978-1259913747 Tesla Motors Inc Case

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Structure of the Case

The case begins on January 1, 2015 with a vignette of CEO Elon Musk wondering about Tesla’s

future, including: (1) Will Tesla be the next great American car company? (2) Can it disrupt the indus-

try with electric vehicles? (3) How should Tesla adjust to increased competition? (4) Can Tesla have a

sustained competitive advantage without any infrastructure? (5) Is Tesla’s business model sustainable?

The vignette ends with Elon Musk wondering what can be done to ensure Tesla’s success over the next

few years.

Following the vignette is a biography of Elon Musk. Musk is a serial entrepreneur who previously

founded Zip2 (an online software provider, sold to Compaq) and PayPal (an online payment processor,

sold to eBay). He is now a portfolio entrepreneur with a stake in three Silicon Valley firms: SolarCity

(solar panel manufacturer), SpaceX (satellite space exploration), and Tesla Motors (electric car maker).

Musk has been lauded for his ability to bring good ideas to life but criticized for his lack of staying

power, and the case suggests he sees Tesla as an opportunity to leave a legacy.

The next section provides a history of Tesla Motors (TSLA). Tesla was founded by Martin Eberhard

and Mark Tarpenning in 2003, with Elon Musk as one of the first investors. Musk took over the lead

engineering and managerial roles after discovering that Tesla was losing $50,000 on each Roadster (its

electric sports car model) it sold in December 2006. The redesigned Roadster then sold for $109,000

before it was later discontinued in favor of the Roadster 2 and Roadster Sport, as well as designs tar–

geted at larger markets. The Model S (family sedan) prototype was unveiled in 2009, and it received

over 2,000 orders, with customers putting down a minimum $5,000 down payment. The Model S

2010 that involved a strategic partnership with Toyota (3 percent stake) helped provide needed cash,

but Tesla did not become profitable until 2013.

While it is beginning to expand internationally, Tesla largely competes in the United States where the

automotive industry has historically been dominated by GM, Ford, and Chrysler. In 2009, the market

share of the Big Three dropped below 50 percent for the first time as a result of increased competition

from German, Japanese, Korean, and Chinese auto manufacturers. U.S. automakers profited during

the “SUV craze” of the 1990s, but they were slow to adapt to shifting customer preferences for less

Tesla Motors, Inc.

TEACHING NOTE

MHE-FTR-032

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REV: MARCH 12, 2015

Teaching Note — Tesla Motors, Inc.

expensive, more fuel-efficient vehicles in the 2000s. Their financial troubles were further compounded

by high fixed costs for unionized labor, with the result that both GM and Chrysler declared bankruptcy

following the 2008 financial crisis. GM has largely recovered, but a failed merger with Daimler led to a

firms that offered higher quality and better fuel efficiency. From Japan, Toyota and Honda have a large

part of the U.S. market and produce vehicles in the United States following voluntary export restraints

(VERs) established in 1981. Producing cars in the United States helped decrease the liability of foreign-

ness. The three largest German auto manufacturers are Daimler, BMW, and Volkswagen, and they are

noted for superior engineering and design. Korean manufacturers, such as Kia and Hyundai, are gain-

California’s zero-emission vehicle [ZEV] mandate in the 1990s). The ZEV mandate is credited with

stimulating early research into electric-car prototypes, but these models were quickly abandoned once

automakers defeated the mandate in federal court. Environmental concerns and rising gas prices have

increased interest in alternative energy, and a competition for establishing a new standard appears to

be emerging among several technologies, including:

• Purebatteryelectricvehicles(e.g.,NissanLeaf,Mitsubishii-MiEV,andTesla’scars)

• Hybridgas/electricvehicles(e.g.,ToyotaPrius,HondaInsight,andChevyVolt)

• Advantagesincludethoseofpureelectricvehicleswithoutrangerestriction

• Disadvantagesincludeweight,cost,andtechnologicalcomplexity

• Biofuelsandnaturalgas(generallyexistingmodelsareconvertedtousethesefuels)

Teaching Note —Tesla Motors, Inc.

For electric vehicles, batteries are the “number one constraint.” Several corporations are investing in

batterytechnology,andnoclearstandardexists.Initialeffortstargetednickel-metalhydride(NiMH)

Before the concluding vignette, the case provides a summary of Tesla’s current challenges and strate-

gic choices. Electric vehicles face price and performance pressure from consumers that is compounded

by lower gas prices, at the same time competition is increasing.

Suggested Answers

AnAlysis: Focus on ExtErnAl And/or intErnAl EnvironmEnts

1. Conduct a PESTEL analysis to identify the forces affecting car manufacturing of alternate energy

vehicles.

• political – Governments play a strong role in the automotive industry. The case primarily contains

information on the impact of the U.S. government. For example, it has provided funding for research

with a 2003 investment of $1.3 billion into hydrogen-powered vehicles, as well as tax incentives (such

as the 2003 commercial truck rebate and the 2009 “Cash for Clunkers” program). It also provided

toward driving differ cross-culturally. While American cities are planned with the car in mind, many

European governments (e.g., London) are taking actions to make driving less attractive and encour-

age pedestrian traffic.

• technological – This is a primary focus of the case, with the discussion of alternative energy sources

such as electric batteries, hybrid engines, hydrogen fuel cells, and biofuels. Automakers must moni-

tor multiple competing technologies to see what emerges as the new standard for automotive pro-

pulsion systems.

Teaching Note —Tesla Motors, Inc.

