it in building Model X, Model S and Model 3 vehicles (Liu, 2021). However, cobalt production has significantly intensified cases of corruption, conflicts and child labour in Congo, and the political instability in Congo can negatively influence Tesla’s supply chain. In addition, Tesla enjoys government incentives for electric vehicles in the USA, where electric vehicle buyers are offered USD 7500 tax credits. Also, international trade agreements influence the manufacturing of fuel vehicles by Tesla. For instance, trade agreements between China and USA are in jeopardy due to political tensions between china’s support of Russia’s Ukraine military engagements and China’s plans to invade Taiwan.
2.2 Economic Factors
Several economic factors that have affected Tesla’s business operations are tax rates, changes in foreign exchange rates, infrastructure quality and inflation. One of the critical economic factors is changes in foreign exchange rates, mainly driven by changes in international business operations and the balance of payments in countries. For example, in China, a depreciation of the Chinese yuan against the US dollar by 7% led to Tesla increasing Model X and Model S prices which negatively impacted their demand. Also, the appreciation of the dollar in 2020 against the euro impacted the production costs of Tesla negatively due to the company sourcing it’s components from European suppliers. Also, Tesla enjoyed an increase in the demand for their cars in Japan due to the depreciation of the US dollar against the Japanese yen. Apart from changes in exchange rates, Tesla has enjoyed government tax incentives in the USA. For instance, the California Alternative Energy and Nevada Tax Incentives benefited Tesla.
2.3 Social Factors
There has been a growing concern and the importance of social factors in international business operations. Social factors can no longer be avoided mainly because they influence business operations. In the case of Tesla, it has received growing popularity in society due to its sustainable business model (de Sousa & Castañeda-Ayarza, 2022). The company has received solid social support due to increased environmental awareness worldwide. Consumers are more likely to purchase products from companies with negligible environmental influence.
2.4 Technological Factors
Besides social and economic factors, technological advancement has boosted business operations in the electric vehicles industry. For instance, Tesla has dramatically benefited from technological advancement in their business and production operations. For example, the performance and range of Tesla electric vehicles have improved due to advanced battery technology adopted by the company (Liu, 2021). One example of an effective battery is the Model S Plaid’s 4680 battery cell. In addition, Tesla has adopted software in their vehicles, enhancing their performance and functionality. This software is fully self-driving software and Autopilot, and the whole driving software was adopted in 2020 and has aided the vehicle in navigating complex urban environments (Liu, 2021). Hence, these technologies and innovations have enabled the firm to differentiate itself from its competitors and be a success.
2.5 Environmental Factors
There has been an increase in environmental awareness, forcing governments to adopt regulations for automobile businesses to reduce their effect on the environment. However, Tesla is on the upper hand mainly because the firm has adopted a sustainable business model. This model has enabled the company to gain a competitive advantage by selling cars that have zero effect on the environment (Tesla Market Analysis 2021). In addition to competitive advantage, government regulations, especially in China and the USA, such as offering tax incentives to firms with lower carbon emissions, benefit Tesla (de Sousa and Castañeda-Ayarza, 2022). These regulations are currently being adopted in India and China, allowing Tesla to venture into these markets.
2.6 Legal Factors
Governments worldwide have adopted laws and regulations related to automobile brands and their labour practices. These laws have since impacted the productivity of firms in the automobile industry. Despite Tesla avoiding legal hassles in production and labour practices, the firm still faces several legal issues, such as passenger safety and product quality. For instance, regulatory investigations against Tesla were initiated in the United States of America in 2021 by National Highway Traffic Safety Administration (NHTSA). The investigations were into the safety of Tesla’s Full Self-Driving system after a series of accidents Tesla was involved in.
3.0 Porter’s Five Forces Analysis
This paper will use Porter’s Five Forces to evaluate the various forces that influence Tesla’s competitive strength and market position.
