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Tesla, Inc. in 2018

Tesla was founded in 2003 by Martin Eberhard, an entrepreneur who wanted to create a faster, sexier electric car. In 2004, Elon Musk agreed to fund the company and became Chairman of the Board. A few years later Eberhard left, and Musk became CEO. In 2018, Tesla had grown into a company with almost $12 billion in annual revenues that produced multiple car models, owned Solar City, produced energy storage systems (for example, Powerwall) and solar roofs. The company’s expansion into multiple product lines and rapid production capacity expansion created large capital requirements for the firm. Tesla missed several of its production goals in early 2018 causing investors to be concerned, but at the end of 2018 posted its first annual profit. Tesla’s cars had rapidly attracted a large and loyal fan base and sales were growing at an impressive rate. But was Tesla trying to do too much too quickly?

Business area Motive Opportunities/Challenges Mass market cars

To help bring the mass market to renewable energy; to build economies of scale in production and procurement

Opportunities: The mass market is large and there is no electric vehicle accounting for a large portion of it Challenges: The mass market is fiercely competitive, and the mass market tends to be quite price sensitive which is going to be difficult address with an electric vehicle since battery costs are high. Tesla (and Musk) lack experience in large-scale auto assembly. If they are successful, they will be imitated which will put more pressure on the price.

Batteries To develop more economical batteries for cars, and to develop residential power storage systems that will enable a move to solar, thereby helping move the world to renewable energy.

Opportunities: If more automakers introduce electric vehicles, there will be large demand for batteries for cars. There is currently no dominant player in residential energy storage batteries. Manufacturing the batteries can help Tesla acquire the experience and knowledge it needs to improve the batteries. Challenges: There are large, mature battery manufacturers already. It is difficult to improve the cost structure of Li ion batteries – it may require a radical innovation. Automakers competing with Tesla may not want to buy batteries from Tesla. Right now residential energy storage is not a mass market so it may be hard to achieve scale advantages. Battery production may distract Tesla from auto production and uses significant capital.

Solar Panels To bring better solar options to the mass market to facilitate moving the world to renewable energy.

Opportunities: There may be significant demand from the mass market if economical and attractive solar options can be developed. Solar panels may be synergistic with Tesla’s residential energy storage solutions. Challenges: Producing solar panels requires very different expertise than producing cars or batteries. Chinese companies are major players in solar panels and may compete heavily on price. Much technological development may be required to make solar panels a feasible option for the mass market. Manufacturing solar panels may distract Tesla from auto and battery production and uses significant capital.

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Tesla, Inc. in 2019

Discussion Questions 1. What were Musk’s and Eberhard’s goals in founding Tesla?

2. How would you characterize competition in the auto industry?

3. What do you think are Tesla’s core competencies? Does it have any sources of sustainable competitive advantage?

4. What is your assessment of Tesla’s moves into (a) mass-market cars, (b) batteries (car batteries and Powerwall), (c) solar panels? Please consider both the motivation for the moves, and the opportunities and challenges for Tesla to compete in these businesses.

5. Do you think Tesla will be profitable in all of these businesses? Why or why not?

6. What do you think Tesla’s (or Elon Musk’s) strategic intent is?

Chapter 6

Defining the Organization’s Strategic Direction

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Overview

• A coherent technological innovation strategy leverages the firm’s existing competitive position and provides direction for future development of the firm.

• Formulating this strategy requires: • Appraising the firm’s environment, • Appraising the firm’s strengths,

weaknesses, competitive advantages, and core competencies,

• Articulating an ambitious strategic intent.

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Assessing the Firm’s Current Position

• External Analysis • Two common methods are Porter’s Five-

Force Model and Stakeholder Analysis. • Porter’s Five-Force Model

1. Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers.

2. Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)

3. Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for vertical integration.

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Assessing the Firm’s Current Position

4. Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for vertical integration.

5. Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price.

