TESLA MOTORS:

A STRATEGIC ANALYSIS

Student Name and ID: Hiba Okba, W1421671

Module: Strategic Perspectives
Module Code: BKEY601.Y
Module Leader: Ioannis Christodoulou
Seminar Leaders: Sumita Ketkar and Kevin Heffernan
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Executive Summary

This report provides a strategic analysis of the electric vehicle (EV) market.
An analysis of the external environment was conducted using tools such as
PEST and Porters 5 forces model to determine the attractiveness and
profitability of the industry Tesla operates in.

The PEST analysis focuses mainly on the UK, however, some global trends for
the US, Europe and Asia has been included throughout where a lack of
research is available on the UK EV market. The PEST analysis revealed that
the most important political intervention is currently the consumer incentives
offered by the government in the form of Plug--in Car Grants. However, this
government incentive is a short--term measure to boost the competitiveness of
EVs in the automotive industry, due to the pressure imposed by the current
budget deficit. Furthermore, it has been reported that consumer awareness
surrounding environmental issues such as climate change and the depletion of
natural resources is on the rise, prompting them to consider investing in an EV
or other alternative fuel vehicles. This has lead to the sales of EVs quadrupling
from 2013--2014.

A major challenge facing the EV industry is consumers perceptions and

attitudes towards EVs perceiving EVs as having a cheap design, unreliable,
underperforming and some drivers experiencing range anxiety which has
lead to their hesitancy in adopting EVs.

Furthermore, high purchase costs and the lack of public charging

infrastructure has created unwillingness by consumers to purchase EVs.
Porters 5 forces model reveals that there is a low--moderate threat of new
entry, moderate threat of substitution, low--moderate buyer power, high
supplier power and moderate competitive rivalry.

Overall, the EV market is attractive, especially in the long--term when the

prices of gas and oil soar due to a lack of natural resources and EV
technological advances. However, the market is currently experiencing
difficulties persuading the mass market to adopt EVs which is impacting the
industrys current profitability.

An analysis of Teslas internal environment using Porters value chain

analysis reveals that Tesla has high levels of vertical integration that has
enabled them to retain high levels of operational and cost control and,
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differentiate themselves from competitors. Teslas current marketing

expenditure is low due to relying heavily on mass media and word of mouth
to promote their products. This has enabled the automobile company to
reinvest all free cash flow back into research and development to enable them
to produce more affordable models to sell to the mass market.

An analysis of a PR crisis experienced by Tesla demonstrates the importance

of CSR, reputation management and customer relationship management on
the overall success of the company. Although four of Teslas Model S
vehicles had caught fire in the space of a year, the automobile company
managed to recuperate from the incident and alleviate consumer concerns
surrounding the reliability and safety of EVs.

Conclusively, a strategic analysis was conducted on Teslas business level

strategy (focused differentiation strategy), corporate strategy (product
development strategy and vertical integration strategy) and recommendations
made to sustain their existing strategies with the aim of developing and
expanding the global recharging infrastructure and developing a cheaper
model to encourage socio--economic groups C2 and below to adopt an EV.
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Abbreviations

CIO Chief Information Officer

CRM Customer Relationship Management
CV Conventional Vehicle
ERP Enterprise Resource Planning
EV Electric Vehicle
OLEV Office for Low Emission Vehicles
PICG Plug--In Car Grant
R&D Research and Development
SG&A Selling, General and Administrative
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Table of Contents
Executive Summary 2
Abbreviations 4
Analysis of External Environment 6
Macro--Environmental Analysis PEST 6
Political and Legal Factors 6
Economic and Environmental Factors 7
Sociological Factors 7
Technological Factors 8
Micro--Environmental Analysis Porters 5 Forces Model 10
Present Opportunities and Threats 11
EV Market Attractiveness and Profitability 11

Analysis of Internal Environment 12

Tesla Motors Value Chain Analysis 12
Primary Activities 12
Supporting Activities 14
Present Strengths and Weaknesses 16

Analysis of PR Crisis 17
An Analysis Of Teslas Response To The Model S Fire Incident 17
Incident Overview 17
Key Stakeholders 17
Communications Objectives & Key Messages 18
Media Response 18
Reputation Management 19

Strategic Analysis 20
Business Level Strategy 20
Growth Corporate Strategy 20
Recommended Future Strategies 21
Strategy Evaluation 21
Strategy Implementation 22
Final Suggestions 22
Bibliography 24
Appendices 29
Exhibit 1 Zap--Map Statistics Number of charge points in UK, 2015 29
Exhibit 2 Tesla Model S Suppliers 29
Exhibit 3 Main Competitors 30
Exhibit 4 Teslas expenditure on product R&D from 2010--2014 31
Exhibit 5 Email correspondence between Tesla and Model S owner 32
Exhibit 6 Elon Musk Statement on Tesla Blog 33
Exhibit 7 Differentiation and Focus Strategy Requirements 34
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Analysis of External Environment

Macro-Environmental Analysis PEST

This PEST analysis of the electric vehicle (EV) industry focuses mainly on the
UK. However, global trends such as those in the US, Europe and Asia will be
included where there is a lack of existing research on the current UK EV
market.

