Sample Masters Pass Marketing Report

Marketing Analysis of Tesla (2019)

Table of Contents

• 1.Introduction
• 2. A Brief Market Overview
• 3. External Market Analysis
  • 3.1. PESTLE Analysis
    • 3.1.1 Political
    • 3.1.2 Economic
    • 3.1.3 Social
    • 3.1.4 Technological
    • 3.1.5 Legal
    • 3.1.6 Environmental
• 4. Internal Analysis of Tesla
  • 4.1. Resource Based View (RBV) and VRIO Analysis
  • 4.2. Assessment of the Current Strategy – SAF Framework
• 5. Conclusions
• 6. References

1. Introduction

Tesla has risen to public attention in the last couple of years through its high-visibility PR actions and high-performance electric cars by setting industry standards and altogether redefining perceptions to personal mobility (Niedermeyer, 2019). Although Tesla is predominantly associated as an Electric Vehicle (EV) manufacturer, its scope of operations covers an assortment of other supporting activities revolving around renewable energy innovation both within and beyond the car-making industry (Niedermeyer, 2019). The high level of vertical integration allows Tesla to exercise control over a large proportion of supply chain operations, which may be perceived as a risk reduction strategy to eliminate supply chain bottlenecks and to reduce ‘time-to-market’ (TTM) in order to capture growth opportunities (Lambert, 2016). Despite Tesla’s stellar growth trajectory, recent news coverage submits strategic issues, and while Tesla’s disruptive effect of the EV market is undisputed, the sustainability of its business model is questionable (Butler, 2019). The first quarter of 2019 proved to be a vast disappointment for investors after Tesla published a loss of $702 million, even higher than the most pessimistic expectations (Butler, 2019). Elon Musk, the Tesla CEO explained the dire financial performance in terms of logistical difficulties (Villasanta, 2019), though it is impossible to disregard intensifying competition and the exhaustion of tax credits and subsidies governments used to provide to advance EV technology adoption in consumer markets (Cloete, 2019). In light of such changes in the external environment, a review of Tesla’s current marketing strategy is timely in 2019.

2. A Brief Market Overview of Current Tendencies Market for Electric Vehicles (EV) and Tesla’s Emergence as Market Leader

One of the growth motors behind Tesla’s success was the company’s visionary idea of altogether redefining the concept personal mobility, well ahead of large competitors only starting to invest in mainstream EV technologies years after the launch of the first Tesla models (the Roadster and Model X) (Niedermeyer, 2019). The lack of investment and/or commercial interest in EVs in the early 2000s was mostly attributed to the engulfing trend of SUVs (Sport Utility Vehicles), and low gasoline prices in key markets (e.g. the US), which temporarily limited the appeal of EVs (Burton, 2013). In addition, encumbering technical difficulties (e.g. insufficient battery capacity) seldom allowed EVs to compete with internal combustion engine vehicles, thus the use of EVs remained largely limited to a small market of enthusiasts and with several EV start-ups’ quick failure, large manufacturers decided to streamline existing technologies within existing capabilities (Link, O'Connor and Scott, 2015).

Tesla’s bold move to channel massive investments into EV prototype developments in 2004 (coinciding with the temporary decline in the demand for EVs) eventually turned out to be the basis of first-mover advantage (Niedermeyer, 2019) by the early 2010s when large rivals (such as BMW and Mercedes Benz) unveiled the first generation of EV models (Todd, Chen and Clogston, 2013). In the early 2010s with the launch of dozens of new EV models, none of the competing EV models was capable of imitating Tesla’s performance (e.g. range and acceleration) (Voelcker, 2013). In 2013, the Tesla S model had an estimated range of 265 miles, whereas the closest rival (the Rav4 EV powered by Tesla’s proprietary technology) had a range of slightly over 100 miles (Voelcker, 2013).

Further variations in the competitive landscape of EVs can be best illustrated with the diminishing difference between the average range of Tesla vehicles and competitors’ models. Tesla continues to offer the highest range in the plug-in EV market, yet with the advancement of technology and rivals’ entry to the expanding EV sector, Tesla’s market-leading position is in jeopardy (MYEV.com, 2019). The new Volvo Polestar model (to be launched in 2020) promises an almost identical performance to Tesla models (RT International, 2019), and with the forecasted double-digit growth in the demand for EVs (Spglobal.com, 2019), competition is likely to intensify in the near future.

