26 Oct Distinguish between different types and levels of strategy and strategy implementation environment of hypothetical and real-world organizations. (CLO3) Gain insights into the strategy-mak
Learning Outcomes:
§ Distinguish between different types and levels of strategy and strategy implementation environment of hypothetical and real-world organizations. (CLO3)
§ Gain insights into the strategy-making processes of different types of organizations (CLO4)
§ Understand the contribution of various functional areas e.g. production, marketing, purchasing, and supply management to the overall well-being of the organization. (CLO5)
§ Understand issues related to strategic competitive advantage in diversified organizations (CLO6)
This assignment includes 2 sections:
I. Case study
Assignment Question(s):
Read carefully the mini case No 18 from your textbook (entitled ‘Tesla Motors Inc.) and briefly answer the following questions: (1 mark for each question)
1. What is the competitive strategy used by Tesla Motors company?
2. Use the five forces of the M. Porter matrix to describe the industry that “Tesla Motors” belongs to.
3. Describe the different functional strategies of the Tesla Motors company.
4. Describe the relationship of Tesla Motors with its primary stakeholders.
5. Describe the market position of Tesla Motors.
6. Describe the core competency of Tesla Motors.
7. Describe any strategic alliance (acquisition, outsourcing, joint venture, ….) used by Tesla Motors? Was it successful? justify.
8. What are the main challenges that Tesla Motors faced?
9. Assess the competitive advantage of Tesla Motors in its market.
10. Recommend solutions for Tesla Motors to improve its competitive advantage.
II. Mini-project
From real national/international market, choose an example of acquisition and answer the following questions: (1 mark each question)
1. Briefly introduce your chosen firms, and partners of the acquisition (industry, nationality, size, market position…). Max 100 words
2. Explain the different reasons for this acquisition.
3. What is the method used by the acquiring firm to manage its culture after acquisition? underline the pros and cons of this method.
4. Is this acquisition successful? Justify.
5. Give three challenges that can face a firm that uses an acquisition strategy.
Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for high-performance electric automotives and power train components. Hoping to develop a
greater worldwide acceptance of electric vehicles as an alternative to the traditional in- ternal combustion, petroleum-based vehicles that dominate the market, Tesla is the first company that commercially produced a federally compliant electric vehicle with the design styling and performance characteristics of a high-end performance automobile. Tesla currently offers one vehicle, the Roadster, for sale, as well as supplying electric
power train components to Daimler for use in its Smart EV automobile. Additionally, Tesla has a partnership with Toyota Motors to develop and supply an electric power train
for Toyota’s Rav4 SUV.
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C A S E 26 Tesla Motors, Inc.: The FirsT U.s. Car Company ipo sinCe 1956 Alan N. Hoffman Bentley University
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Industry Six—Transportation
Company Background Tesla Motors was founded in Silicon Valley in 2003 by Martin Eberhard and Marc Tarpenning to create efficient electric cars for driving aficionados. The founders acquired their first round of financing from PayPal and SpaceX founder Elon Musk who subsequently took over as CEO in 2008. The company unveiled its first car, a two-seat sports car named the Roadster, in 2006 after raising $150 million and going through four years of technological and inter- nal struggles.1 Powered by a three-phase, four-pole AC induction motor, the Roadster has a top speed of 130 mph and accelerates from 0 to 60 mph in under four seconds, all com- pletely silent.2 Production of the Roadster began in March of 2008 with a first-year production run of 600 vehicles.3 In June 2008, Tesla announced that it would be building a four-door,
This teaching case was compiled from published sources. The author would like to thank Lindsay Pacheco, Patrick Toomey, Ned Coffee, William Gormly, and Will Hoffman for their research. Please address all correspondence to Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham, MA 02452; [email protected] Printed by permission of Dr. Alan N. Hoffman.