Political and Legal Factors

Plug--In Car Grant: A Consumer Incentive

Over 25,000 claims have been made since its initiation in 2011 whereby grants
of up to 5,000 are awarded to EV claimants. Moreover, 200 million has been
made available to ensure PICG continues to be available from 2015--2020.
Following a governmental market review set out in May 2015, new grant
levels will be decided to ensure that industry support will resume without
depleting the budget rapidly (Gov, 2015).

Subsidy to research and development

The OLEV has funded 60 million to identify and support emerging
technologies in the field of ultra-low emission vehicles. 500,000 of which
has been awarded to 6 British companies to carry out research on the
practicality of recycling and re-using batteries for low and ultra low
carbon vehicles (Gov, 2015).

Infrastructure development
Government funding of 37 million has gone towards the installation of EV
charge points across the UK. Over a third is being given to homeowners to
install domestic charge points, whilst the remainder is being allocated
amongst local authorities (Pearson, Acenet). There are currently 8096 charge
points in the UK (Zap--Map, 2015). Exhibit 1 demonstrates the growth in the
number of UK charge points over the last year.

Providing additional preferential access

Other incentives include exempting EV owners from congestion charge in
London and offering free parking to EV owners in Copenhagen (Tsang et al,
RAND, 2013).

Government efforts in supporting this growing industry are evident.

However, the subsidy to purchase cost is arguably the most important
political intervention in the short--term. The price difference between an EV
and CV is considerable, at least 15,000 (Tsang et al, RAND, 2013). Therefore,
significant funding in this area is required if the competitiveness of EVs is to
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be enhanced in the automotive market. However, relying heavily on

government funding to sustain this competitiveness is impractical especially
due to the current budget deficit. Due to this political pressure, consumer
incentives may be reduced in the near future (Tsang et al, RAND, 2013).

Economic and Environmental Factors

Consumption Rates and Fuel Prices

Current global consumption rates are exhausting the planets ability to
maintain our current lifestyles. Due to increased demand, fuel prices have
increased drastically (theaa, 2015) and sources of conventional energy are
depleting at a perturbing rate (alternative--energy--news).Global consumption rates
have increased even more so in countries such as China and India due to the
rise of the middle class. This has resulted in a higher demand for passenger
cars and with it, the need for oil. It has been predicted that by 2050, there will
be as many as 1.5 billion cars on the road; almost double of that in 2010 (Todd,
Chen & Clogston, 2013). For this reason, alternative energy sources for
transportation such as electricity is an inevitable investment.

Levels of Employment
The total job creation of EVs is not clear as of yet, however, many studies have
predicted that employment growth in the EV industry will outweigh any
reduction of jobs in the conventional fuel industries (Todd, Chen & Clogston,
2013).

Additional Economic Development Opportunities

The development of EVs will contribute to a greater quality of life with
regards to pollution, reduction in energy spending and minimising the
economies reliance on foreign oils (Todd, Chen & Clogston, 2013). This will
create more disposable income for EV consumers, which will encourage more
spending in other sectors such as housing and enable wealth to be contained
within local economies.

Sociological Factors

Consumer Behaviour
The demand for EVs in the UK has seen a significant increase, with the
number purchased quadrupling from 3,500 in 2013 to 15,500 in 2014
(NextGreenCar, 2015; Business Green, 2015). This is perhaps largely due to
both government incentives for consumers to go green and a greater
awareness surrounding environmental issues such as climate change and the
depletion of natural resources.
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Consumer Status
Studies conducted by the university of Michigan and Pike research reported
that the owner of an EV is more likely to be well--educated, earn a high
income, and middle--aged (Todd, Chen & Clogston, 2013).

