Tesla Inc.'s Response to Change

1 Tesla Inc.’s Response to Change Introduction Global interest in electric vehicles is growing at a fast rate due to several factors, key among them being their eco-friendliness. In recent years, there has been worldwide concern about the acceleration of global warming that is caused by the emission of greenhouse gases; electric cars have become popular because they address this issue. Additionally, while their initial costs are high, they are cheaper to run and maintain. Other factors driving the automotive industry toward electrification include government support towards electric manufacturers through subsidies and other incentives, the continuous increase in oil prices, and the strict regulations on motor vehicle emissions. Additionally, as more major vehicle manufacturers enter the electric car industry, the prices of electric cars have declined due to an increase in competition and favorable government policies towards environmental conservation.

Tesla Inc. is one of the key players in the electric vehicle industry. It has been in existence since 2003 and produces purely electric cars. Tesla's created its first electric car, the Roadster in 2008. It was the first electric car ever produced capable of travelling over 300 kilometers per charge because it consumed only 110 watt-hours per kilometer (Vance, 2015).

It revolutionized the electric automobile industry as more car manufacturers began to research on developing all-electric automobiles that were fast and energy efficient. Tesla currently produces the Model S, X and 3 vehicles and is one of the automobile manufacturers that are leading the shift towards energy efficient transportation. This paper discusses the strategies that the CEO of Tesla should use to position the company to enhance its ability to respond to change.

Vertical Integration versus Outsourcing for Tesla

2 Michael Porter’s Diamond framework is useful in the analysis of Tesla’s competitive advantage. It can be used to evaluate whether Tesla should apply vertical integration or outsourcing to facilitate a faster response to change. According to Porter’s National Diamond, a nation or organization can achieve growth more effectively by enhancing its knowledge base, increasing its skilled workers, developing more advanced technologies, acquiring stronger government support and a favorable culture. In addition to this, nations achieve a higher competitive advantage compared to their peers as a result of the pressure placed on businesses to invest and innovate, the availability of skills and resources, the matching of skills and resources to opportunities in the internal and external environment and also the objectives of individuals in businesses (Arshed, & Pancholi, 2016). Porter’s National Diamond has five points; factor conditions, structure, rivalry, related and supporting industries and demand conditions.

To facilitate more effective adaptability to change, Tesla should use vertical integration as opposed to outsourcing because it is advantageous to the company in three main ways. Firstly, vertical integration will enable the organization to achieve higher cost savings.

Implementing vertical integration eliminates the middleman between the organization and its customers and thus controls Tesla’s costs. As a result of the vertical integration strategy, Tesla reduces its distribution costs through managing its own supply and distribution channels. A reduction in costs leads to higher profit margins. Secondly, vertical integration is beneficial to Tesla because it gives the company a more significant competitive advantage by enabling Tesla to achieve a higher knowledge base and thus setting high barriers to the entry of new competitors. The third advantage of implementing vertical integration as opposed to outsourcing is that it gives the organization tighter control over its operations (Cho, T., &

3 Mun, 2013). When the company outsources its operations to another firm, it might not be able to manage its operations effectively since it has less control. Vertical integration helps to reduce the uncertainties that may arise from not being in control of critical operations such as the supply and distribution. Despite the numerous advantages that vertical integration accrues Tesla, it may also cause certain disadvantages to the company. It increases the barriers to market entry for other manufacturers and might therefore hinder the growth of the electric car industry. Secondly, vertical integration requires the organization to carry out its operations for itself which consumes a lot of time and capital (Fainshmidt, & Judge, 2016). Outsourcing, on the other hand, is not a viable option for Tesla because it bears significant demerits to the company. For instance, it reduces managerial control which might result in a substandard quality of products and services and ultimately reduce the company's revenue. Outsourcing the company's crucial roles poses a significant risk to the company in case the outsourced company fails to perform the duties delegated to it (Markusen, & Xie, 2014). Outsourcing is also a threat to the confidentiality and security of the organization's information.