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672 CASE 26 Tesla Motors, Inc.
five-passenger sedan called the Model S to be built in California and be available for sale in 2012.4 The Model S is slated to retail for approximately $57,400 and be offered with battery options for 160-, 230-, or 300-mile ranges per charge. The company went public in June 2010 with an initial public offering at $17 a share, raising about $226.1 million in the first stock debut of a car maker since the Ford Motor Company held its initial public offering in 1956.5
Tesla has also used its innovative technology to partner with traditional automobile manu- facturers on their electric vehicle offerings. In 2009, Tesla signed a deal to provide Daimler with the battery technology to power 1000 electric Smart city cars.6 Tesla will supply battery packs and electric power trains to Daimler and in return it will receive auto manufacturing and design expertise in areas including safety requirements and mass production of vehicles.7 Later in that same year, Daimler announced that it had acquired a “nearly 10 percent” stake in Tesla.8 On October 6, 2010, Tesla entered into a Phase 1 Contract Services Agreement with Toyota Motor Corporation for the development of a validated power train system, including a battery, power electronics module, motor, gearbox, and associated software, which will be in- tegrated into an electric vehicle version of the RAV4 for which Tesla received US$60 million.9
In May 2010, Tesla purchased the former NUMMI factory in Fremont, California, one of the largest, most advanced and cleanest automotive production plants in the world, where it will build the Model S sedan and future Tesla vehicles.10 Additionally, Toyota invested US$50 million in Tesla and together the two companies will cooperate on the development of electric vehicles, parts, and production system and engineering support.11
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Strategic Direction Tesla desires to develop alternative energy electric vehicles for people who love to drive. While most car companies are developing small, compact electric cars, Tesla has focused on a high-priced, high-performance electric vehicle that competes against traditional perfor- mance cars such as those offered by BMW and Porsche. The company has also devoted many resources to research and development in an effort to produce an electric power train that has both long mileage between recharges and the high performance that car enthusiast’s desire.
Tesla’s main objectives are to achieve both growth in sales and profits, provide technologi- cal leadership in the field of electric vehicles, and foster sustainability and social responsibility. The company desires for growth are served with its development and sale of the Model S vehicle that is expected to retail for almost half of the Roadster price and thus create higher demand and revenue. The company further strives for growth through its strategic partnerships with Toyota and Daimler to supply electric power trains to those companies for use in their electric vehicle designs.
The company’s objectives of sustainability and social responsibility are shown through its desire to develop automobiles that are not powered by petroleum products and produce very little carbon emissions. The company won the Globe Sustainability Innovation Award 2009.
Tesla’s Competition Tesla’s products participate in the automotive market based on its power train technology. It currently competes with a number of vehicles in the non-petroleum powered (alternative fuel) automobile segment from companies such as Mitsubishi, Nissan, General Motors (Chevy), Toyota, BMW, and Honda to name a few. Within this market segment, there are four primary means of power train propulsion which differentiate the various competitors in this market:
◾ Electric Vehicles (EV) are vehicles powered completely by a single on-board energy stor- age system (battery pack or fuel cell) which is refueled directly from an electricity source. Both the Tesla Roadster and the Model S are examples of electric vehicles.
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CASE 26 Tesla Motors, Inc. 673
◾ Plug-in Hybrid Vehicles (PHEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine that can be refueled both with traditional petroleum fuels for the engine and electricity for the battery pack. The internal combus- tion engine can either work in parallel with the electric motor to power the wheels, such as in a parallel plug-in hybrid vehicle, or be used only to recharge the battery, such as in a series plug-in hybrid vehicle like the Chevrolet Volt.
◾ Hybrid Electric Vehicles (HEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine but which can only be refueled with traditional petroleum fuels as the battery pack is charged via regenerative braking, such as used in a hybrid electric vehicle like the Toyota Prius.12
◾ Hydrogen Vehicles are vehicles powered by liquefied hydrogen fuel cells. The power plants of such vehicles convert the chemical energy of hydrogen to mechanical energy either by burning hydrogen in an internal combustion engine, or by reacting hydrogen with oxygen in a fuel cell to run electric motors.13 These vehicles are required to refuel their hydrogen fuel cells at special refueling stations. Examples of these types of vehicles are the BMW Hydrogen 7 and the Honda Clarity.