3. External Market Analysis

3.1 PESTLE

3.1.1 Political

The political landscape for EV manufacturers has been outstandingly encouraging in the last couple of years. Pressures from NGOs and civic organisations succeeded in convincing governments to grant tax allowances and subsidies to early EV adopters to offset the negative externalities of internal combustion engines (Schmidt, 2019a). Additionally, free charging stations to reduce to the total cost of EV adoption were deployed in major cities as the manifestation of environmental policies (Yu et al., 2018). Unfortunately, there is a global trend of dissipating subsidies for EV owners. For instance, in Germany, specific high-end models (e.g. Tesla model S) no longer enjoy purchase incentives (Petzinger, 2018). The Chinese government has also been considering the reduction of EV purchase incentives (Prnewswire.com, 2019). The erratic Trump administration proposed a future suspension of EV subsidies (Reuters, 2019) and with escalating tensions in international trade relations (predominantly occurring on the China-US axis), there may be a remarkable surge in political uncertainty (Evarts, 2019).

3.1.2 Economic

The decreasing cost of technology and the positive economic outlook propelled EV adoption and market growth both in the developed and the developing world (e.g. China) (Calabrese, 2014). Predictions of a global economic decline (especially from the last six months) with a forecasted downward pressure on consumer spending (Sherman, 2019) present a mild-to-moderate economic threat for the EV market.

3.1.3 Social

Environmentalism as a movement has gained substantial traction in most consumer markets, including but not limited to the automotive industry (Malyan and Duhan, 2018). The environmental consequences of carbon emission, combined with government incentives, have proven to be significant push factors for EV market growth – with current estimates and the increasing environmental awareness (as socio-cultural developments), EV manufacturers’ value proposition stays entirely relevant and inimitable for traditional gasoline car producers (a temporary source of competitive advantage) (Degirmenci and Breitner, 2017). The move towards sharing economy concepts and the decline in vehicle ownership among western consumers (Hallgren, 2018) are evolving social/market trends worth monitoring (Khrennikov, 2019).

3.1.4 Technological

Major technological advancements in EV battery technology occurred in the last ten years, resulting in the steady decline of the direct cost of EV technology (Bullard, 2019). With extending ranges comparable to petrol-fuelled engines, EVs have become close substitutes to regular cars with a relevant value proposition to an extended proportion of consumers (Bullard, 2019). The widespread adoption of EVs, unfortunately, surfaced a variety of technological difficulties challenging the sustainability of EV technology (McGeehan, 2017). Most EV battery components (e.g. lithium) are not available in infinite quantity and thus cannot entirely resolve sustainability concerns.

3.1.5 Legal

The amplified stakeholder pressures for environmental protection eventually gained traction among regulators and with the recent emission scandals, EVs gained an improved legitimacy (Schmidt, 2019b). Internal combustion engine emission standards are becoming increasingly stringent year by year (Continental, 2019), and while there may be options to curb gasoline engines’ toxic gas emissions further, dominant themes in regulations forecast a dire future for traditional engines. Progressive countries (such as Norway) vowed to eliminate internal combustion engine sales (in the next ten to twenty years) (Dugdale, 2018) that acts as another push factor for EV adoption.

3.1.6 Environmental

One of the critical drivers of EV adoption encompasses the visible anthropogenic effects of emission-induced climate change (Calabrese, 2014). Non-renewable energy sources are accountable for the majority of carbon emissions in the auto industry (Calabrese, 2014). In parallel to the overall (and at times excessive) stakeholder support for EV adoption, it shall be noted that the excavation of certain battery ingredients (e.g. cobalt and nickel) poses substantial environmental threats yet to be addressed by industry leaders and regulators (Katwala, 2019).

4. Internal Analysis of Tesla

4.1 Resource Based View (RBV) and VRIO Analysis

The Resource-Based View (RBV) of strategy is an analytical framework evaluating the extent to which firms are capable of utilising existing resources within current competencies to sustain competitive advantage through dynamic capabilities to adjust to developments occurring in firms’ external environment (Warren, 2008). Tesla’s resources and competencies are summarised in table 1 below.

Table 1 – Key Resources and Competencies of Tesla Motors

The VRIO (an acronym standing for Value, Rarity, Inimitability and Organisation) is a diagnostic model to measure whether an organisation is capable of grasping external opportunities and neutralising potential threats (e.g. intensifying competition in the market for EVs) (Witcher and Chau, 2010). Value, as a fundamental element of competitive advantage, refers to organisational capabilities of presenting offers as solutions to impending needs (e.g. demand for zero-emission vehicles under the quest of environmentalism as a prevailing theme in contemporary societies) (Witcher and Chau, 2010). Tesla evidently satisfies this criterion with its EV models, and the same would apply to the rarity principle concerning Tesla’s resources and competencies. Even if Tesla does not necessarily control scarce resources, the sophisticated internal processes and transformations (i.e. the social complexity) (Ashkanasy, Wilderom and Peterson, 2011) so far prevented rivals from emulating Tesla’s success. Nonetheless, as it was implied earlier, there is a fast-approaching threat of competitive parity with the approach of new EV market entrants. Key resources and competencies shall be difficult to imitate for rival firms (Witcher and Chau, 2010), yet with the substantial advancement in battery technology and new entrants’ amplified interest to diversify away from traditional engines, Tesla is under pressure to sustain continuous innovation.