Values, Perceptions and Attitudes

Although more fuel efficient, many consumers associate EVs with having a
cheap design and being unreliable (Tsang et al, RAND, 2015). Furthermore,
car trial programmes have reported that range anxiety is a current issue
causing EV drivers to take extra precautions before journeys (Tsang et al,
RAND, 2015). Unfamiliarity with EVs is leading to feelings of
underperformance when compared with CVs, demonstrated by in--depth
interviews with EV drivers in Denmark (Tsang et al, RAND, 2015).

Although consumers are becoming more aware of the impacts caused by their
fuel consumption, hesitancy in adopting EVs is somewhat caused by doubts in
its current technological capabilities. However, the entrance of luxury car
manufacturers into the EV market could reverse the image associated with
owning an EV.

Technological Factors
Much technological development has transpired over recent years in the EV
industry. However, there are still many limitations present surrounding
battery technology including all--electric drive range which currently only
allows on average for a 100 mile journey. Furthermore, the length of time it
takes to fully recharge batteries typically requires 6--8hours (Tsang et al,
RAND, 2015).

Issues remain with the lack of publicly available charging infrastructure and
other infrastructure fundamentals such as overnight parking devoted to EVs
(Tsang et al, 2015). Moreover, many technical issues have been encountered
by EV drivers attempting to recharge their vehicles including; batteries
ceasing to charge, batteries overheating or EVs being set for delayed
charging due to electricity rates being cheaper at night (chargepoint.com).

Furthermore, concerns surrounding price needs to be addressed if EVs

competitiveness against CVs is to become a reality and move it away from its
current niche. This means that the battery production costs needs to be
reduced whilst maintaining or enhancing vehicle performance.
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Although the UK government and many others globally have invested

heavily in R&D to support the expansion of the EV industry into mass
market, any breakthrough in technology cannot be guaranteed.
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Micro-Environmental Analysis Porters 5 Forces Model

Low --Moderate Low --Moderate

Threat of New Entry: Buyer Power:

High capital investments Level of competition creates moderate
No economies of scales due to low choice for consumers in terms of price,
volume production functionality and design
Future buyer power likely to increase if
Extensive knowledge and
EVs are sold to mass market
expertise is required
Buyers Supplier Power:
Established CV manufacturers
Power EV companies highly dependent on
with high economic power can enter suppliers (Exhibit 2 shows number of
market with more ease suppliers used by Tesla)

High

Threat of Competitive Suppliers

New Entry Rivalry Power

Threat of Substitution: Competitive Rivalry:

Substitutes include hybrid and Moderate number of successful
alternative fuel cars competitors (Exhibit 3 shows 5 Main
In the event of slow/no technological Competitors) in EV market
breakthroughs within EV industry, other EV industry currently in
technologies may emerge
Threat of developmental stage
Consumers are extremely price sensitive
Substitution Global sales of EVs expected to grow
and will tend to substitute if they do not from 352,000 per year to 1.8 million in
perceive a great difference in immediate
2023 (Hill, 2014)
value
Future rivalry intensity is likely to
increase, therefore EV companies need
to remain innovative and
technologically--driven

Moderate Moderate --High

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Present Opportunities and Threats

Key Opportunities:
Short--term government support in consumer incentives and R&D due
to EV industry growth stage
Increase in oil and gas prices
Key Threats:
Doubtful consumer perception and attitudes towards EVs in terms of
price, design and reliability
Unpredictable technological development
Increased future competition
Lack of global charging infrastructure

EV Market Attractiveness and Profitability

The EV market is an attractive one to enter due to the inevitable depletion of
natural oils and gases. The use of electricity in transportation as a substitute to
CV energy has become a near--term reality for countries internationally.
Although the adoption of EVs within recent years has been slow, research
has shown that the market will become more attractive and profitable within
the next decade.
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Analysis of Internal Environment

Tesla Motors Value Chain Analysis

Primary Activities

Supply chain management

Tesla motors currently have high levels of vertical integration in its
manufacturing processes. Although Model S uses over 3,000 purchased parts
that are internationally sourced from over 350 suppliers and several major
components for their other vehicles are outsourced; much of the
manufacturing processes occur in--house that enables them to maintain control
over their quality standards and intellectual property (Tesla Motors, 2015).

Tesla currently owns and operates two automobile manufacturing plants in

California Tesla Factory, and Nevada Gigafactory. The latter is currently
being developed and expected to be fully operating by 2016. By 2020, it is
estimated that the Gigafactory will produce approximately 500,000 EVs
annually. Total capital expenditure is estimated to be around $4--5billion with
half of that expected to be financed by Tesla (Tesla Motors, 2015).