Established in Japan in 1970, Mitsubishi Motors Corporation is a member of the Mitsubishi conglomerate of 25 distinct companies. Mitsubishi Motors is headquartered in Tokyo, Japan, and employs roughly 31,000 employees. The company sells automobiles in 160 countries worldwide and in 2010 sold 960,000 units.14 Within the United States, the company had a meager 0.5% of the market share in 2010 with 55,683 units sold.15 Along with traditional gasoline engine automobiles, the company has long been involved in the R&D of electric vehicles. Mitsubishi has been involved in electric vehicle research and development since the 1960s with a partnership with the Tokyo Electric Power Company (TEPCO).16 Since 1966 to the present, the company has dabbled in electric vehicle and battery research and development with numerous prototype vehicles produced.
In 2009. Mitsubishi released its newest EV car called the i-MiEV (Mitsubishi Innovative Electric Car). The i-MiEV is a small, four-passenger, all-electric car with a top speed of ap- proximately 80 MPH and a quoted range of 75 miles on a single charge based on U.S. driving habits and terrain.17 The car is based on lithium-ion battery technology. In October 2010, the company announced that it had reached the 5000 production unit mark for the car.18 Cur- rently the i-MiEV is being sold in Japan, other Asian countries, Costa Rica, and 14 countries in Europe. The Japanese price of the i-MiEV was originally US$50,500 but was reduced to US$42,690 in mid-2010 due to competition from other car companies. Mitsubishi plans on introducing the i-MiEV to the U.S. market in the fall of 2011.
Mitsubishi i-MiEV
The Nissan Motor Company, formed in 1933, is headquartered in Yokohama, Japan and em- ploys over 158,000 workers. Currently, it builds automobiles in 20 countries and offers prod- ucts and services in 160 countries around the world.19 In 2010, it sold globally over 3 million vehicles in its first three fiscal quarters (April 2010–December 2010) with over 700,000 of those being sold in the United States.20 The company operates two brands, Nissan and Infinity, which design and sell both passenger vehicles and luxury passenger vehicles.
On December 3, 2010, Nissan introduced the LEAF, which it billed as the world’s first 100% electric, zero-emission car designed for the mass market.21 The LEAF is a five- passenger electric car with a top speed of 90 mph and a quoted range of 100 miles on a single
Nissan LEAF
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674 CASE 26 Tesla Motors, Inc.
charge using lithium-Ion battery technology. The current 2011 price in the United States for the LEAF is approximately US$33,000, which is also eligible for the US$7500 electric vehicle tax credit. It is reported that Nissan had sold 3657 LEAFs by the end of February 2011 with 173 of the sales within the United States and the rest in Japan.22
Chevrolet Motor Company was formed in 1911 and joined the General Motors Corporation in 1918.23 GM has its global headquarters in Detroit, Michigan, and employs 209,000 people in every major region of the world and does business in more than 120 countries.24 In 2010, Chevrolet sold 4.26 million vehicles worldwide and 1.57 million in the United States.25
In mid-December 2010, Chevy began delivery of a four-passenger, plug-in hybrid elec- tric vehicle called the Volt. The Volt operates by using an electric engine until the batteries are discharged and then a gasoline engine kicks in for what Chevy calls “extended-range” driving. The car is quoted as having a range of 35 miles in electric mode and an additional 340 miles of extended driving using the gasoline engine.26 It is reported that Chevy had sold 928 Volts by the end of February 2011; all within the United States.27 The current 2011 price in the United States for the Volt is approximately US$42,000, which is also eligible for the US$7500 electric vehicle tax credit.
