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TEACHING NOTE
CASE 16
Tesla Motors in 2016
Overview
Tesla Motors began shipping its trail-blazing Model S sedan in June 2012. The Model S was a fully electric,
four door, five-passenger luxury sedan with an all-glass panoramic roof, high definition backup camera,
a 17-inch touchscreen that controlled most of the car’s functions, keyless entry, xenon headlights, dual
USB ports, tire pressure monitoring, and numerous other features that were standard in most luxury vehicles.
Fold-down second row seats were standard on the Model S; however, buyers had the option of ordering a third
Customer purchases of Tesla’s Model S climbed swiftly, from 2,653 vehicles in the July-December period of
2012 to 50,332 Model S vehicles in full-year 2015. In 2015 the Tesla Model S was the best-selling large luxury
vehicle in the United States, with a unit volume of 25,202 vehicles. In second place was the Mercedes-Benz
S-Class with sales of 21,394 vehicles; 2015 sales of the Model S were far above those of BMW’s 700 series
gave the Model S a score of 99 out of 100 points in 2013, 2014, and 2015, saying it was “better than anything
we’ve ever tested.” However, the Tesla Model S did not make Consumer Reports list of the “10 Top Picks for
2016: Best Cars of the Year.”
The sleek styling and politically correct power source of the Tesla Model S was thought to explain why thousands
of wealthy individuals in countries where the Model S was being sold—anxious to be a part of the migration
Will Its Strategy Be Defeated by Low Gasoline
Prices and Mounting Competition?
:
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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,
Shipments of Tesla’s Model X, a 7-passenger crossover SUV with “falcon-wing” rear doors that provided easy
access to third-row seats and had a base price of $81,200 ($5,000 above the base price of the Model S) and a
fully-equipped price of as much as $140,000 for the high-end versions, began in the last quarter of 2015. The
Model X was expected to reach a production rate of 1,000 vehicles per week in Q2 of 2016. Tesla management
Elon Musk, Tesla’s current chairman and CEO, had a ground-breaking strategic vision for Tesla Motors that
featured three major elements:
1. Bring a full-range of affordable electric-powered vehicles to market and become the world’s foremost
manufacturer of premium quality, high performance, electric vehicles.
Musk’s stated near-term strategic objective was for Tesla to achieve sales of about 500,000 electric vehicles
annually by year-end 2020. Longer term, Musk’s strategic intent was for Tesla to be the world’s biggest and
most highly-regarded producer of electric-powered motor vehicles, dramatically increasing the share of electric
vehicles on roads across the world and causing global use of gasoline-powered motor vehicles to fall into
permanent long-term decline.
1Jeff Evanson, Tesla Motors Investor Presentation, September 14, 2013, posted at teslamotors.com, accessed November 29, 2013
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But in 2016 there were three mounting challenges with the potential to imperil Musk’s vision for Tesla Motors:
1. Gasoline prices across much of the world had dropped significantly in 2015 and early 2016—in the
United States to levels below $2 per gallon—and were widely expected to remain low for 2 or more
years because of a worldwide oil glut that was likely to be long-term. Low gasoline prices made the
would compete against the Model 3, and they were working to improve these models substantially to
make them even more attractive to buyers than the Model 3.
3. Tesla was struggling to prove it could lower costs enough to be both price competitive and profitable.
In 2015, Tesla reported a net loss of $888.7 million on its sales of 50,332 Model S vehicles—equal to
a loss of $17,650 per car. This exceeded Tesla’s 2014 loss of $294.5 million on sales of 31,655 Model
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 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.
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”
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Videos for Use with the Tesla Motors Case. There are two videos you can show (or let students view on
their own) when discussing the Tesla case in class:
We recommend showing the second video at the beginning of class. The first video, we think, is best shown just
after mention of how Tesla’s backward vertical integration into battery manufacture (both for cars and for energy
storage—the Powerwalls) is a major component of Tesla’s strategy at its new Gigafactory in Nevada.
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:
The content of the case ties links nicely with many of the topics covered in Chapters 1 through 7.
One 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 2? Use the financial
ratio information in Table 4.1 of Chapter 4 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 3?
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 opted to make the Connect supplement for the 21th Edition a part of the materials required
for your course.
OR
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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
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 follows Case 31. The content of this Guide is particularly
helpful to students if your course is their first experience with cases and they are unsure about the mechanics of
how to prepare a case for class discussion, oral presentation, or written analysis.
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 performance as shown in case Exhibit 2, (3) an assessment of whether the information
in case Exhibit 3 is valuable or misleading, and (4) 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. Your report should be 5-6 pages, plus it should include an assortment of
charts, tables, and exhibits to support your analysis and prospects for long-term success.
■ 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
prospects for revolutionizing the global automotive industry’s use of gasoline-powered engines versus
battery-powered engines.
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?
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4. What is your assessment of Tesla’s financial performance as shown in case Exhibit 2? Use the financial
ratio information in Table 4.1 of Chapter 4 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 3? Does the data provide additional valuable information?
Why or why not?
6. What are the issues/problems that Elon Musk and other members of Tesla’s top management team need to
address?
7. What, if any, changes/adjustments in Tesla’s strategy would you recommend that Elon Musk consider?
8. 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?