Assessing Tesla’s Strategic Position as of 2013 through the BCG growth-share matrix Tesla's BCG Growth-Share Matrix assumes that an increase in Tesla's market share will lead to a rise in revenue. This assumption is based on the fact an increase in market share is an indication that the organization is advancing in the experience curve compared to its competitors. Therefore it is reducing its costs and increasing its revenues. According to the matrix, growth in market share necessitates a higher investment in assets to enable the organization to serve the market's needs adequately. As the market grows, the company needs to enhance its capacity to fulfill its needs. As of 2013, Tesla had been producing electric cars

4 for five years and had still not begun to make profits due to the high capital investment that is involved in constructing manufacturing plants, charging stations and other supporting infrastructure. The money consumed by these projects was more than the money produced by the sale of Tesla’s products. However, despite the losses, this was a necessary capital investment because it developed the assets and infrastructure that has enabled Tesla to generate revenues.

The BCG matrix has four categories; dogs, cash cows, stars and question mark. A dog is a business that does not command a significant share of the market and is based in an industry that grows at a slow pace (Palia et al., 2014). A cash cow commands a high market share and is based in an industry that is experiencing slow growth. A star commands a significant proportion of the market and is also based in an industry that is experiencing rapid growth. A question mark, on the other hand, is a business that grows at a very slow pace but is based in an industry that has high growth potential. As of 2013, Tesla Inc. was a star because it was a fast-growing company in an industry that was advancing at a fast rate. Tesla also had significant potential to acquire a large market share due to the uniqueness of its products.

Typical of stars, Tesla required substantial funding to emerge as a strong force in the electric car industry and to maintain a steady growth rate. If appropriate strategies are implemented, the star has the potential to become a cash cow (Stern, & Deimler, 2012). This matrix shows that the main factors that Tesla should consider to grow its business are; increasing its market share, reducing its costs, operating in an industry that has a high potential for continued scalability and developing products that are relevant and attractive to the market's emerging needs.

Implementing Change Strategies

5 In today’s dynamic business environment, making the right decisions is essential to Tesla’s success and the continuity of its business. Tesla is one of the pioneers of the electric vehicle industry. Therefore it has to perform extensive research and development to ascertain whether its decisions are appropriate for the company’s growth. To improve the accuracy of its decision-making, Tesla should implement technologies such as business analysis software to aid the process. Tesla’s leadership is centered around its CEO, Elon Musk. This might be detrimental for the company because organizational success requires the contribution and synergetic effort of the entire workforce. Tesla should decentralize its leadership and involve its employees in developing strategies that will enable it to achieve its vision and objectives.

Tesla Inc. has garnered significant public and media attention in recent years as awareness on the importance of developing environment-friendly products increases as a result of the rise in the effects of global warming. Despite the high demand for Tesla's electric vehicles, it has taken an extended period to achieve stability and profitability because of its massive investment in developing infrastructure. While this might help it in the long-term, it creates a cash-flow problem in the short term that leads to increased borrowing and resultantly, increased interest expenses (Vance, 2015). To minimize this problem, Tesla should outsource its distribution function to automobile dealers both nationally and internationally by entering into partnership agreements with them. This will help the company increase its sales and reduce its distribution costs, thus enabling it to generate higher revenues and profits.

Tesla's planning structure should be transparent and inclusive. Teamwork is vital to planning because it facilitates the development of better ideas as well as the effective execution of the plans. The planning structure should be focused on enabling Tesla to achieve

6 faster growth at a lower cost to become more profitable. To enable better planning, it is crucial for Tesla to assess its external and internal environment regularly through SWOT analysis, and to develop the appropriate strategies based on the findings of this analysis. There are various indicators of success for Tesla Inc. They include; a higher market share, increased profitability, a higher rate of innovation, customer satisfaction and employee satisfaction.

Conclusion The automobile industry has many dominant and experienced players such as General Motors, Honda, Toyota and BMW among others. It is relatively challenging for a new company to enter the market and develop a niche market due to the intense competition.

However, Tesla has achieved this within a short period by manufacturing a product that is unique, different and relevant to the market's current need for eco-friendly products. Tesla creates sleek, high-performance vehicles for the segment of the market that is not pricesensitive and cares deeply about the environment. However, despite the uniqueness of its product, Tesla needs to enhance its ability to respond to changes in the external environment due to the increase in the number of automobile manufacturers who are producing electric cars in response to Tesla's success and the heightening demand for environmental-conscious vehicles.

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