Chevy Volt
The Toyota Motor Company was established in 1937 and is headquartered in Toyota City, Japan. It employs over 320,000 employees worldwide with 51 overseas manufacturing com- panies in 26 countries and regions.28 Toyota’s vehicles are sold in more than 170 countries and regions. For fiscal year 2010, Toyota sold over 7.2 million vehicles worldwide, of which 1.76 million were sold in the United States.29
In 1997, Toyota introduced a five-passenger, gasoline-electric hybrid automobile called the Prius. The Prius has both a gasoline engine and an electric motor, which is used under lighter load conditions to maximize the car’s fuel economy. The electric batteries are recharged via the gasoline engine only. On April 5, 2011, Toyota announced that it had sold its 1 millionth Prius in the United States and had surpassed 2 million global sales 6 months earlier in October 2010.30 Currently, Toyota offers four versions of the Prius in the United States with prices ranging from US$23,000 to US$28,000. The company has announced a plug-in version of the Prius, which is slated for sale in 2012.
Toyota Prius
Bayerische Motoren Werke (BMW) was established in 1916 in Bavaria, Germany. Originally, the company started manufacturing airplane engines, but after World War I, Germany was not allowed to manufacture any airplane components as part of the terms of the armistice.31 The company turned its focus to motorcycle engine development and subsequently, in 1928, developed its first automobile. Presently, the company is headquartered in Munich, Germany, and employs approximately 95,000 workers. In 2010, BMW sold approximately 1.2 million vehicles.32
In 2006, BMW introduced the four-passenger Hydrogen 7 automobile that was the world’s first hydrogen-drive luxury performance automobile.33 The car is a dual-fuel vehicle capable of running on either liquid hydrogen or gasoline with just the press of a button on the steering wheel.34 The combined range for the car is approximately 425 miles with the hydrogen tank
BMW Hydrogen 7
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CASE 26 Tesla Motors, Inc. 675
contributing 125 miles and the gasoline providing the rest. To date, BMW has only produced 100 units of the vehicle, which have been leased/loaned to public figures. The car has not been made available for purchase to the general public and no sale price has been quoted.
The Honda Motor Company was established in the 1940s in Japan originally as a manufac- turer of engines for motorcycles.35 Honda produced its first production automobile in 1963 and has been a global supplier since then. In 2010, Honda sold 3.4 million automobiles world- wide with 1.4 million being sold in the United States.36 In 2008, Honda began production of its four-passenger FCX Clarity, the world’s first hydrogen-powered fuel-cell vehicle intended for mass production.37 The FCX Clarity FCEV is basically an electric car because the fuel cell combines hydrogen with oxygen to make electricity which powers an electric motor, which in turn propels the vehicle.38 The car can drive 240 miles on a tank, almost as far as a gaso- line car, and also gets higher fuel efficiency than a gasoline car or hybrid, the equivalent of 74 miles per gallon of gas.39 The company planned to ship 200 of the Clarity to customers in Southern California who can lease it for three years at US$600 a month.
Honda Clarity
Barriers to Entry and Imitation The barriers to entry into the non-petroleum-powered automobile market segment are high. The hybrid technology for vehicles such as the Prius is well understood by the major automo- bile companies and many of them have developed and marketed their own version of electric/ gasoline hybrid vehicles. The all-electric and hydrogen fuel-cell automobiles are unique tech- nologies that require resources to develop. In this segment, the energy storage and motor technologies are barriers to new competitors. Rechargeable battery systems and fuel cells are newer technologies that require large investments in research and development. A competitor would need to develop its own technologies or partner with another company to acquire these resources.
Proprietary Technology As electric vehicles are a newer technology, Tesla’s innovation has led it to have some unique resources in technology and intellectual property over its competitors. Tesla’s proprietary technology includes cooling systems, safety systems, charge balancing systems, battery engi- neering for vibration and environmental durability, customized motor design and the software and electronics management systems necessary to manage battery and vehicle performance under demanding real-life driving conditions. These technology innovations have resulted in an extensive intellectual property portfolio—as of February 3, 2011, the company had 35 issued patents and approximately 280 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas.40 These patents and innovations are not easily duplicated by competitors.
A second unique resource that a company developing electric vehicles would require would be its battery cell design. Tesla’s current battery strategy incorporates proprietary pack- aging using cells from multiple battery suppliers.41 This allows the company to limit the power of its battery supply chain. The company also has announced a partnership with Panasonic to jointly collaborate on next-generation battery development.