With regards to raw materials, Tesla predominantly consumes aluminium,

steel, cobalt, nickel and copper (Tesla Motors, 2015). Although they possess an
adequate supply of these materials to ensure manufacturing and supply
requirements are met, material prices are constantly fluctuating depending on
market conditions and global demand.

Operations
Both of Teslas factories are well equipped for several manufacturing
operations including stamping, plastics, body assembly, paint operations and
final vehicle assembly (Tesla Motors, 2015).

High levels of reliability for the design and production of their products and
services are maintained through their quality control processes. Quality
engineers are employed to work with engineering teams to ensure that
functional design and durability requirements for their products are met as
well as ensuring suppliers are efficient in delivering parts at the required
quality level within a specified time frame and budget (Tesla Motors, 2015).
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Distribution
Tesla currently distributes its vehicles to consumers directly through their
online stores. Additionally, Teslas loan programme introduced in North
America in 2013 and Europe in 2014 provides customers with a resale value
guarantee that enables customers to resell their vehicle back to Tesla for a
predetermined price within 36--39 months of delivery (Tesla Motors, 2015).
This eliminates customer concerns regarding the resale value of the Model S
whilst enabling them to enjoy ownership of the vehicle during this period.

Vehicle inventory is typically low due to Tesla providing the vast majority of
their customers with the option to customise their vehicles before ordering.
For the Model S, a deposit of $2,500 is required to begin the production
process. Outstanding payments are collected upon delivery (Tesla Motors,
2015).

Marketing and Sales

Teslas key marketing objectives are:

To generate demand for their vehicles and drive leads to their sales
teams;
Build long--term brand awareness and manage corporate reputation;
Manage their existing customer base to create loyalty and customer
referrals; and
Enable customer input into the product development process
(Musk and Ahuja, 2015)

Thus far, the primary driver of sales for Tesla has been media coverage and
word of mouth. Both forces have enabled Tesla to achieve sales without the
use of traditional marketing activities such as television, radio and print
advertising, which would have otherwise resulted in high marketing
expenditures.

Teslas marketing efforts include holding display and demonstration events.

Additionally, they market and sell their cars through highly visible and
premium company--owned outlets and galleries in major metropolitan
locations.

Teslas marketing and sales strategy allows them to offer differentiated and
persuasive customer experiences that would not otherwise be present with
franchised automobile dealers and service centres. This also allows them to
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retain better control over costs associated with inventory, warranty services
and pricing as well as enabling them to maintain/enhance their brand and
obtain prompt customer feedback (Tesla Motors, 2015).
Currently Teslas marketing strategy is working in their favour by relying
heavily on media coverage, word of mouth and industry trade shows to
promote their brand. However the longevity of their approach is doubtful as
established automobile manufacturers plan to enter the EV market in the near
future. This will inevitably lead to a change in Teslas current marketing
practices, causing them to increase marketing expenditure so they can
effectively compete with bigger companies who have the advantage of
stronger brand awareness, larger customer base and considerably greater
resources than Tesla.

Service
Tesla focuses heavily on customer support, providing both company--owned
service centres Service Plus, and employing a number of mobile technicians
Tesla Rangers.

Tesla service centres are located at 95 different sites and the company plans to
open several more worldwide in the near future. Technical issues with the
vehicles can be diagnosed through an on--board wireless system, and in the
event that the vehicle is in need of a service, customers can contact one of the
service centres for a repair (Tesla Motors, 2015).

For Model S, Tesla provides customers with an eight--yearnewvehicle limited

warranty in addition to a comprehensive maintenance programme. The
maintenance plan covers around the clock roadside assistance, annual
inspections, and the replacement of wear and tear parts. This comes as either
a fixed fee per Tesla Ranger visit or as an unlimited service for a higher
initial purchase price. Tesla Roadster customers are provided with a four
year new vehicle limited warranty, the opportunity to buy an extended
service plan and a battery replacement option (Tesla Motors, 2015).

Supporting Activities

Product R&D, Technology, and Systems Development

Exhibit 4 shows Teslas spending on product R&D since 2010. The increase in
expenditure is a result of them developing their new Model X which they
aim to sell at a price of $30,000 --$40,000 to $50,000 less than its predecessor
Model S (Ross, 2014).
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As Teslas success in the market is based on the utilisation and development of

advanced technology, they rely heavily on introducing breakthrough
innovations. The company--owned service centres enables their technicians to
collaborate with their engineering and R&D team to identify problems with
existing technology, create solutions and incorporate those improvements
into their new output (Tesla Motors, 2015).

