1

Thomas Edison State University

BUS-421-OL010 – October 2017 Term

Module 4: Case Study 4: Case 16 – Tesla Motors in 2016: Will Its Strategy Be Defeated by Low

Gasoline Prices and Mounting Competition?

“When Henry Ford made cheap, reliable cars people said, ‘Nah, what’s wrong with a

horse?’ That was a huge bet he made, and it worked.” – Elon Musk

Tesla Motors’ strategy builds competitive advantage based on the development of

products that differentiate the company from others in the automotive industry. Because of this

method, Tesla’s generic competitive strategy is broad differentiation. For example, Tesla’s

products are competitive because they combine advanced environmentally friendly technology,

considering that most automobiles today use fuel engines. In using this generic strategy, Tesla

attracts all potential customers, who are now increasingly interested in eco-friendly products

(Thompson, et al, 2018, p. 144).

Originally, Tesla used a focused differentiation generic competitive strategy. Using this

strategy, the company highlighted the uniqueness of its products, but also focused mainly on

consumers interested in the luxury car market. Affluent customers have a high tendency to be the

first on the block in purchasing newly announced products. However, now that Tesla has gained

popularity and production costs are decreasing, the company’s generic competitive strategy has

shifted to broad differentiation.

Tesla Motors’ CEO, Elon Musk, set a strategic objective to achieve sales of around

500,000 electric vehicles annually by year-end 2020. However, this objective may be easy to
This study source was downloaded by 100000849781261 from CourseHero.com on 03-06-2023 04:28:29 GMT -06:00

https://www.coursehero.com/file/27491501/BUS-421-CaseStudy4docx/
 2

accomplish if there were no competing factors. Tesla faces tough competition from other high-

end automotive manufacturers that are developing electric vehicles with features that would

enable them to compete with Tesla’s Model S and Model X vehicles (Thompson, et al, 2018, p.

C-199). Also, in 2014, the company made a pledge that the company would not sue rivals for

infringing on Tesla’s 500 patents involving electric vehicles or related equipment if the party was

acting in good faith (Thompson, et al, p. C-214). The reason the company made this pledge

according to Elon Musk, was to encourage the advancement of a fast-evolving platform for

electric vehicles which benefited both Tesla and other electric auto-makers. The pledge could

possibly void Tesla’s technological competitive advantage over rival auto-makers of electric

vehicles.

As stated in the case study, gasoline prices have declined and are expected to remain low

for several years due to worldwide oil surplus (Thompson, et al, 2018, C-199). Low gas prices

make buyers less interested in purchasing electric vehicles. Though, Tesla cars will continue to

attract affluent buyers who are passionate about preserving a clean environment, competition

from other electric automotive manufacturers and low gas prices is what may get in the way of

Tesla accomplishing the 2020 goal of 500,000 vehicles.

Tesla Motors is a “first mover” in the electric vehicle industry. The company has

established significant brand loyalty, exploiting network attempts and positive feedback circles,

and locking consumers into its innovation and technology. This was evident from Tesla’s early

customers whose praise for the Model S followed by glowing articles in the media were so

pervasive that Tesla had not yet spent money on advertising to boost customer traffic in its

showrooms (Thompson, et al, 2018, p. C-198). It can be expensive for later entrants to attempt to

break down Tesla’s loyal customer base and market share. Next, as a first mover, Tesla can create

switching costs making it difficult for other competitors to enter the market.

This study source was downloaded by 100000849781261 from CourseHero.com on 03-06-2023 04:28:29 GMT -06:00

https://www.coursehero.com/file/27491501/BUS-421-CaseStudy4docx/
 3

As an early leader in the electric vehicle industry, Tesla can increase sales ahead of rivals

and thus reap volume-based cost advantages associated with realization of scale economies and

learning effects. Tesla can move down the learning curve ahead of rivals by accumulating

valuable knowledge related to consumer needs, process technology, and distribution channels.

Tesla’s lithium-ion battery’s charging, and recharging levels are examples of acquiring valuable

customer knowledge and customer requirements. Finally, Tesla has set the technical standard in

the electric vehicle industry that many auto-makers attempt to duplicate. Continued research,

innovation, and product technology makes Tesla a standout from its competitors.