Inherent to the requirements for an electric automobile company is the knowledge and skills of the workforce. Tesla believes that its roots in Silicon Valley have enabled it to recruit
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676 CASE 26 Tesla Motors, Inc.
engineers with strong skills in electrical engineering, power electronics, and software engi- neering to aid it in development of its electric vehicles and components.42 Being one of the first to market with a high-performance EV also gives the company a first-mover advantage in experience and branding.
Tesla has an agreement with the automobile manufacture Lotus for the supply of its Road- ster vehicle bodies. The company entered into a supply agreement in 2005 with Lotus that requires Tesla to purchase a certain number of vehicle chassis and any additional chassis will require a new contract of redesign to a new supplier.43 This places a large dependence on Lotus to both fulfil the existing contract and also gives them significant power in the event that Tesla requires additional Roadster units.
Tesla is dependent on its single battery cell supplier. The company designed the Roadster to be able to use cells produced by various vendors, but to date there has only been one sup- plier for the cells fully qualified. The same is also true for the battery cells used for battery packs that Tesla supplies to other OEMs.44 Any disruption in the supply of battery cells from its vendors could disrupt production of the Roadster or future vehicles and the battery packs produced for other automobile manufacturers.45
External Opportunities and Threats Electric vehicle companies may be able to take advantage of many of the opportunities with the continuous shift toward green energy. President Barack Obama has publicly committed to funding “green” or alternative energy initiatives through various vehicles.46 In his 2011 State of the Union Address, the President set a goal of getting one million electric cars on the road by 2015.47 Within the United States, various federal and state governmental agencies are currently supporting loan programs through the likes of the Department of Energy and the California Zero-Emission Vehicle (ZEV) program. The tragic Louisiana BP oil spill that took place from April to May 2010 intensified the focus on decreasing U.S. dependence on petroleum prod- ucts. It also highlighted the fact that while alternative energy is currently more expensive to produce than conventional energy, there are hidden environmental and human costs that must be taken into consideration when making this comparison. This increased focus on alternative energy has been beneficial for the EV industry, benefiting both Tesla and its competitors. Due in part to this increase in funding, Tesla is competing in an industry that is expanding, making its absolute market share less relevant than how fast it is growing its market share.
Despite the new dawn of interest and pledges for funding alternative energy, many plans for funding will never come to fruition. Currently in the United States, there is a massive budget deficit, and members of the Republican Party have focused their demands for budget cuts in the “discretionary spending” arena, which is where alternative energy funding falls. Notably, some of the cuts proposed would seriously affect programs funding energy efficiency, renewable energy, and the DOE Loan Guarantee Authority.48 The EV industry has very few lobbyists compared to the traditional car and petroleum industry, and so is more vulnerable to being targeted in budget cuts. These cuts represent a serious threat to the continued develop- ment of the alternative energy and electric car industry. For EVs to come into widespread use, the United States must develop an EV-charging infrastructure, and this will need the support of both state and federal government in the form of both funding and regulation.
Not only is the federal government facing budget cuts, but the state of California is also dealing with massive shortfalls and reductions in services and funding. This is especially important to Tesla since it operates its manufacturing in California, and one of its largest tar- get markets is California, due to the strict emissions regulation and traditional green focus of Californians.
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There are also many regulations to which companies developing electric vehicles are sub- jected. A topic of current interest is the upcoming change in how the range of electric vehicles is calculated—a regulation determined by the EPA. It is thought that the new calculation will result in a lower advertised range for all the electric vehicles, which may make their superior- ity over traditional petroleum-based vehicles less prevalent. There are also numerous safety requirements that EVs must adhere to, governed by the National Highway Traffic Safety Ad- ministration. Companies that produce less than 5000 cars for sale and have three product lines or less can qualify for a gradual phase-in regulation for advanced airbag systems and other safety requirements. Similarly, in Europe, smaller companies are currently exempt from many of the safety testing regulations, and are currently allowed to operate under the “Small Series Whole Vehicle Type Approval.”
