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TEACHING NOTE
CASE 17
Tesla Motors’ Strategy to Revolutionize
the Global Automotive Industry
Overview
In his February 2014 Letter to the Shareholders, Elon Musk—an early investor in Tesla Motors and its current
Chairman and CEO—was pleased with the company’s future prospects. Tesla’s strategy was producing rapidly
improving results, and by all indications the company’s execution of the strategy was very much on track.
Musk’s report left little doubt that Tesla Motors making good progress in its journey to manufacture premium
quality, high performance electric vehicles capable of winning widespread customer acceptance and accelerating
the world’s transition from carbon-producing, gasoline-powered vehicles to energy-efficient, environmentally
responsible electric vehicles.
After suffering five years of losses totaling $943.5 million on combined revenues of just $861 million during
2008–2012, Tesla delivered 22,477 of its recently-introduced Model S vehicles to customers in 2013. Production
rates had recently increased to 600 vehicles per week and were expected to reach 1,000 vehicles per week by
year-end 2014. Tesla reported global revenues of $2.0 billion in 2013 and over $100 million in net income on
a non-GAAP basis. Deliveries to customers in Europe began in August 2013, and deliveries to China were set
to begin in Spring 2014—the company’s sales showroom in Beijing was already generating the heaviest traffic
of any of Tesla’s showrooms worldwide. Musk was confident that sales of Tesla vehicles in Europe and China
would exceed sales in the United States in two, no more than three, years. Tesla was well along on its plan to
begin producing two new models in 2014–2016—an SUV and a mid-priced sedan. The company’s stock price
had climbed from $34 in January 2013 to over $250 in March 2014.
The Tesla Model S had received widespread praise and acclaim not only as the world’s best electric vehicle
but also as a product far superior to any other brand or model of electric vehicle currently on the market. In
2013, the Model S was the most awarded car in the United States. In picking the 2014 Tesla Model S as the
“best overall” model out of 260 cars tested, Consumer Reports awarded the Tesla Model S a score of 99 out of
100 (the highest score any vehicle had ever received from the magazine) and described it as “a technological
tour de force” with “blistering acceleration, razor-sharp handling, compliant ride, and versatile cabin.” The
sleek styling and politically correct power source of the Tesla Model S was thought to explain why thousands
of wealthy individuals in North America and Europe—anxious to be a part of the migration from gasoline-
powered vehicles to electric-powered vehicles and to publicly display support for a cleaner environment—had
become early purchasers and advocates for the vehicle. Indeed, word-of-mouth praise for the Model S among
current owners and glowing articles in the media were so pervasive that Tesla had not yet spent any money on
advertising to boost customer traffic in its showrooms. In a presentation to investors, a Tesla officer said “Tesla
owners are our best salespeople.”
According to Jessica Caldwell, senior analyst at Edmunds.com (a respected Web site for automotive industry
data):
Influential people set trends while the mainstream aspires to follow. We’ve seen this countless times in many
different retail sectors. Cars are no different, albeit more expensive than most other purchases. Additionally,
with the proclivity of tech geek being chic, the Silicon Valley area will set trends faster than traditional high-
income markets like New York that have roots in (highly vilified) banking.
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So, as Tesla increases the number of models on offer and price points, it could find itself in demand by more
than just those in these wealthy enclaves. After all, most luxury car companies find the most volume in their
entry-level vehicles.
Headed into 2014, Tesla Model S owners in 20 countries were driving their vehicles almost 1 million miles every
day—and had driven their vehicles a total of 200 million cumulative miles. Management believed more than 80
percent of Model S owners were using their Model S as their primary vehicle. All the available evidence pointed
to Tesla’s Model S as being the best electric vehicle the world had ever seen.
Tesla Motors is a very high-profile company in a high-profile industry. Elon Musk is a very high-profile CEO.
Tesla is one of the most widely watched companies in the world, and news of its every move and every quarterly
report attracts widespread attention and rapt investor interest.
Suggestions for Using the Case
Tesla Motors is an intriguing company headed by a very intelligent CEO, Elon Musk, who has an affinity for
making bold and strategically-astute decisions about how Tesla is going to conduct its crusade to revolutionize
the global automobile industry and supplant gasoline-powered vehicles with battery-powered vehicles. In all
likelihood, students will find this a fascinating case and will be quick to express their opinions/convictions about
the company, about Elon Musk’s strategic vision, about the strategy that Tesla Motors is pursuing, and about the
company’s prospects for success.
The content of the case ties tightly to Chapters 1–7, and is best-suited for the second half of your module on
business strategy when students will likely have a bit stronger command of how to apply the concepts and
analytical tools covered in the first seven chapters of the text. Students definitely need to have read Chapter 7
before being assigned the Tesla case because Tesla is very definitely pursuing a global strategy in a globally
competitive industry that is dominated by global competitors.