Tesla Motors’ manufacturing strategy was to source several parts and components from

outside suppliers but to design, develop, and manufacture in-house components where it had

intellectual property and core competencies (e.g., lithium-ion battery packs, electric motors, gear

boxes, and other powertrain components) (Thompson, et al, 2018, p. C-216). Tesla’s strategy

included creating alliances with larger, established companies like Daimler AG, Toyota, and

Panasonic which were crucial to Tesla’s early success. The Daimler partnership provided Tesla

with access to superior engineering expertise and a cash dosage of $50 million, helping to save

the company from possible bankruptcy (Thompson, et al, 2018, p. C-200). The Toyota

partnership gave Tesla access to a world-class automotive manufacturing facility located near its

headquarters in Palo Alto, California. The alliance with Panasonic, and consumer electronics

company and world leader in battery technology, was significant as Tesla tries to position itself in

the business of sustainable and decentralized energy. The two companies are jointly investing in

a new $5 billion lithium-ion battery plant in Nevada (Hoang, et al, 2016).

The benefit of the alliance experience does not come automatically but hinges on the

degree to which the organization can capture and leverage its experience (Hoang, et al, 2016).

Tesla views its alliances as part of an overall strategy to establish a new standard in automotive

technology and to gain a competitive advantage. Tesla demonstrates the potential benefits of a

carefully
This study source craftedby and
was downloaded well-executed
100000849781261 alliance strategy.
from CourseHero.com on 03-06-2023 04:28:29 GMT -06:00

https://www.coursehero.com/file/27491501/BUS-421-CaseStudy4docx/
 4

While Tesla had developed close relationships with the suppliers of lithium-ion battery

cells and certain other parts, it typically did not have long-term agreements with them. However,

Tesla’s agreement with Panasonic regarding the lithium-ion batteries was different. In the 2011

agreement, Panasonic would supply Tesla with enough battery cells to build more than 80,000

vehicles. In 2013, both companies agreed to extend the agreement through the end of 2017

(Thompson, et al, 2018, p. C-219).

The secret behind Tesla’s rapid success and what sets the company apart from the

traditional automotive manufacturer, is a desire to take complete ownership of the supply chain

from start to finish. While other companies were outsourcing many components of their business

to reduce labor costs, Tesla knew that to control the value chain, it needed to be vertically

cohesive.

Tesla is a supply chain manager’s dream, with the entire process from design to assembly,

including sales and servicing, taking place in the United States. All components, including the

battery plant, are produced in California (Handfield, 2016). The result is 100 percent control and

visibility over their supply chain.

Tesla’s incredible success has been built on exploiting technology trends more

aggressively than other auto-makers are able to do. The formula is to go for the high-end of the

automotive market: deliver performance, luxury, and something exceptional, which Tesla has

done. Tesla has blazed a trail with technology, novel design, manufacturing, and most recently

with automation which has helped Tesla stand out in an industry that is already incredibly

congested.

This study source was downloaded by 100000849781261 from CourseHero.com on 03-06-2023 04:28:29 GMT -06:00

https://www.coursehero.com/file/27491501/BUS-421-CaseStudy4docx/
 5

References:
28 Elon Musk Quotes That Show His Genius. (2017, July 08). Retrieved October 26, 2017, from

http://www.theinspiringjournal.com/28-elon-musk-quotes-that-show-his-genius

Handfield, R. (2016, April 4). Supply Chain View from the Field. Retrieved October 27, 2017,

from https://scm.ncsu.edu/blog/2016/04/04/insource-outsource-cost-trade-decisions-

have-lasting-impact-at-tesla/

Hoang, H., & Rothearmel, F. (2016, August 23). How to Manage Alliances Strategically.

Retrieved October 27, 2017, from http://sloanreview.mit.edu/article/how-to-manage-

alliances-strategically

Thompson, A., Peteraf, M., & Gamble, J. & Strickland, A. J. III (2018). Crafting and executing

strategy: The quest for competitive advantage, concepts and cases (21th ed.). New York,

NY: McGraw-Hill.

This study source was downloaded by 100000849781261 from CourseHero.com on 03-06-2023 04:28:29 GMT -06:00

https://www.coursehero.com/file/27491501/BUS-421-CaseStudy4docx/
Powered by TCPDF (www.tcpdf.org)