However, there is a risk that Teslas R&D efforts may be inadequate in

adapting to new EV technology that may result in them being unable to
source and integrate latest technology into their vehicles.

Human Resource Management

Currently employing over 6,000 employees in over 100 different locations
(Radius, 2014), Tesla continues its plans to recruit and develop a high number
of new talents from around the world to support its growth plans. Currently
their team has core competencies in computer--aided design and crash test
simulations as well as expertise in lightweight materials that will enable them
to reduce the product development time of new models (Tesla Motors, 2015).

However, as EVs are currently in the developmental stage, Tesla may face
difficulties in recruiting experienced workers that will result in them having
to dedicate substantial time and expense training new recruits.

Teslas sales output is expected to grow dramatically in the coming years and a
key concern for them is the limited number of specialised service engineers in
their workforce, especially in Europe and Asia. This compels them to hire a
high number of specialised staff in high voltage training and servicing
techniques (Tesla Motors, 2015). Employing qualified workers is fundamental
to the success of the business, as limited expertise will adversely affect
customer relationships which will in turn impact the businesses ability to
breed customer loyalty and sell additional vehicles.

General Administration
Teslas SG&A expenses consist primarily of personnel and facilities costs.
These relate to their company--owned stores, marketing and sales activities,
executive, finance, human resources, information technology and legal
organisations (Tesla Motors, 2015).

Teslas management information systems were developed by CIO Jay Vijayan

who worked with a team of 250 employees to build Teslas ERP system from
concept to finished product. It currently serves as the foundation of Teslas
operations, with every department utilising it (Oleg, 2013).
Furthermore, several other IT systems including Teslas e--commerce and
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service and logistics systems have been designed to ensure simplicity, agility
and flexibility to fit Teslas needs (Vijayan, LinkedIn).
Current strategic and commercial partners include Panasonic, Toyota and
Daimler. A key strategic alliance with Panasonic has enabled the two
companies to work on developing the Gigafactory, with both investing in
production equipment. However, Tesla has greater control over all other
aspects of management due to providing the land and, buildings and utilities.

Present Strengths and Weaknesses

Key Strengths:
Technological and physical assets such as their factories and
intellectual property
Global charger infrastructure
Component manufacturer for other automotive manufacturers
entering the electric vehicle market such as Toyota, Mercedes--Benz and
BMW
Exclusive EV manufacturer
Highlevels of confidentiality
Low marketing expenditure

Key Weaknesses:
Profits difficult to retain due to substantial R&D expenditure which is
currently causing losses
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Analysis of PR Crisis
An Analysis Of Teslas Response To The Model S Fire Incident
Incident Overview
Since 2013, Tesla has had to deal with four of their Model S vehicles catching
fire (Lopez, Business Insider, 2014). However, the incident that gained most
media attention was when one Model S caught fire following a collision with
a large metal object on a highway outside of Seattle late 2013 (Musk, 2013;
Forbes, 2013). Although the driver escaped without injury, the collision caused
significant damage to the vehicle, which was captured on video by a witness
that went viral instantaneously. The aftermath of the incident caused the
company shares to drop from $193 to a value of $172.81 within a matter of two
days (Forbes, 2013).

Key Stakeholders
To limit the damage caused by the incident on company performance, Tesla
had to address its stakeholders. The stakeholder theory proposes that
organisations that effectively manage their stakeholder relationships will
survive longer and perform better than organisations that neglect their
stakeholder relationships (Freeman, 1984).

Consumers
Tesla communicated directly and promptly with the driver who was involved
in the Model S incident in order to provide them with updates of the
investigation that was being carried out by Teslas engineering team. A clear
explanation was provided as to why the vehicle had been set on fire and
assured the driver of their continuous support until the case was concluded.
Exhibit 5 shows the email correspondence between Tesla and the Model S
owner, and demonstrates their efforts in trying to compensate the owner of
the vehicle as well as assure them that the incident was a rare occurrence.

Teslas appropriate actions in dealing with this incident was crucial to the
business as without the proper intervention, their sales would have been
adversely affected due to current owners and potential customers having a
negative perception of Tesla vehicles and the businesss CRM.

Shareholders
Millon (2013) explains that Enlightened Shareholder Value (ESV) is the idea
that corporations should pursue shareholder wealth with a long--run
orientation that seeks sustainable growth and profits based on responsible
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attention to the full range of relevant stakeholder interests. In order to avoid

further reductions in their share value, Tesla had to immediately convince
shareholders that the incident was being rectified to the fullest extent to
minimize further occurrences. Investors key concern is the financial
performance of Tesla and need to be constantly updated on matters that could
potentially affect share prices.