The case contains detailed information on Tesla’s emergence as an important and fast-growing company, the
various elements of Tesla’s strategy, and the company’s performance—both financially and strategically. While
the case is a bit lengthy (28 pages), the full story of what Tesla is doing, the scope of its ambitions, and the
rationales underlying the company’s assorted strategic initiatives all need to be laid out in order for class members
to have enough information to draw conclusions about the soundness of Tesla’s strategy and the company’s
prospects for market success. The analysis that students need to do in this case is not particularly demanding or
extensive. The big debate—which certainly can be argued both pro and con—is whether Tesla can “pull it off”
and be the disruptive catalyst for transforming the world’s automobile industry in the manner that Elon Musk
envisions. This calls for thoughtful business judgment on the part of class members and whether the company is
or is not likely to be able to surmount all the hurdles it faces.
Videos for Use with the Tesla Motors Case There are three videos you can show (or let students view on
their own) when discussing the Tesla case in class:
nA 2:39-minute May 29, 2013 Wall Street Journal video entitled “Tesla: Its First Decade and the Road Ahead”
that can be accessed at http://www.wsj.com/video/tesla-its-first-decade-and-the-road-ahead/5D9E356D-
3546-4CAB-AB9C-F4426949451E.html. This video can be shown at the beginning of the class period.
nA 9:44-minute April 2, 2013 YouTube video entitled “Elon Musk: How I’m Guaranteeing Tesla Model S”
that can be accessed at http://www.youtube.com/watch?v=LS2BCL6SWYI. We suggest showing this video
when you cover the new lease option for the Model S introduced in Spring 2013.
nA 5:54-minute October 10, 2014 YouTube video entitled “Elon Musk: I Don’t Follow Tesla Stock That
Much.” It can be accessed at https://www.youtube.com/watch?v=Bjq6tXRKfUQ. This video can be shown
before you ask students for their actions recommendations or just after you cover Tesla’s recent financial
performance and financing activities.
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If class time is too constrained to show all three videos, then our suggestion is to show only the second video in
class.
The Connect-based Exercise for the Tesla Motors Case. We developed an exercise for Tesla case for
inclusion in the publisher’s Connect™ Management web-based assignment and assessment platform because:
nThe content of the case ties links nicely with many of the topics covered in Chapters 1 through 7.
nOne of the purposes of the case exercises is to drill students in applying the concepts and analytical tools
discussed in the chapters to the circumstances posed in the cases.
This particular Connect-based exercise concerns the following six questions:
1. What are the key elements of Tesla Motors’ strategy?
2. What is your assessment of Tesla’s financial performance as shown in case Exhibit 1? Use the financial ratio
information in Table 4.1 of Chapter 4 (pages 81–83) to assist you in calculating a revealing set of` financial
ratios and interpreting them.
3. What do we learn from the data in case Exhibit 2?
4. What are the issues/problems that Elon Musk and other members of Tesla’s top management team need to
address?
5. What, if any, changes in Tesla’s strategy would you recommend that Elon Musk consider?
6. What is your outlook for Tesla’s future performance and its prospects for revolutionizing the global
automotive industry’s use of gasoline-powered engines versus battery-powered engines?
It should take class members roughly 45 minutes to complete the exercise, assuming they have done a
conscientious job of reading the case and absorbing the information it contains. Answers to the first five questions
are automatically graded, and the grades are automatically recorded in your Connect grade book. The caliber of
class members’ answers to the sixth question can be assessed during the class discussion—however, be aware
that there is ample room for differing views as to whether Tesla is or is not likely to be successful.
What to Tell Students in Preparing the Tesla Case for Class. To give students guidance in what to do
and think about in preparing the Tesla case for class discussion, we strongly recommend two things:
1. Have class members complete the Connect-based exercise for the Tesla case in the event you have
adopted the Connect software for your course.
OR
2. Provide class members with assignment questions and insist that they prepare good notes/answers to
these questions before coming to class. Our recommended assignment questions for the Tesla case are
To facilitate your use of assignment questions and making them available to students, we have posted a file of
the Assignment Questions contained in this teaching note on the instructor resources section of the Connect
In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case
unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing
substantive answers to a set of well-conceived study questions before they come to class. In our classes, we
expect students to bring their notes to the study questions to use/refer to in responding to the questions that
we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral
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Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have
class members read the Guide to Case Analysis that immediately follows Case 31 in the text. The content of this
Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. We
definitely recommend use of the Tesla Motors case for written assignments and oral team presentations. Our
suggested assignment questions are as follows:
■ Tesla Motors CEO Elon Musk has employed you as a consultant to assess the company’s overall situation
and recommend a set of actions to improve the company’s future prospects. Please prepare a report to Mr.
