Strategic Analysis Of Tesla Inc: PESTEL, SWOT And Porter’s Framework

Environmental Analysis

Discuss about the Managing Customer Experience and Relationships.

Strategic analysis may be defined as the process of developing strategy for a business by exploring the business environment. It is the process of conducting research on the business environment and analyzing the company’s position in relation to the internal and external environment (ArbabKash et al. 2014). This report shall conduct an environmental analysis using PESTEL, SWOT and Porter’s framework. These frameworks shall help in analysing the companies using external and internal forces. As a result, the strengths, weaknesses, opportunities and threats shall be determined. Further, the organizational analysis shall be conducted using value chain and VIRO analysis. The strategic issues may be determined so that ethical and social considerations can be built.

Tesla was founded on 1st of July, 2003 in Delaware, US and it was founded by Martin Eberhard and Marc Tarpenning but the company also considered JB Straubel, Ian Wright and Elon Musk as their cofounders. The headquarters is in Palo Alto, California and they have been working on electric vehicles, solar panel manufacturing and energy storage. Their main aim is to make the world less dependent on fossil fuels. Tesla believes that the world needs to reduce their reliability on fossil fuels and work for a zero-emission future. Their CEO, Elon Musk, who has been the face of this company, sees this company as an independent automaker and aims at providing electric cars at an affordable price to the average customers. The aim is to accelerate the era of sustainable transportation by introducing more and more compact electric cars in the market as much as possible. Tesla’s continuous growth confirms that the market is ready for this change and responding so well to the organisation’s energy storage products and electric vehicles. Under Elon Musk’s leadership back in mid 2016, the company’s corporate mission was “to accelerate the world’s transition to sustainable energy” addressing the renewable resources and its related market opportunities (Gamble and Thompson 2014).

Environment analysis is one of the strategic tools to identify all the internal and external elements which can affect the organization’s performance. It shall be useful in identifying all the opportunities and threats.

PESTEL Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Analysis
Political	For reducing the dependency on oil, the government is providing incentives to the electric automotive companies. Therefore, there is a wide opportunity for Tesla for expanding its market or conducting research and development (Grant 2016).
Economic	The consumers are likely to purchase electric vehicles when the gas prices increase. Tesla has high opportunity of sales as the gasoline prices are on a hike.
Social	The consumers are becoming conscious about the environment. Therefore, there is an increase in preference in the cars that add to fuel efficiency, safety and sustainability.
Technological	Tesla is rapidly conducting research and development activities. There is a scope that they develop innovative technologies while partnering with Apple or Google for creating software for self-driving vehicles (Shahan 2017).
Environmental	The automobile industry affects climate and natural resources. Tesla is enhancing sustainability as it produces zero emission vehicles. Therefore, there is a push for creating hybrid and electric vehicles.
Legal	The US government is providing loan and incentives for the automobiles creating environmental friendly vehicles. Tesla must avoid breaking regulatory laws that are related to unhealthy emissions into the atmosphere (Frynas and Mellahi 2015).

Tesla Motors has been designing, developing, manufacturing and selling the energy storage products and fully electric vehicles. They have their own network of supercharger stations, service centres and vehicle sales all around the globe (Frynas and Mellahi 2015).

Porter’s Five Forces

Tesla has been delivering new, highly advanced and innovative technologies transforming the driving experience. They have a distinguished and unique status in the market. They are not the only company providing such cars but they have dominated the market thoroughly when it comes to high end luxury electric cars. Their growth shows how rapidly they have increased their sales over the last few years. The sales increased 59% in 2014 and then 27% in 2015 (Shahan 2017). The growth came from the demand of their Model S and Model X cars. It is hard for new companies to enter the market which is already being dominated by Tesla, Inc.