The Press
The media is considered to be another key external stakeholder that acts as a
bridge between the company and its other stakeholders. Studies have
indicated that even limited negative press can undesirably impact a
consumers perceptions and attitudes towards a business (Ioanas and Stoica,
2014; Schlosser, 2005). As mentioned previously, Tesla relies heavily on mass
media and word of mouth to promote their vehicles. Therefore it was crucial
that the company provided clear and accurate details of the incident and how
they were working to rectify any issues caused on their part to mass media in
a timely fashion to avoid the ramifications caused by circulated false
information.

Communications Objectives & Key Messages

Exhibit 6 shows a statement that was released by Teslas CEO and product
architect, Elon Musk, three days after the incident on the companys official
blog providing an articulate explanation as to why Teslaa Model S vehicle
had caught fire. Furthermore, he had provided statistics comparing an EV
with a CV, arguing how a driver is five times more likely to experience a fire
in a CV than in a Tesla (Musk, 2013).

It was apparent that Musk had three key communication objectives that he set
out to achieve in his statement; prevent the circulation of false information
regarding Teslas vehicles by providing a clear and rational explanation,
reinstate consumers trust in the company, and boost Teslas reputation
through media coverage.

Media Response
Positive Media Response
Following Musks official statement, many media platforms quoted directly
from his blog in a positive way to overturn the speculations surrounding the
incident involving Teslas Model S. Many supporting Musks argument that
for consumers concerned about fire risk, there should be absolutely zero
doubt that it is safer to power a car with a battery than a large tank of highly
flammable liquid (NYTimes, 2013; WashingtonPost, 2013;
TheWallStreetJournal, 2013; LATimes, 2013).
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Negative Media Response

Contrary to the positive reactions, some provoking content was written in
response to Musks statement. Forbes (2013) pointed out theres no gasoline
here and lithium--ion batteries already have a reputation for running hot and
catching fire. Boeings 787 Dreamliner was grounded soon after its inaugural
flights earlier this year because of electrical fires traced to the planes lithium-
-ion batteries. Furthermore, some had accused Musk of blaming the fire
fighters who attempted to put out the fire, sarcastically insinuating that the
fire fighters didnt read the drivers manual (Rayman, 2013).

Reputation Management
Watson and Kitchen (2010) explain that for an organisation to meet their
corporate objectives and remain competitive within their industry good
reputation paves the organisational path to acceptance and approval by
stakeholders. A positive reputation is not created coincidentally; rather it is
the combinational outcome of strong leadership, management and
organisational operations quality of products and services and stakeholder
relationships (Watson and Kitchen, 2010).

Tesla dealt with the companys PR crisis effectively. However, they must
continue to monitor, understand and nurture their stakeholder relationships
(Watson and Kitchen, 2010). Kitchen and Laurence (2003) explain that if the
organisation or its CEO cannot communicate its mission, brands or values,
some other organisation, stakeholder or irate public with communication
capabilities can or willcorporate communication must be mastered by the
corporation and those duly appointed to speak on its behalf; or it will master
the corporation (Watson and Kitchen, 2010).
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Strategic Analysis
Business Level Strategy
Tesla is currently pursuing a focused differentiation strategy (Porter, 1980),
whereby the source of their competitive advantage derives from the way they
differentiate their products and services. Furthermore, their competitive scope
of the market focuses on a specific niche AB Social Grade1. Exhibit 7
highlights the commonly required skills and resources needed to adopt a
focused differentiation strategy along with the common organisational
requirements, which are currently being met by Tesla.

Growth Corporate Strategy

Teslas corporate strategy is a combination of product development with
vertical integration in its manufacturing processes, as highlighted in the value
chain analysis.

By adopting a product development strategy, the company aims to become the

leading innovator in the automotive market. However, the costs and risks
involved with this strategy are high (MarketingDonut.co.uk). Tesla has already
invested heavily in R&D in order to make their vehicles more affordable and
attractive to the mass market. Elon Musk explains Almost any new
technology initially has high unit cost before it can be optimized and this is no
less true for electric cars. The strategy of Tesla is to enter at the high end of the
market, where customers are prepared to pay a premium, and then drive
down market as fast as possible to higher unit volume and lower prices with
each successive model (Musk, 2006). Thus far, Teslas strategy has been
successful and difficult to imitate by competitors due to the extensive
investments and countless patents. However, in 2014, Elon Musk permitted
the release of Teslas portfolio of patents to the public allowing others to use
their technology in good faith. The decision to release Teslas patents was in
the hope that it would drive the growth EV market.