• legal – Historically, the California ZEV mandate of the 1990s is credited with stimulating the devel-

opment of early electric-car prototypes, even though they were abandoned when the mandate was

defeated in federal court in 2002. Consumer liability, auto-safety regulation, and state regulation of

Even if a better technology emerges later, it is possible that available infrastructure may maintain the

advantage of widely adopted technology. For example, the QWERTY typewriter keyboard is not nec-

essarily a superior arrangement, but it was the first to gain widespread adoption. Other forces that

remain important are economic and sociocultural forces that will impact demand for Tesla’s products.

2. Conduct a SWOT analysis to analyze internal and external conditions Tesla must consider going

forward.

Strengths

• Experiencedmanagementwithgoodtrackrecord(ElonMusk)

Weaknesses

• Higherpricesthancompetitors

• Strugglestomaintainconsistentprofitability

Opportunities

• Growingconcernsofenvironmentalsustainabilityandacceptanceofelectriccars

• Alliancewithotherautomanufacturersbymakingtechnologyavailable

Teaching Note — Tesla Motors, Inc.

of McGraw-Hill Education.

• Expandingbeyondsportscarstobroadermarketcategories

• Expandinginternationally

• Additionalalliancestoaccessfinancing

Threats

• IncreasedcompetitioninU.S.marketandinternationally

• Lackofaclearstandard,andthepotentialitwillbesetbyacompetitor

3. Using VRIO analysis, evaluate whether Tesla has a sustained competitive advantage.

Tesla’s IPO and profitability signal that it is likely a viable company. However, its ability to achieve a

sustained competitive advantage likely depends on organizing its resources and capabilities to capture

value. Elon Musk’s high identification with Tesla and involvement with other ventures leads to concern

about the focus of Tesla and the depth of its managerial talent. Making Tesla’s technology available to

FormulAtion: Focus on BusinEss, corporAtE,

And/or GloBAl strAtEGy

4. How does Elon Musk constrain Tesla’s options?

Tesla’s value is highly dependent on the continuing presence of Elon Musk, both for his engineer–

ing and entrepreneurial abilities, and he continues to be actively involved in his two other companies

(SolarCity and SpaceX). However, an executive who is highly identified with a firm, such as Elon

Teaching Note —Tesla Motors, Inc.

of McGraw-Hill Education.

that Elon Musk wants Tesla to represent his legacy, he may be overcommitted to electric vehicles and

lithium-ion batteries that may contribute to poor decisions. One possibility in this area is his high com-

mitment to quality that keeps the cost of Tesla vehicles higher than competitors.

5. (Advanced) How has Tesla departed from existing auto industry practices?

Tesla is a very innovative company. In addition to challenging the 100-year-old design of combus-

tible engines in automobiles, Tesla displayed several other innovative strategies. For example, while

Tesla has moved into designing and producing its own cars, it originally worked with Lotus for the

design and production of the Roadster. Traditionally, auto manufacturers have used their own design

implEmEntAtion: Focus on rEcommEndAtions

And How to ExEcutE tHEm

6. What short-term objectives are required for Tesla to survive?

In the short term, Tesla needs to lower costs and grow sales. The primary concern for Tesla is achiev-

ingconsistentprofitabilityand/orsecuringcontinuedfinancing.ThisproblemrelatestoTesla’sfocus–

7. What are the primary elements of Tesla’s internal and external environment that need to be

addressed for it to achieve a sustained competitive advantage?

While a case can be made for multiple concerns, the elements of a SWOT analysis suggest relevant

questions to organize responses:

• Howcanmanagersusestrengthstotakeadvantageofopportunities?

Tesla has recognized strengths in electric-car technology and design that it can use to help set an

Teaching Note — Tesla Motors, Inc.

• Howcanmanagersovercomeweaknessestotakeadvantageofopportunities?

Tesla needs continued financing in the short-term (weakness), and there is growing acceptance of

• Howcanmanagersusestrengthstoreducetheimpactofthreats?

The threat of increased competition and lack of a clear standard in alternate energy can be addressed

• Howcanmanagersovercomeweaknessesandreducetheimpactofthreats?

Tesla needs to ensure compatible infrastructure is developed to support its cars. Involvement in gov-

ernment projects, company investments, and possibly using traditional dealerships to share the cost of

investment may be needed.

Recent Updates

1. Planned locations of Tesla’s stations, see: http://my.teslamotors.com/supercharger

2. Apple car: the Economist, February 21, 2015: http://www.economist.com/news/

business/21644149-established-carmakers-not-tech-firms-will-win-race-build-vehicles

3. RumorsApplemightacquireTesla:http://www.forbes.com/sites/robinlewis/2014/05/15/

buying-beats-bah-why-apple-should-think-big-and-buy-tesla/

4. Insightful article in the wall street Journal (march 4, 2015) about how the existing car companies plan to

Teaching Note —Tesla Motors, Inc.

Additional Resources

5. Tesla’swebsite(http://www.teslamotors.com/models)hasworthwhileinformationonitsdiffer–

6. https://www.youtube.com/watch?v=5XdiGMIUxeY(7:24).AvideoofaTeslamediaevent

7. For additional reading, a July 2013 Bloomberg Businessweek article entitled: “why everyone loves

tesla,” see: http://www.businessweek.com/articles/2013-07-18/the-tesla-electric-cars-creators-

Teaching Note — Tesla Motors, Inc.

ExhIbIT TN-1 A VRIO Analysis of Tesla

Tesla’s Resources and Capabilities

… are they?

Valuable

Rare

Costly to

Imitate

Organized to

capture value