Tesla Motors Strategy Essay

Tesla Motors has a cash flow problem, which makes it vulnerable to the many larger competitors who want into the electric vehicle business. The advantage Tesla has is with its battery technology, which is vastly superior to anybody else's, and in its brand name and leadership. The in-house distribution is unique to the industry but it might be too early to determine whether this is helping Tesla or hurting it. This paper will examine how these elements work on the company strategically, and there will be a recommendation to leverage the company's strengths while shoring up its weaknesses. It is recommended that the auto business is spun off into strategic partnership with an established automaker and that Tesla maintains its battery IP and energy business. The battery technology would be licensed to the auto company.

Major Issues

Tesla Motors has a future that is potentially promising, but there are a number of hurdles that the company needs to overcome in order for that future to materialize. First, the company has a cash flow problem. While they are increasing their revenues, they are also increasing their burn rate (MSN Moneycentral, 2015). They are engaged in major products that are years away from bringing in stable cash flow, and this is going to put the company at financial risk in the interim. The creation of Tesla Energy may serve as a means of getting some short-term cash flow, though arguably the economics of the product are limited outside of Germany (Castelvecchi, 2015).

The cash flow issue hints at another threat, that of competition. As the company notes in its latest annual report, there are a number of competitors getting into the electric car business. This is good in some ways, because it will help to improve the charging infrastructure overall, which will benefit Tesla. The key factor here is that the company currently has technological competitive advantage, and it will need to maintain that in order to for it to stay ahead of the competition. But the competitors are generally much larger and have much greater access to capital. If Tesla's cash flow issues cause it to lose its technological competitive advantage, it might not have very much else.

A third major strategic issue for the company is to generate higher sales in the U.S. And China, the two biggest markets in the world. While Tesla is a growing, successful company in Europe, there are issues that it needs to overcome in these markets. In the U.S., sales have been relatively flat since the Model S. was introduced, partially due to production constraints but also due to the charging infrastructure. Concerns about infrastructure are also hindering growth in China as well.

Analysis of External Environment

Porter's Five Forces Model is a good tool by which the profitability of an industry can be understood. This is a good model to use to understand Tesla, a company which has thus far struggled to generate a profit. The five forces are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes, and the intensity of rivalry. The bargaining power of suppliers is not great in this industry -- not only is Tesla a major buyer but it is likely to become a bigger buyer in the future. For the major technologies that underpin the product, they are either developed in-house or with key strategic partners. The bargaining power of buyers is pretty high, given how much competition that there is in the automobile industry. That said, with technological superiority, Tesla has a certain amount of bargaining power in the market for electric cars. The major test of this bargaining power with buyers will be with the Model X is launched in 2016, as that is a more mainstream vehicle and Tesla will have to move out of its niche comfort zone to compete in that market.

The threat of new entrants is one of the most significant threats for the company, given that most major automakers are entering the electric car industry, and that they are better capitalized than Tesla, and can outspend Tesla in R&D. There has long been concern in the industry that Tesla will basically be the next Blackberry, leading the industry during the early stages only to be rendered irrelevant when the big money enters the industry. The threat of substitutes is actually quite low. While Tesla has sought to position itself against mainstream luxury cars, the reality is that the market for electric cars is somewhat distinct from the combustion engine car market. Buyers who are looking at a Tesla are usually oriented to electric vehicles and comparing the Tesla against those other options. The intensity of rivalry is low right now, because this is a small industry, but it will increase as the industry becomes larger and more companies enter it. Overall, the industry is marginally attractive. The buyers are, to an extent, price takers, but only because this is a niche market. The mainstream market that Tesla hopes to enter next year will be quite a bit different, and there is more completion in that market. The five forces also do not touch on the issue of scale -- scale is needed to be profitable in automaking, normally, and Tesla does not really have the scale needed to be profitable at this point in time.

There are tremendous opportunities in electric cars. Even now, when gas prices are fairly low, there is a social trend towards reducing carbon emissions, and electric cars are generally viewed favorably by the market as a means to do just that. The only major issue for consumers is the performance of said vehicles, something that Tesla has sought to address as the core of its business strategy. The auto market is one of the biggest consumer products markets in the world, so the overall potential for this business is in the billions. Geographically, Europe is the best-developed market for this product because of the high gasoline taxes there, which make electric cars more affordable on a comparative basis than they are in North America. But there is strong growth potential in most of the world's major markets, at least the ones with reliable electric grids. The Model X will seek to tap the enormous potential market for a mainstream electric car that can perform on a level with combustion engine vehicles.

Tesla has also identified that its batteries are superior to other technology on the market and seeks to enter the home energy market starting this summer in Germany and then expanding from there. Not a lot is known about the Tesla Energy subsidiary, which was just announced, but this clearly an area where the company sees tremendous potential.

There are several threats worth mentioning. First, there is the threat of competition, which is probably the single biggest threat that the company faces. Competition is not intense yet, and Tesla has defended against competition by developing technological competitive advantage. But the reality is that the other automaker are large, they have a lot of money and they will all want a piece of electric if that industry goes anywhere. Tesla needs to not only develop its own business, but it needs to have a plan for dealing with increased competition as it enters the electric car business.

Some other potential threats include new technologies, shifts in consumer sentiment, and in some cases government action. It is more likely that government action will be favorable to the company -- support of the Chinese government with respect to infrastructure would give Tesla a huge boost in that market -- but there are states where Tesla cannot sell its vehicles, because of restrictions on the company's distribution model, which cuts out the dealerships. Overall, the opportunities outweigh the threats by a wide margin, which is one of the compelling things about Tesla Motors.

As for the key industry success factors, the electric car industry is nascent and there are no great success stories. However, it can be said with certainty that a strong brand is required to compete against the major established players in the automotive industry. The company is building that brand. Distribution channels are essential, with for electric cars this also means charging stations -- remember that regular cars did not take off in sales until there were paved roads and gas stations to support the growth of that industry.

Another key industry success factor is going to be overcoming the technological challenges. For example, Tesla is working to have cars that can travel well in excess of 200 miles on a single charge. The lack of travel distance has been one of the major issues with electric vehicles, as well as long charging times. The Superchargers, which can charge a Tesla in 15 minutes, are a critical success factor, going along with the travel distances. As these improve, the company's products will be more viable on the market because they will better meet the…