Teslas forward vertical integration strategy has provided the company with
numerous benefits. This strategy allows for Tesla to gain more control over
their entire value chain from the supply chain right through to their
distribution channels. This allows their capital to be internally contained by
eliminating the middle--man costs by optimising resource utilisation and
avoiding unnecessary expenditure. Furthermore, vertical integration also
allows Tesla to distinguish themselves from competitors at all operating
levels from production inputs to retail channels (Kokemuller, Chron).

1 Social Grade A: Upper Middle Class, Social Grade B: Middle Class

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Recommended Future Strategies

Elon Musk stated that the overarching purpose of Tesla...is to expedite the
move from mine--and--burnhydrocarbon economy towards a sustainable, solar
electric economy (Tesla Motors Inc, 2012). In order to pursue Musks
mission and vision of the EV company, two strategies should be supported.

Market Penetration Strategy: Develop and Expand Re-Charging

Infrastructure
The recent change in Teslas strategy has meant that the companys portfolio of
patents have been removed, in the spirit of the open source movement, for
the advancement of electric vehicle technology (Musk, 2014). Although an
extremely risky move, and one that will affect Teslas competitive advantage,
Tesla has made it clear that the benefits of mass customer adoption far
outweigh the costs of strengthening competitors (Shane, 2014). Teslas current
problem isnt outdoing competitors, but rather that the mass market is
resistant to adopting electric vehicles. This is largely due to the lack of global
recharging infrastructure, among other things. Currently the sales for EVs
only account for 0.6% of the total number of vehicles sold worldwide, a
quarter of those sales being Tesla vehicles. In order for Tesla to adopt a
market penetration strategy, they will need the long--term support of other
automobile manufacturers in order to incentivise the development of
recharging stations (Shane, 2014).

Product Development Strategy: Continue to develop cheaper

alternatives to enable Tesla to sell to mass market
In order to support Teslas vision, it is recommended that their product
development strategy be sustained. Tesla is currently adopting a top--down
approach and it is recommended for them to continue doing so, in order for
their vehicles to become more attractive and affordable to the mass market.
Teslas Model X, an all--electric SUV, is currently being developed and set to
enter the market early 2016. Aimed at socio--economic group C12, this new
model will sell at a price of $30,000. However, in order to reach a broader
customer base, this suggests that an even cheaper EV should be developed to
accommodate those in social grades C23 and below.

Strategy Evaluation
Both strategies have been evaluated according to Johnson and Scholes SAF
model.

Market Penetration Strategy Evaluation

Suitability: Aligning with Teslas overarching goal, this strategy is suitable
for the long--term success and profitability of the business. Although Teslas

2 C1 Lower Middle Class

3 C2 Skilled Working Class
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share of sales will most likely shrink as a result, their profitability will
increase due to EVs accounting for a greater share of the total automotive
market.
Acceptability: Teslas decision to publicly release its portfolio of patents has
currently been accepted by shareholders. Surprisingly, it has resulted in the
companys share price to increase by around 14% (Shane, 2014). However, the
long--term effect it has on shareholder value will only become evident once the
success of the strategy has been determined.
Feasibility: The likelihood of this strategy succeeding depends on how the
rest of the automobile industry reacts to it. In order for this strategy to
succeed, several well--established competitors would have to utilise these
patents and create a greater demand for EVs. This can be done by developing
and expanding the recharging infrastructure worldwide, which would
eliminate one of the major concerns consumers have about the reliability of
EVs.

Product Development Strategy Evaluation

Suitability: This strategy supports Teslas overall mission and vision,
allowing them to utilise their strengths in technological development to
provide cheaper alternatives for a broader range of consumers so that their
long--term strategic objectives are met.
Acceptability: This strategy is deemed to be acceptable to shareholders since
it aims to promote the widespread adoption of EVs, hence leading to higher
profit margins and an increase in shareholder return.
Feasibility: For this strategy to succeed, Tesla must continue to reinvest all free
cash flow into making their vehicles more affordable. Furthermore, Tesla
needs to recruit a large number of skilled workers who are experienced and
knowledgeable in EV engineering, as production capacity will significantly
increase if EVs are adopted by mass market.

Strategy Implementation
Tesla should continue to support these existing strategies by utilising and
developing their current tactics continue investing in the expansion and
development of recharging infrastructure with the support of other
automobile companies and government assistance, persuade and support
businesses to install recharging stations for their employees to use, and
develop an even more affordable and compact EV for consumers of social
grade C2 and below ($20,000 and below).