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:
Product line strategy—Offer a number of models for customers to choose from—the Model S, the
recently-introduced Model X crossover, and the mass-market Model 3 (planned for 2017 that was
Technology and product development strategy—Spend heavily on R&D to design, develop, test, and
refine the components and systems for updated versions of the Model S and Model X and, further, to
get the Model E ready to go into production in 2017 (so that it could be profitably sold at a base price of
$35,000).
• 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
and advancements being made globally by battery cell manufacturers and to benefit from ongoing
improvements in the energy storage capacity, longevity, power delivery, and costs per kilowatt-hour
of the battery packs used in its current and forthcoming models.
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• 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
Manufacturing 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
• 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,
nearly complete Model S units shipped from the Tesla Factory, performed certain final assembly
activities, conducted final vehicle testing, and handled the delivery to customers throughout the
European market. It also functioned as Tesla’s European service and parts headquarters.
• During 2014 and 2015, installations of new equipment boosted the annual production capacity of
the Tesla Factory from about 21,500 vehicles in 2013 to nearly 60,000 vehicles at year-end 2015. In
2014, Tesla began producing and machining various aluminum components at a facility in Lathrop,
CA; in 2016, Tesla was nearing completion of an expansion at the Lathrop facility to include an
aluminum castings operation. In late 2015, Tesla completed construction of a new high-volume
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was in a nearby Nevada county (this county was reputed to have the fifth largest deposits of lithium
in the world). In early 2016, construction of the Tesla Gigafactory was proceeding at a rapid clip, with
completed space already available for production of Tesla’s energy storage products (which began in the
last quarter of 2015).
In 2016, Tesla announced that it was on track to achieve a 30 percent cost reduction in the battery pack
for the Model 3, plus ongoing annual cost reductions of 5-8 percent and ongoing improvements in
battery performance of 5-8 percent annually. In addition, the company had discovered ways to build
Supply chain strategy— Tesla’s Model S and Model X used over 3,000 purchased parts and components
sourced globally from over 350 suppliers, the majority of whom were currently single-source suppliers.
It was the company’s practice to obtain the needed parts and components from multiple sources
While Tesla had developed close relationships with the suppliers of lithium-ion battery cells and certain
other key system parts, it typically did not have long-term agreements with them. The one big exception
was the relationship Tesla had with Panasonic to supply Tesla with lithium-ion batteries. Tesla began
Distribution 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
motor vehicle manufacturers, all of whom sold vehicles and replacement parts at wholesale prices to
their networks of franchised dealerships that in turn handled retail sales, maintenance and service, and
warranty repairs.
1. The ability to create and control its own version of a compelling buying customer experience,
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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
• Tesla was aggressively expanding its network of sales galleries and service centers to broaden its
geographical presence and to provide better maintenance and repair service in areas with a high
However, there was a lurking problem with Tesla’s strategy to bypass distributing through franchised
Tesla dealers and sell directly to consumers. Going back many years, franchised automobile dealers in
the United States had feared that automotive manufacturers might one day decide to integrate forward
into selling and servicing the vehicles they produced. To foreclose any attempts by manufacturers to
As sales of the Model S rose briskly in 2013-2015 and Tesla continued opening more sales galleries and
service centers, both franchised dealers and statewide dealer associations became increasingly anxious
about “the Tesla problem” and what actions might need to be taken. Dealers and dealer trade association
A host of skirmishes ensued in states like Ohio, New Jersey, New York, Texas, Arizona, Maryland,
Georgia, Indiana, West Virginia, Virginia, Pennsylvania, and Michigan. In several cases, settlements were
reached that allowed Tesla to open a select few sales locations, but the numbers were capped. In states
where manufacturer direct sales to consumers were expressly prohibited in 2015-2016 (Texas, Arizona,
covering prepaid maintenance for up to eight years or up to 100,000 miles and an Extended Service
plan. The maintenance plans covered annual inspections and the replacement of wear and tear parts,
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excluding tires and the battery. The Extended Service plan covered the repair or replacement of vehicle
parts for up to an additional four years or up to an additional 50,000 miles after the expiration of the four
year or 50,000 mile new vehicle limited warranty.
All Model S owners were entitled to use the free supercharging service at any of Tesla’s Supercharging
stations to get a 50 percent recharge in 20 minutes, an 80 percent recent recharge in 40 minutes, or a
100 percent recharge in 75 minutes. As of year-end 2015, Tesla had 584 Supercharger stations open
worldwide; each station had 4 to 10 charging spaces. About 300 new Supercharger locations were
planned in North America, Europe, and Asia for 2016.
Marketing strategy— In 2014-2015, Tesla’s principal marketing goals and functions were to:
• Generate demand for the company’s vehicles and drive sales leads to personnel in the Tesla’s
showrooms and sales galleries.
• Build long-term brand awareness and manage the company’s image and reputation.
During 2012-2015, extensive media coverage, glowing praise from both new Model S owners and
admiring car enthusiasts (which effectively enlarged Tesla’s sales force at zero cost), and the decisions
of many green-minded auent individuals to help lead the movement away from gasoline-powered
vehicles had combined to drive good traffic flows at Tesla’s sales galleries and create a backlog of orders
for the Model S and Model X. As a consequence, going into 2016, the company had achieved a growing
volume of sales without spending for traditional media advertising and had relatively low marketing
costs.
Model S buyers in the United States were given the option of selling their vehicle back to Tesla within
a window of 36 to 39 months after delivery for a guaranteed percentage of the purchase price, thus
enabling them to enjoy the benefits of Model S ownership without concern for the vehicle’s resale value.