Tesla Motors Case Discussion Questions

According to Article, Answer the following question 1) Analyze Tesla’s industry by using Porter’s five forces framework. There are different ways to define the industry boundary. For example, you can define it as an “automobile industry as a whole” or as an “electric vehicle (EV) industry”. There is no one right answer. 2) Nissan Leaf could not meet its expectation in 2011 and 2012 (p. 6). Why do you think it couldn’t? 3) Without a doubt, Tesla has been very successful in the market for the last several years. However, there are also concerns on its sustainability. What do you think are major challenges that the company faces today? 4) If you are an advisor or a consultant of Elon Musk, what would you suggest to address the concerns?Student name
MGMT 449
Professor Heejin Woo
1
Tesla Motors Case Notes
Analysis of Tesla’s industry (automobile industry) using Porter’s five forces framework
1. Threat of New Entry: Low
o Economies of scale requires the new entries of automobile industry to spend a lot of money
and time to invest in research and development on the powertrain and other components of
the models. According to the Harvard Business Case, the cost of designing a new model
was from $1 billion to $6 billion (pg. 2). Therefore, it already requires the new entries to
produce and sell in a great volume in order to cover the design costs, despite considering
the other costs yet.
o Capital requirements are high in order to increase the popularity and public awareness of
the new models. The case study shows that the popular automobile companies were
spending around $4 billion in 2010 on advertising (pg. 3).
o Customers tend to trust the popular brands more because of the great safety concern
regarding vehicles. It is also related to the quality advantage of the incumbent electric
vehicles that receive good feedbacks from users.
o Although the market is attractive because of the high demands of vehicles, there are high
entry barriers due to the high capital and quality requirements for new entries.
2. Bargaining Power of Suppliers: Low
o The concentration of suppliers is low because there are a lot of car component suppliers in
the market.
o Suppliers would have more power if the components are outsourced to them, instead of the
car companies producing the components themselves because different models or brands
require unique components.
o However, the manufacturing costs are relatively high for vehicle, so many popular brands
have their own supply and assembly lines to save costs.
3. Bargaining Power of Buyers: High
o According to the case study, American households in average hold at least one or more
vehicles (pg. 1). Since there are high customer demands, and they are mostly individuals
instead of retailers, the power of buyers is low.
o However, intermediate customers such as the dealers have power to fluctuate the choices of
customers. Based on the case study, dealers might seek for lower prices for car sales, but
make money through car repair and maintenance (pg. 3). Since they have bigger bargaining
powers, they can ask for lower prices.
o Although the vehicles might be expensive to many potential customers, customers are
likely to evaluate the quality over the price to secure their lives and safety if accidents
happen.
o In addition, buyers have great power over the price since there are many different vehicles
brands and models. Although safety is the main concern of many users, there are a lot of
vehicles choices with great safety but lower prices.
4. Threat of Substitutes: Low
o Although there are other transportations that can substitute vehicles, they are hard to
replace vehicles due to the large geographic environment and the lack of public
transportation in the United States. Considering the other transportation options such as
Student name
MGMT 449
Professor Heejin Woo
2
bicycles, public transportations and so on, they are not convenient for users since they often
have to travel in long distance.
o Since there are no similar substitutes for vehicles, and people cannot make them or live
without them, the threat of substitutes is low.
5. Intensity of Rivalry: High
o The vehicles brands share similar or common goals of serving different groups of
customers by providing different models, such as sports cars and SUVs. Competitors
usually cut prices to win customers. In order to increase sales, case study points out that
Nissan lowered the price of Nissan Leaf to attract buyers and the strategy was successful
(pg. 6).
o There are some unique elements for brands, such as their images and customer services that
make the brands outstanding. However, many brands share similar characteristics, which
lower the attractiveness of the brands.
o The older models are perishable, and the values would decrease gradually once the new
models release. As a result, the companies would lower the price even more.
Although threat of new entrants and substitutes and bargaining power of suppliers are low,
bargaining power of buyers and intensity of rivalry are high. Considering all, I suggest that this
industry is moderately attractive to existing players but not attractive to potential new
entrants.
Failure of Expectation for Nissan Leaf
o Electric vehicles were not as popular back in 2011 and 2012. There were still a lot of hidden
problems because they were considered newly developed type of vehicles. For example, the
case reports that there were still imperfections on battery with short life and defective cooling
system (pg. 6).
o In addition, the original price was set too high. People could have purchased nicer
automobiles without worrying about the defects of electric cars. People usually stepped back
with high price and quality that was not guaranteed. Therefore, Nissan’s decision to lower the
price would encourage people to try the cars without the great trade-off of money
Challenges of Tesla
o Since electric vehicles have earned their popularities in recent years, and many other
automobile brands have decided to create models of electric vehicles, it is hard for Tesla to
sustain their unique characteristics and advantages. The case mentions that Tesla worked with
Panasonic to create the battery for the car (pg. 7). Tesla might lose its advantage when other
brands approach Panasonic to invent their batteries.
o In addition, the case points out that the top management teams had no experience in
automobiles (pg. 6). Therefore, it is harder for them to keep up and compete with the wellexperienced
management teams who comes up with their new electric car models.
o As Tesla wishes to create different model types for different groups of customers, they might
not be able to make improvements on each type due to their limited income and the lack of
automobile knowledge at the management level. According to the case, Tesla’s net income for
the first half of 2013 was only $49,000 (pg. 16).
Student name
MGMT 449
Professor Heejin Woo
3