Final Suggestions
Currently, Teslas marketing expenditure is low due to relying heavily on
mass media and word of mouth to support the growth of their company.
Although this is freeing up capital for Tesla to use on R&D, it is limiting them
in other areas supporting the widespread understanding, knowledge and
 23

reassurance of owning an EV (short and long term value) and, encouraging

consumers to purchase a Tesla vehicle over those of its competitors.
Therefore, it is advisable that Tesla intensifies the marketing efforts to
overcome existing barriers preventing the adoption of EVs by the mass
market.
 24

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 29

Appendices

Exhibit 1 Zap-Map Statistics Number of charge points in UK, 2015

Exhibit 2 Tesla Model S Suppliers

Supply Chain Model S uses over 3,000 purchased parts which we source
globally from over 350 suppliers, the majority of whom are currently our single
source suppliers for these components. We have developed close relationships
with several key suppliers particularly in the procurement of cells and certain
other key system parts. While we obtain components from multiple sources
whenever possible, similar to other automobile manufacturers, many of the
components used in our vehicles are purchased by us from a single source. In
addition, while several sources of the battery cell we have selected for our
battery packs are available, we have currently fully qualified only one cell. We
expect to fully qualify additional cells from other manufacturers in 2015.

We use various raw materials in our business including aluminum, steel, cobalt,
nickel and copper. The prices for these raw materials fluctuate depending on
market conditions and global demand for these materials. We believe that we
have adequate supplies or sources of availability of the raw materials necessary
to meet our manufacturing and supply requirements. There are always risks and
uncertainties, however, with respect to the supply of raw materials that could
impact their availability in sufficient quantities or reasonable prices to meet our
needs.

(Source: Tesla Motors. (2014) Form 10-K. [Online] Available from:

http://ir.teslamotors.com/secfiling.cfm?filingid=1564590-15-1031&cik=
[Accessed on 6th April 2015]
 30

Exhibit 3 Main Competitors

We believe that our vehicles compete in the market both based on their
traditional segment classification as well as based on their propulsion
technology. For example, Model S competes primarily in the extremely
competitive premium sedan market with internal combustion vehicles
from more established automobile manufacturers, including Audi, BMW,
Lexus and Mercedes. Our vehicles also compete with vehicles propelled by
alternative fuels, principally electricity.

Many established and new automobile manufacturers have entered or have

announced plans to enter the alternative fuel vehicle market. BMW, Daimler,
Nissan, Fiat, Ford and Mitsubishi, among others, have electric vehicles
available today. Moreover, Porsche, Lexus, Audi, Volkswagen and Volvo are
also developing electric vehicles. Electric vehicles have also already been
brought to market in China and other foreign countries and we expect a number
of those manufacturers to enter the United States market as well. In addition,
several manufacturers, including General Motors, Toyota, Ford, and
Honda, are each selling hybrid vehicles, and certain of these manufacturers
have announced plug-in versions of their hybrid vehicles.
Most of our current and potential competitors have significantly greater
resources than we do, may be able to devote greater resources to the
manufacture, sale and support of their products, and have other advantages. We
believe our exclusive focus on electric vehicles and electric vehicle components,
as well as our history of vehicle development and production, however, are the
basis on which we can compete in the global automotive market in spite of the
challenges posed by our competition.

(Source: Tesla Motors. (2014) Form 10-K. [Online] Available from:

http://ir.teslamotors.com/secfiling.cfm?filingid=1564590-15-1031&cik=
[Accessed on 6th April 2015]
 31

Exhibit 4 Teslas expenditure on product R&D from 2010-2014

 32

Exhibit 5 Email correspondence between Tesla and Model S owner

 33

Exhibit 6 Elon Musk Statement on Tesla Blog

 34

Exhibit 7 Differentiation and Focus Strategy Requirements

Generic Strategy Commonly Required Common
Skills and Resources Organisational
Requirements
Differentiation Strong marketing Strong coordination
abilities among functions in
Product engineering R&D, product
Creative flair development,
Strong capability in marketing
basic research Subjective
Corporate reputation measurement and
for quality or incentives instead of
technological quantitative
leadership measures
Long tradition in the Amenities to attract
industry or unique highly skilled
combination of skills labour, scientists, or
drawn from other creative people
businesses
Strong cooperation
from channels
Focus Combination of the Combination of the
above policies directed above policies directed
at the particular at the particular
strategic target strategic target