3.1 Bargaining power of suppliers
In the automobile industry, the suppliers’ bargaining power is moderate, mainly due to many suppliers and their low threat of forward integration. However, in the case of Tesla, the situation is different to other automobile manufacturers that require a thousand parts from various suppliers to manufacture their cars (Hoelzlhammer, 2018). For Tesla, their drive train only requires 17 moving parts compared to a typical drive train of 200 moving parts. Besides, Tesla uses backward integration, which has reduced its dependence on suppliers. Also, the company’s partnership with Panasonic has enabled the firm to manufacture its batteries, reducing its reliance on external suppliers. Hence, the bargaining power of suppliers to Tesla is low.
3.2 Buyers Bargaining power
In Tesla’s case, their buyers enjoy a higher bargaining power mainly because technological advancement and innovation have stimulated the manufacturing of electric vehicles. In other words, there are many electric vehicle options that customers can choose from. These electric vehicles are BMW Sedan, Ford Mustang and Honda, produced by BMW, Honda, Nissan, Ford and General Motors (Han, 2021). Additionally, customers have the option of gasoline-powered vehicles mainly because electric vehicles produced by Tesla are pretty expensive. However, the price premium of Tesla is highly offset by its innovation and quality reputation in the market.
3.3 Threat of Substitutes
In the case of Tesla, the company owns a market share of 17% in the global electric vehicles market and only 1.2% in the overall automobile market, indicating that there are numerous ways of transportation customers can use to navigate from one area to another (Jiang and Lu, 2023). These substitutes include public transportation, hybrids and hydrogen vehicles. Despite the availability of these substitutes, Tesla enjoys a large customer base due to their substantial battery range and overall passenger safety. Overall, Tesla cars are in their class, and the only car that has emerged as a competitor is Polestar, developed by Volvo. Hence, the threat of substitutes is moderate, and there is a need for Tesla to research and develop efficient cars continuously.
3.4 Threat of new entrants
Despite Tesla being one of the first cars to enter the electric vehicles market, many companies are entering the market due to increased demand for electric vehicles, low barriers to entry, technological advancement and favourable government policies (Hoelzlhammer, 2018). Many governments, such as the USA, are offering subsidies and incentives to electric vehicle manufacturers, which makes it easier for new entrants to enter the market. These companies that have entered the electric vehicles industry include General Motors, Nissan Motor and Ford (Farooq, 2022). In addition, China has provided government incentives to electric vehicle manufacturers, increasing the number of entrants into the market, such as BYD and NIO, which are currently considered the most prominent electric vehicle manufacturers in China. Apart from effective government incentives that have increased the number of entrants into the market, there are several difficulties these players have experienced, including high capital requirements, economies of scale and first-mover advantage (Jiang and Lu, 2023). The first mover advantage includes these firms, such as Tesla, investing significant capital in research and development and marketing, boosting customer loyalty. Therefore, the threat of new electric vehicle entrants is moderate.
As stated, Tesla operates in the automobile industry and experiences high competition. The competition in this industry is highly shaped by increased demand for gasoline-powered or electric-powered automobiles. These vehicles are produced by firms such as Xpeng, Nissan, Ford, NIO, and General Motors (Han, 2021). However, Tesla has gained a competitive advantage by producing differentiated vehicles with high performance, battery durability and zero environmental impact.
4.0 VRIO Analysis
Besides, this paper uses the VRIO Analysis to evaluate Tesla’s resources and determine its long-term competitive advantage in the electric vehicles industry. These resources include their ability to attract talent, brand awareness, distribution, capital access, leadership vision, marketing expertise and supply chain network. The VRIO Analysis measures key characteristics of Tesla resources, such as their value, rarity, imitability and organization.