Tesla has been working on the development of their technology but it comes at a cost. They have been burning through their cash over the time which is not significantly a very good sign for a company. They are also in a position where they have to pay off a lot debt. This is due to the investments made in their research and technology over the years and for developing the technologies being used in the cars. As of March 31, 2016, they nearly had $2.5bn long term debt and capital lease on their balance sheet. The interest payments are fairly high. Tesla’s revenue from countries except The US is not great and they need to expand their overseas market cap and go global on a larger scale.

One of the biggest opportunities is to increase their global production and sales by expanding their operations globally specially in the Asian market. Tesla works according to their strength and they have launched Model 3 back in March, 2016 after Model X and Model S which was sold at nearly half the price of their first two models. The Model 3 was aimed to be manufactured and sold more than the earlier two models. Tesla has been expanding their market by introducing lesser expensive car for the average customers. They absorb more opportunities in the field of technologies being used and optimise their use (Fisher and Oberholzer-Gee 2013).

The price of the raw materials used for manufacturing such cars and energy storage devices increases evidently. Lithium, steel, aluminium, graphite and many other materials are subject to change their cost according to the global demand and supply. There are other threats such as their competitors working on making their cars better and Nissan Leaf gave them a tough fight to their car Model S back in 2015. Government regulations can also decide the future of a company’s goals. If the government regulations favour the company then it will help them achieve their goals easily and if it does not then the delay in work can lead to losses as well (Harrison and John 2013).

Porter’s Five Forces	High/Low	Analysis
1.     Competitive Rivalry	High	The market is highly competitive. The automotive companies which are bigger tend to be aggressive in their approach. The competitive aspects of five forces analysis points towards the rivalry as highly prioritized consideration for the strategic management (Epstein and Buhovac 2014).
2.     Supplier Power	Moderate	Tesla’s business is highly dependent on their suppliers. The suppliers’ quality of work, reliability, punctuality and efficiency would be a big factor for Tesla’s success. The supply level, forward integration and size of suppliers, these are all a moderate force. The suppliers’ forward integration is low level. The suppliers determine the reputation of the company and builds on trust.
3.     Buyer Power	Moderate	In this aspect, the customers’ buying power determines the sales revenue of Tesla. The Low switching cost for consumers from one brand to another is a strong factor but the substitutes available and purchase of low volume are moderate and weak force respectively. For the same reason, for Tesla customers reduce the barrier if they want to purchase from other companies. Tesla has been working on developing cars for their average customers as well (Govindan et al. 2014).
4.     Threat of substitution	Moderate	Tesla has been facing their substitutes’ impact on their electric cars and energy storage industry environment. The availability and performance of the substitute is a moderate factor for them. The performance and availability is not that much of concern for Tesla however they do need to work on the costing factor. The substitute factor matters when the option offered is good (Harrison and John 2013).
5.     Threat of New Entrants	Low	This business is not easy to enter because of the cost related to brand development and cost of doing business. The technology used has to be advanced or at least at par with the companies already existing in the market. The external factors determining the weak force of this threat analyses that the cost of developing brand and continuing the business is high. Tesla has been working on this for years and it is hard for other new entrants to compete with (Fisher and Oberholzer-Gee 2013).

Financial Analysis

Tesla entered the market through expensive high-end cars that targeted the high income people. The business model is based on selling, servicing, and charging its electric vehicles. Tesla adopts the direct sales strategy rather than selling via franchise dealerships. The company sells the cars directly to its customers. The brand also introduces internet sales in which the customers can customize the needs. Tesla follows broad differentiation as the generic strategy. This generic strategy helps the firm in building competitive advantage as it helps Tesla in differentiating from other brands (Tseng and Hung 2014). The potential customers are broadly attracted who are interested in environmental friendly products. Tesla mainly targets the customers who believe in sustainability. The key stakeholders include the investors, employees, directors, suppliers, government and public. Tesla maintains constant communication with its stakeholders and publishes annual report. Tesla communicates with its stakeholders by communicating in the annual meetings. Tesla also manages its social media pages for keeping the stakeholders abreast of the latest achievements. The stakeholders at Tesla are highly committed towards the organization (Johnston and Marshall 2016).