By progressing onto the last criterion for sustainable competitive advantage, Tesla’s strategic issues become more ostensible. Tesla’s weak profitability (in particular to the 2019 Q1 report) questions whether the resources are adequately organised to tie different resources and competencies together to generate long-term sustainable competitive advantage (Korosec, 2019). So far Tesla has been unable to achieve the desired economies of scale (to reduce unit costs) (Brian, 2018), which presents a critical strategic problem and a threat to the long-term feasibility of the current strategy. As a primary weakness, Tesla’ high level of vertical integration may eventually turn into a source of competitive disadvantage. In comparison with other car manufacturers operating in partnership with modular suppliers to reduce unit costs (Hudson, Schamp and Amin, 2012), Tesla’s reluctance to outsource car components may be an impending obstacle to cost optimisation.

The SWOT analysis in table 2 recaps Tesla’s current situation as the basis for evaluating the need for an immediate turnaround strategy.

Table 2- Tesla Motors’ SWOT Analysis

4.2 Assessment of the Current Strategy – SAF Framework

Recent press coverage on Tesla’s performance and commercial feasibility portray an ambiguous future for the organisation without radical changes to its corporate-level strategy (Assis, 2019). Elon Musk stated in 2019 May that with Tesla’s growing debt and cash flow difficulties, it is only a matter of time until insolvency sets in, possibly marking the end of one of the most innovative car manufacturers in the world if investors continue to lose confidence in Tesla’s strategy (O'Kene, 2019). In 2018, Elon Musk promised a complete overhaul of Tesla’s spending, yet looking at the accumulated loss of $702 million in the first three months of 2019, progress of restructuring has been far from being satisfactory, despite record sales of the new affordable model 3 (Whitwam, 2019). The causes of curtailed progress are manifold, and speculations involve an array of options to explain Tesla’s failing performance, ranging from the overestimation of demand for premium EVs, intensifying competition and capacity problems resulting in internal inefficiencies and thus low sales margins inadequate to keep Tesla solvent in the long-term.

The SAF strategic alignment framework is another diagnostic tool for gauging strategic directions based on strategic suitability, acceptability and feasibility (Prasad, 2015). Tesla’s dire financial situation over the last couple of years implies that despite the CEO’s ambitious agenda to completely redefine the concept of personal mobility, tactics so far have failed to realise strategic objectives. Tesla’s original strategy of EV production remained mostly unchanged and progressively became estranged from the reality of the EV market (shown in dispersing cash reserves). Concerning suitability, Tesla’s value proposition may be capable of exploiting opportunities, though Tesla’s shrinking competitive advantage questions Tesla’s capacity to mitigate threats within current resources and competencies. Tesla’s exceptional innovation capability once supported the organisation to emerge as the leading EV manufacturer; with intensifying competition and the ‘democratisation’ of EV ownership, Tesla’s current strategy is exceptionally exposed to external threats (see table 2 SWOT analysis). Suitability concerns likewise influence stakeholders’ acceptance of the corporate level strategy – the high volatility of Tesla share prices is a clear indication of the dubious feasibility of Tesla’s marketing strategy (Assis, 2019), as well as the progressive deterioration of Tesla’s competitive advantage.

5. Conclusions

The future of Tesla’s as the leading manufacturer of innovative EVs rests on unstable foundations. Financing difficulties, problems with product reliability and supply chain bottlenecks in the last years are the significant barriers to Tesla’s viability. In the early 2000s, the decision to diversify into the EV market may have proven to be an unconventional choice with limited market demand for zero-emission cars. In retrospect, this unconventional move served as the foundation for Tesla’s success as an industry trendsetter for other traditional carmakers. The launch of the affordable Model 3 so far has not delivered initial promises (i.e. a satisfactory cash flow) and while the new model sells at a relatively affordable price level (comparable to similar cars in the same category of small sedans), the accumulated $700 million in losses questions whether Tesla possesses any realistic options to escape a catch-22 paradox. To improve margins through economies of scale, Tesla must significantly ramp up production volumes, though with the present financial situation, securing funds is likely to be a pivotal challenge for Tesla. Rivals entering the lucrative market of EV vehicles seems to be better positioned in this regard with a notable cost advantage (through economies of scale and scope) over Tesla to capitalise upon favourable trends. China and the far east constitute the key growth centre for EVs, but with the ongoing trade war between the US and China, Tesla is likely to miss these key markets and a stable revenue stream. Funding Tesla from capital markets so far has been a temporary solution to keep the organisation afloat and financially viable; nevertheless, with the present outlooks as of 2019, betting on Tesla’s insolvency no longer appears as a far-fetched speculation.

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