Tesla has established a solid loyal customer base due to their brand reputation in enhancing environmental sustainability and the quality of vehicles they produce. Besides having a loyal customer base, Tesla is also highly valued for its positive relationship with suppliers (Atkins, 2019). The company has an effective distribution system where inputs and outputs are delivered based on criteria and standards agreed upon (Jensen et al., 2023). Also, Tesla is highly valued and can raise equity internally, critical in meeting its diversification and expansion plans. For example, Tesla raised $2.7 billion in 2020 through a combination of notes and share offerings used in constructing the Gigafactory in Shangai, China (Jensen et al., 2023).
Despite Tesla products being valuable, its improved distribution process and its ability to raise capital efficiently, it still faces issues related to safety concerns and the reliability of its vehicles which could affect its customer loyalty (VRIO | tesla, 2022).
Apart from Tesla products and technology being valuable, they are also rare. Tesla is the only company that has successfully commercialized its electric vehicles on a large scale, producing cars that have durable batteries and have a negligent impact on the environment (Gopaldas, 2022). In addition, Tesla’s adaptability to the different cultures in markets they have ventured into is rare by being able to use user-friendly marketing strategies and localized communication (Gopaldas, 2022). However, Tesla’s rarity would reduce significantly in due time mainly because its competitors are investing heavily in research and development of electric vehicle technology.
Apart from Tesla’s products and technology being rare, it is almost impossible for its competitors to imitate them due to the massive investments made by Tesla in research and development. For instance, Tesla hugely invested in the Autopilot system and battery technology, signifying it is a competitive advantage (Jensen et al., 2023). Also, the company’s marketing competition is a unique resource because it is highly localized depending on the cultures of regions they have expanded to. As a result, it has enhanced Tesla’s competitive edge. Lastly, Tesla has a renowned reputation and brand loyalty due to its ability to produce high-quality, durable electric vehicles. This is supported by the company being ranked as the fifth most valuable automobile brand. However, the electric vehicle industry is no longer a niche market. It is becoming regular and more accessible for Tesla competitors to replicate some of their car features, especially the charging infrastructure (Merlin, 2022).
Tesla has enhanced its value creation and sustained its competitive advantage through a decentralized organizational structure. This structure has enabled the company to respond and adapt to changing market conditions and quickly adopt new technologies (Atkins, 2019). Also, Tesla ensures their employees are highly skilled by offering in-house training for specific job roles and boosting their commitment to the organization (Gupta, 2022). Lastly, the organization’s vision and corporate leadership are not substitutable and cannot be used to manage other firms in the industry. This is mainly because Tesla’s leadership is unique and provides a strategic direction for the company (Gupta, 2022). However, Tesla’s organizational structure has led to several communication and inefficiency issues, which have contributed to production delays in the recent past.
5.0 Key Strategic Issues
Based on the strategic Analysis of Tesla above, it is clear that there are several key strategic issues the company faces. These strategic challenges include:
- Tesla faces increased competition in the electric vehicle market from companies such as Xpeng, General Motors and hybrid vehicles producers. Tesla’s competitors continuously invest in the research and development of electric vehicles, which poses a significant challenge to Tesla. As a result, there is a need for Tesla to continue innovating and differentiating itself from its competitors to boost its market share.
- Tesla also faces supply chain risks. These risks have resulted from the company relying heavily on global supply chains, and geopolitical tensions and suppliers’ bankruptcy disrupt their materials sourcing. For instance, Tesla sources cobalt from the Democratic Republic of Congo which has faced political instability in the recent past affecting the distribution of cobalt to Tesla factories.
- Regulatory environment. Tesla’s business operations are highly affected by the changing regulatory policies designed by the government. For instance, the suspension of tax incentives could significantly affect the production of Tesla vehicles in the USA. Hence, the company must adopt critical strategies to navigate the regulatory environment (Merlin, 2022).
- Economic downturn- increased changes in the exchange rate and a rise in inflation rates have significantly affected the business operations of Tesla. Tesla cannot increase their sales for electric vehicles in economies experiencing depreciating currency, such as Japan, hence the need to mitigate this issue by adjusting their pricing strategies (Merlin, 2022).
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