Capital Structure Ratios	Debt to Equity Ratio	2.43 (Marketwatch.com 2018)
Return on Equity	-60.38% (Gurufocus.com 2018)
Asset Ratio	Debt-to-Total Asset Ratio	0.33
Return on Assets	-9.52%

Overall, the list of ratios for Tesla for the year ending 2017 is determined as under:

Source: (Statista.com 2018)

The current ratio for Tesla is 0.86 that indicates difficulty experienced by the company in meeting its present obligations. However, if Tesla has good long-term prospects, it shall be able to borrow against the current obligations. Further, the quick ratio is 0.56 indicating that tesla cannot pay its current liabilities completely in the present. Tesla had reported a net loss of $889 million in 2015 that resulted in a return on equity of -88.9% in 2015. Tesla requires increasing its expansion by leveraging debt. The debt increased from $598 billion in 2013 to about $6 billion in 2017.The debt-equity ratio of Tesla was reported to be lower than the overall industry average at 2.12% in 2017 (Harrison and John 2013).

Tesla does not have a strong financial position in the market as it has huge debts. Tesla is expected to balloon another $5 billion within the next few years through equity share or long-term debt positions. The company already runs in a negative cash flow position with nearly $4 billion in debts in 2017.  This position can be recovered only by increasing share-equity. While it is argued that the increased revenue at Tesla shall provide necessary funds for expansion, at the same time it is argued that their expansion investment shall never turn into profits.

It is argued that revenues have strongly increased. Till 2012, it is noticed that there is fluctuations in gross margin, selling, general and administrative and research and development. Tesla does not include selling, general and administrative expenses in its cost of sales. There was a loss experienced in 2016 due to the timing difference between expense and revenues (Mitchell 2017).

It is further analysed that for expanding, Tesla may need fresh capital. If the expansion is done via debt, the interest expense shall reduce the profitability. The interest expense may reduce if the company grows revenue, specifically in the case where capital is raised via stock emissions. The capital expenditure does not have a direct effect on the income statement. However, it shall lead to higher charges for depreciation thereby affecting profits.

Tesla has brought elements of luxury within the automobile industry among the consumers. The brand recognition and perceived elite status has increased the demand for Tesla electric vehicles. However, Tesla faces troubles relating to market segmentation as there are less offerings in comparison with other brands. Tesla launched a marketing plan in 2015 that targeted the entrepreneurs, business executives and wealthy individuals. These customers are always looking to purchase a luxury segment car. Tesla needs to expand its target market by focusing on the entry-level luxury buyers, tech-savvy and eco-friendly customers. According to Mitchell (2017), Tesla is the only automotive company that mainly satisfies its customers.

The Model X has been reported to have quality problems. In a survey, it was reported that Tesla Model S was highly satisfying in comparison to other brands like Chevrolet, Porsche, Ford, Mazda and others (Mitchell 2017). According to the figures of March 2018, Tesla is reported to own 0.2% market share (Statista.com 2018). Tesla moved into the mass market after launching Model 3. It is analysed that Tesla will never stop innovating and it is the most attractive feature about the company. Therefore, Tesla mainly targets the customers who like technology moving faster than their wallet (Sroufe and Joseph 2017).

A recent autopilot related accident that happened in March 2018 after the first one that happened back in 2016, has sparked a controversy questioning Tesla’s safety feature. Although Tesla did provide a justification for them but it still became a big issue. Tesla has also recalled 123,000 Model S cars for fixing an issue related to its power steering and this is not a good sign for such an esteemed company.