Additionally, battery safety and testing is regulated by the Pipeline and Hazardous Mate- rials Safety Administration, which is based on UN guidelines regarding the safe transport of hazardous materials. These guidelines ensure that the batteries will perform or travel safely when undergoing changes in altitude, temperature, vibrations, shocks, external short circuit- ing, and overcharging.
Other regulatory issues include automobile manufacturer and dealer regulations, which are set on a state-by-state basis. In some United States states, such as Texas, it is not legal for the dealer and manufacturer to be owned by the same company. Therefore, these regulations would impact the market penetration levels that a company wishing to utilize a distribution model based on being able to both manufacture and sell its cars through its own wholly owned dealerships would be able to reach in certain states.
An interesting, though potentially costly, new regulation is the minimum noise require- ments, mandated by the Pedestrian Safety Enhancement Act of 2010 signed in January 2011. There have been concerns that since electric cars are so much quieter than their combustion- engine counterparts that their design must be somehow altered to increase the amount of noise they generate in order to make them easier to hear by people with impaired vision. These regulations are likely to take effect by 2013 and could alter electric vehicle designs.
The macroeconomic conditions of 2011 and the outlook for the near future is slow but continued growth,49 in contrast to the past several years of economic retraction. In recent years, American buyers, and indeed buyers in most parts of the world, have cut back on dis- cretionary purchases in light of high unemployment and general economic uncertainty. The economic recovery has created more demand for higher-priced luxury vehicles.
The largest component of what makes an electric vehicle attractive from a financial stand- point is the savings in traditional fuel costs. There is a huge difference between the cost of electricity to recharge an electric vehicle versus the cost of gas to fuel a conventional vehicle. Hence, as oil prices increase, the financial incentive to purchase an electric vehicle increases as well. Additionally, the variability of oil prices means that owners of conventionally pow- ered vehicles cannot predict what their fuel costs for the year will be with any confidence. Thus, the much more stable costs of electricity make an electric vehicle more desirable. It is not likely that the cost of oil will ever see a sustained and significant drop in price, nor is it likely that the cost of oil will ever be as stable as the cost of electricity, creating a sustained advantage over traditionally powered vehicles.
Electric vehicle manufacturers are currently riding the wave of environmental conscious- ness that began in the 1960s, and has been slowly gaining momentum since. The “Green movement” encourages people to make choices that lessen their negative impact on the envi- ronment, and to use resources that are renewable. Alternative fuel products fit this description, by both reducing consumer demand for oil and eliminating harmful emissions during use. For the time being, electric vehicles still leave a noticeable “footprint,” though one not nearly as large as a conventional car.
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Challenges to Adoption of Electric Cars: Consumer Perceptions
Consumer perceptions of electric vehicles are a huge challenge to adoption. Many people think of electric vehicles as being underpowered, clunky looking, hard to charge, quirky, and undependable. Public experience with traditional vehicles and their concerns about the new- ness of alterative fuel vehicles must be overcome.
Additionally, the absence of a public infrastructure for recharging electric vehicle batteries introduces a “Which came first – the chicken or the egg?” paradox: There is no infrastructure because there are not enough electric vehicles, and part of the reason why there are not many electric vehicles is because there is no infrastructure to support them. For the time being, consumers must charge their vehicles either at home, or possibly at their place of work. This limits the electric vehicle driving range, which has a negative impact on the image of electric vehicles with consumers.
Another concern that consumers have when considering an alternative energy vehicle is the cost. Electric vehicles, as well as most alternative fuel vehicles, cost significantly more than traditional vehicles of similar style and performance. This is due both to the cost of the research and development and the high cost of materials, particularly for the battery cells.50 Additionally, the production of low environmental impact products is in most cases more expensive than their conventionally produced counterparts. So long as there are areas of the world willing to sacrifice the environment (natural resources, air, water, waste production) to create low-cost products, this dynamic will continue.
The EV industry is hampered by the public view of the limited range of vehicles in com- parison
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