6. Recently Porter has acknowledged the role of complements. Must consider: a) how important complements are in the

industry, b) whether complements are differentially

available for the products of various rivals (impacting the attractiveness of their goods), and

c) who captures the value offered by the complements.

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Assessing the Firm’s Current Position 3

• Source: Michael Porter, Competitive Strategy:

Techniques for Analyzing Industries and Competitors.

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Assessing the Firm’s Current Position

Stakeholder Analysis

1. Who are the stakeholders.

2. What does each stakeholder want.

3. What resources do they contribute to the organization.

4. What claims are they likely to make on the organization.

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Assessing the Firm’s Current Position

• Internal Analysis 1. Identify the firm’s strengths and weaknesses.

Helpful to consider each element of value chain.

• Source: Michael Porter,

Competitive Advantage:

Creating and Sustaining

Superior Performance.

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2. Assess which strengths have potential to be sustainable competitive advantage

• Rare • Valuable • Durable

• Inimitable

Resources are difficult (or impossible) to imitate when they are: • Tacit • Path dependent • Socially complex • Causally ambiguous

Assessing the Firm’s Current Position

Competitive Advantage

Sustainable Competitive Advantage

Identifying Core Competencies and Capabilities 2

Source: C. K. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May–June 1990.

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Identifying Core Competencies and Capabilities

Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the marketplace.

• Competencies typically combine multiple kinds of abilities.

• Several core competencies may underlie a business unit.

• Several business units may draw from same competency.

• Core competencies should: • Be a significant source of competitive differentiation • Cover a range of businesses • Be hard for competitors to imitate

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Risk of Core Rigidities

When firms excel at an activity, they can become over committed to it and rigid.

• Incentives and culture may reward current competencies while thwarting development of new competencies.

• Dynamic capabilities are competencies that enable the firm to quickly respond to change. • E.g., firm may develop a set of abilities that

enable it to rapidly deploy new product development teams for a new opportunity; firm may develop competency in working with alliance partners to gain needed resources quickly.

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Strategic Intent • A long-term goal that is ambitious, builds upon and

stretches firm’s core competencies, and draws from all levels of the organization.

• Typically looks 10-20 years ahead, establishes clear milestones • Firm should identify resources and capabilities needed to

close gap between strategic intent and current position.

Research Brief: Blue Ocean Strategy 1

• Adapted from Kim, W.C. & Mauborgne, R. 2005. Blue ocean strategy. Boston: Harvard Business School Press.

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Research Brief: Blue Ocean Strategy 2

Managers can challenge the industry’s strategic logic by asking the following four questions:

1. Which of the factors that the industry takes for granted should be eliminated?

2. Which factors should be reduced well below the industry’s standard?

3. Which factors should be raised well above the industry’s standard?

4. Which factors should be created that the industry has never offered.

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Theory In Action

The Balanced Scorecard

 Kaplan and Norton argue

that effective performance measurement should incorporate:

 Financial perspective

 Customer perspective

 Internal perspective  Innovation and

learning

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FIGURE 6.7 Identifying the Resource and Capability Gap

Summary of Chapter 6

• Porter’s five-force model entails assessing • Stakeholder analysis involves identifying • To analyze the internal environment, • Next the firm identifies its core competencies. • Sometimes core competencies can become core

rigidities • Dynamic capabilities are competencies • A firm’s strategic intent is the articulation • Once the firm articulates its strategic intent, • The balanced scorecard is a measurement system

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Discussion Questions

1. What is the difference between a strength, a competitive advantage, and a sustainable competitive advantage?

2. What makes an ability (or set of abilities) a core competency?

3. Why is it necessary to perform an external and internal analysis before the firm can identify its true core competencies?

4. Pick a company you are familiar with. Can you identify some of its core competencies?

5. How is the idea of “strategic intent” different from models of strategy that emphasize achieving a fit between the firm’s strategies and its current strengths, weaknesses, opportunities and threats (SWOT)?

6. Can a strategic intent be too ambitious?

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