The productivity of Tesla is difficult to compare with other companies. Tesla tries to be more vertically integrated than the others. Tesla does not focus on its losses of $0.68 per share of 2017 but it launched its compact electric sedan (Dron 2017). Tesla experiences poor productivity levels but Elon Musk has formulated certain tips for its employees to overcome such issues. Tesla is increasing its production levels to 6,000 units weekly by June 2018 for attaining profitability (Dron 2017). The middle-managers at Tesla are adding to the cost as they need to be paid salary, but their inefficiency is resulting in low productivity. There is poor communication between the departments at Tesla (Dron 2017). It is estimated that the production goals shall ramp up to 10,000 per week by the end of 2018 (Yvkoff 2017). Moreover, the production shall aggressively increase to 100,000 in 2020 (Yvkoff 2017).

Tesla constantly strives for innovation. Tesla makes electric vehicles that are affordable by the people. Tesla was founded in 2003 and launched its first electric sports car in 2008. The company innovated Model S in 2015 that became the best selling electric vehicle in 2015 and 2016. Tesla has partnered with leading competitors such as Mercedes Benz and Toyota for expanding in the market of electric cars. They are innovating in the field of battery technology thereby contributing to success. In this company, if technical employees desire to get promoted to management level, they need to undergo training. To ensure constant product development and innovation the company is focusing on encouraging diversity along with developing an inclusive surrounding which leverages diversity in communities (Govindan et al. 2014).

The capabilities can be evaluated using the VRIO analysis as under:

Capabilities	Valuable	Rarity	Imitability	Organization	Competitive Advantage
Large production facility	Yes	No	–	–	Competitive parity
Central location of stores	Yes	Yes	Yes	Yes	Sustained competitive advantage
Technical expertise	Yes	Yes	No	–	Temporary competitive advantage
Green market trend advantage	Yes	No	–	–	Competitive parity

Tesla has the most valuable assets and capabilities in its production facility. The location of stores is increasing the amount of customers. Elon Musk opened its patents to its coveted automobiles allowing the market segment to bring a niche customer segment. Tesla now serves customers in certain areas and has the ability to grow exponentially over the coming years. The biggest halt is the consumer and governmental regulations on electronic vehicles.

Tesla needs to increase its revenue streams by greater marketing efforts. Firstly, Tesla needs to improve its multinational presence. It needs to enhance the business by laying new foundations in new facilities and sales operations. Also, there is a need for significant investment in research and development for manufacturing products that are competitive (Blomback et al. 2014).

Secondly, Tesla may create a strategic alliance with Apple Inc. As Tesla intends to develop cars, they may use their financial resources to build an affordable car while providing zero emissions. It is known that Apple is engaged in creating ‘Titan’, its electric car project. As Apple is moving in the same line as Tesla, it shall be beneficial for Tesla to strategize partnership with Apple (Grant 2016).

Thirdly, Tesla may continue investment for product innovation as there is intense competition in the automobile industry. Innovation shall help in creating market needs and improve market reputation for Tesla. Lastly, Tesla must diversify its supply chain to enhance it and reduce risks. There is a need to create better visibility in the supply chain that shall enable the supply chain. The supply chain needs to be enhanced in a manner that shall decrease the cost of production, resulting in higher profitability.

Conclusion

Tesla’s continuous growth confirms that the market is ready for this change and responding so well to the organisation’s energy storage products and electric vehicles. For reducing the dependency on oil, the government is providing incentives to the electric automotive companies. The consumers are becoming conscious about the environment. Tesla is enhancing sustainability as it produces zero emission vehicles. Therefore, there is a push for creating hybrid and electric vehicles. Tesla has been delivering new, highly advanced and innovative technologies transforming the driving experience. Tesla has been working on the development of their technology but it comes at a cost. Tesla has been expanding their market by introducing lesser expensive car for the average customers. The automotive companies which are bigger tend to be aggressive in their approach. The performance and availability is not that much of concern for Tesla however they do need to work on the costing factor. Tesla has been working on this for years and it is hard for other new entrants to compete with. The potential customers are broadly attracted who are interested in environmental friendly products.

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