Musk that includes (1) the pros and cons of Tesla Motors’ strategy, (2) an evaluation of Tesla’s financial
■ Prepare a brief report to Tesla Motors CEO Elon Musk outlining (1) the 3–4 top priority issues that Tesla
management needs to address, (2) your outlook for Tesla’s future performance, and (3) the company’s
Assignment Questions
1. What are the key elements of Tesla Motors’ strategy?
2. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the
competitive approach that Tesla is employing?
3. Are you impressed by the strategy Elon Musk has crafted for Tesla? Why or why not?
4. What is your assessment of Tesla’s financial performance as shown in case Exhibit 1? Use the financial ratio
information in Table 4.1 of Chapter 4 (pages 81–83) to assist you in calculating a revealing set of financial
ratios and interpreting them.
5. What do we learn from the data in case Exhibit 2? Does the data provide additional valuable information?
Why or why not?
6. What grade would you give Elon Musk for his handling of the battery pack fires and battery-charging fire in
the residential garage of a Model S owner?
7. What are the issues/problems that Elon Musk and other members of Tesla’s top management team need to
address?
8. What, if any, changes/adjustments in Tesla’s strategy would you recommend that Elon Musk consider?
9. What is your outlook for Tesla’s future performance and its prospects for revolutionizing the global
automotive industry’s use of gasoline-powered engines versus battery-powered engines?
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Teaching Outline and Analysis
1. What are the key elements of Tesla Motors’ strategy?
Class members should have little trouble identifying the following key elements of Tesla’s strategy:
nProduct line strategy—Offer a number of models for customers to choose from (and several powertrain
options (at least for the Model S)—the Model S, the forthcoming Model X crossover, and the mass-
nTechnology and product development strategy—Spend heavily on R&D to design, develop, test, and
• By 2014, top executives believed that the company had developed core competencies in powertrain
and vehicle engineering and that the company’s core intellectual property was contained in its
electric powertrain technology—the battery pack, power electronics, induction motor, gearbox, and
• Tesla’s compact, modular powertrain system had far fewer moving parts than the powertrains
• Tesla had had elected to use “18650 form factor” lithium-ion battery cells, chiefly because a battery
• Tesla’s accumulated experience and expertise had produced a core competence in battery pack
design and safety, putting Tesla in position to capitalize on the substantial battery cell investments
• Tesla had developed custom-designed 3-phase alternating current induction motors for its powertrain
• The battery pack and the performance and safety systems of Tesla vehicles required the use of
numerous microprocessors and sophisticated software. Many of the software programs had been
nVehicle design and engineering strategy—Tesla had devoted considerable effort to creating significant
in-house capabilities related to designing and engineering portions of its vehicles, and it had become
knowledgeable about the design and engineering of those parts, components, and systems that it
nManufacturing strategy—In May 2010, Tesla purchased the major portion of a recently closed
automobile plant in Fremont, California, for $42 million; months later, Tesla purchased some of the
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• Tesla’s manufacturing strategy was to source a number of parts and components from outside
suppliers but to design, develop, and manufacture in-house those key components where it had
considerable intellectual property and core competencies (namely lithium-ion battery packs,
electric motors, gearboxes, and other powertrain components) and to perform all assembly-related
• In December 2012, Tesla opened a new 60,000 square-foot facility in Tilburg, Netherlands, about 50
miles from the port of Rotterdam, to serve as the final assembly and distribution point for all Model
S vehicles sold in Europe and Scandinavia. The facility, called the Tilburg Assembly Plant, received
nSupply chain strategy—The Model S contained over 2,000 parts and components that Tesla was sourcing
globally from over 300 direct suppliers, the majority of whom were currently single-source suppliers. It
nDistribution strategy: A company-owned and operated network of retail stores and service centers—
Tesla sold its vehicles directly to buyers and also provided them with after-sale service through a network
of company-owned sales galleries and service centers. This contrasted sharply with the strategy of rival
• Management believed that integrating forward into the business of traditional automobile dealers
and operating its own retail sales and service network had three important advantages:
1. The ability to create and control its own version of a compelling buying customer experience,
2. The ability to achieve greater operating economies in performing sales and service activities.
3. The opportunity to capture the sales and service revenues of traditional automobile dealerships.
When Tesla buyers purchased a vehicle at a Tesla-owned sales gallery, Tesla captured the
full retail sales price, roughly 10 percent greater than the wholesale price realized by vehicle
manufacturers selling through franchised dealers. And, by operating its own service centers,