An Analysis of Tesla

Company Overview, History, Industry and Competitive Analysis

Tesla Motors has been in business thirteen years as of the writing of this report, with headquarters located in the hub of American technology, Silicon Valley. Since its founding in 2003 by CEO and Product Architect, Elon Musk, the company now boasts an employee base of 14,000. More impressive than the total employee size today is that in 2010, shortly before launching its very successful, second luxury vehicle, the Model S, the company only had 899 employees (Richard, 2016). Logically, one might wonder why an automaker would have needed to hire so many employees so quickly, when the company was producing roughly 20,000 cars each year and widely touted its automated production capabilities (Street, 2016). One might believe it is because in March 2016 Tesla crossed over to become the manufacturer of mass-market vehicles by introducing a $35,000 family car. Historically, and following Musk’s publicly stated strategy, its first vehicles were developed and priced for the luxury market, out of reach for most car buyers, with the intention of funding later-stage, mass market development (Moseman, 2016). However, this author contends the reason for Tesla’s exponential employee growth is that the company, as described on its corporate website, does not just develop, manufacture, distribute and market electric vehicles, but it also envisions itself as a technology and design company with a focus on energy innovation (Tesla, 2016a). While its core product has been an all-electric, consumer automobile, Tesla is becoming a multiple-business organization (Coulter, 2013), expanding its product and service lines to include a nationwide charging station network for its electric cars, producing battery hardware in its ‘Gigafactory’ located in Nevada, and servicing solar power customers through its proposed acquisition of SolarCity. As stated in a recent Harvard Business Review analysis of Tesla:

By defining itself as more than just a car company, Tesla is avoiding a common trap companies fall into as they mature: it is not letting the markets it’s in today bound tomorrow’s opportunities. (Suskewicz, 2015)

According to the company’s most recent 10-K, which includes its industry categorization on the NASDAQ, Tesla is considered to be in the auto manufacturing industry, and it currently serves a niche through electric vehicles (Tesla, 2016b). Globally, motor vehicle sales have grown by roughly 3% per year on a compounded basis for the last twenty years, with a significant amount of that growth coming from China and Europe (Gao et al., 2014), as reported by McKinsey & Company. In 2015, based on an analysis by PwC, auto sales globally reached just over 60 million units, with North America and Western Europe representing the two largest individual markets, followed by China and India (Hirsh et al., 2016). And while overall auto sales growth for China has flattened according to PwC, China is in fact the world’s largest new car market and one of the largest for plug-in electric cars. (Edelstein, 2016a). In terms of total electric vehicles sales, just over 550,000 units were sold in 2015 globally, of which just under 26,000 were manufactured by Tesla (InsideEVs, 2016). And despite EV’s only representing 1% of total car sales globally, supporting research indicates that the product life cycle for the electric car category has transitioned from an introductory, Early Adopter phase to full Growth:

The U.S. market for plug-in electric vehicles is reaching a new level of maturity and expansion. The introduction of [Plugin Electric Vehicle] options in the truck, van, and sport utility vehicle segments – which make up half the North American automotive market – will help drive strong growth in the PEV market going forward. (Shepherd, 2014)

Because of Tesla’s aforementioned ventures into industries beyond automaking and Musk’s strategy of starting with luxury and moving to mass market, the company’s direct and indirect automaking competitors can’t be identified simply. The most effective way to identify Tesla’s strategic group of direct competitors is to compare Tesla’s total electric vehicle car sales by its closest competitors in its primary market, North America. Tesla’s Model S is the single best selling electric vehicle against all other competitors, and sales data for the first six months of 2016 show Tesla Model S and Model X having sold 19,185 units, the Chevy Volt and Spark at 11,480 units, the Ford Fusion and C-Max Energi at 10,560 (InsideEVs, 2016). In the luxury all-electric category, BMW and Mercedes are distant fourth and fifth places with under 7,000 units on a combined basis (InsideEVs, 2016). Internationally, Chinese automaker BYD sells more electric cars than BMW, GM, Nissan, Renault, or even Tesla (Voelcker, 2016). Most importantly, in terms of brand strength for Tesla among its competition, Consumer Reports ran a survey in 2014 which demonstrated that Tesla was the fifth leading brand among all car buyers in the United States (Consumer Reports, 2014).

In terms of indirect competitors to Tesla’s automaking business, the primary alternative technologies to electric vehicles include hydrogen cell and more fuel-efficient, ‘traditional’ petroleum based vehicle applications including diesel, natural gas, ethanol-blended gasoline, and hybrids (Voelcker, 2011). In these cases of indirect automaking competition, the most relevant in the luxury vehicle category Tesla faces is BMW with its upcoming Hydrogen 7 series (BMW, 2016) and Mercedes-Benz with its BlueTEC Clean Diesel product line (Mercedes, 2016). With respect to Tesla’s mass market Model 3, the competition is substantial from GM with Toyota’s Prius hybrid, as well as Ford’s Fusion and Focus hybrids (InsideEVs, 2016).

Blurring the lines further with respect to indirect competition is Apple, Google/Alphabet, and Samsung. Apple’s car project has not been officially announced by the company, but rumors are that the car will be fully electric (DeBoard, 2016). Google’s car project is public and known to focus squarely on the feature of autonomous, self-driving capabilities (Bergen, 2016). And Samsung has very recently entered the electric car market by investing $450 million USD in aforementioned Chinese electric car manufacturer, BYD (Yu, 2016). None of these technology giants have any history in automaking, but each, like Tesla, are multiple-business organizations because each competes in more than one industry (Coulter, 2013). Likewise, each of these technology-based competitors has become a critical partner to the auto industry whether through in-console software applications like Apple CarPlay (DeBoard, 2016) and Google’s Android Auto (Bergen, 2016), or Samsung’s core automobile technology for EV batteries, parking cameras, and parking sensors (Yu, 2016). Likewise, Google, Ford, and Uber have developed a partnership to further self-driving cars, while Uber’s competitor in the ride sharing space, Lyft, has partnered with Volvo on the same technology (Shephardson, 2016). Even without the ride-sharing investments, Lyft and Uber represent indirect competitors to Tesla as well, what Michael Porter calls “alternative industry providers” with respect to Porter’s five-forces matrix (Coulter, 2013), especially because ride-sharing reduces the need for vehicle purchasing. In summary, these partnerships are the foundation of what can be referred to as an “ecosystem,” as coined by many business experts, including Ron Adner, Dartmouth’s professor of Strategy at the Tuck School:

Tesla has the ability to leverage what I call ecosystem carryover: using existing positions in existing market spaces to jump-start a winning position in a new market space…. ecosystem carryover was Apple’s secret sauce in entering the then-established market for smartphones and changing the game. (Adner, 2015)

As Deloitte Consulting stated in a recent report on corporate strategy and ecosystems, “some view the rise of ecosystems as an opportunity for creating powerful new competitive advantage,” (Kelly, 2015), which is an opinion shared by this author. Critical to Tesla’s vision and mission, as we will explore next, is the distinct competitive/ differential advantage the company has gained by building its foundation for its own next-generation ecosystem, and it will be an ecosystem that could prove to be light years ahead of those built by its competitors.

Evaluation of Mission, Vision, Value Statements

Tesla and Elon Musk make it very clear in the first sentence on Tesla’s corporate web page that the company’s mission and vision goes beyond automaking: “Tesla’s mission is to accelerate the world’s transition to sustainable energy” (Tesla, 2016a). In many ways, their self-described mission resembles more of a vision. A vision tends to be broad in its goals, elaborates purpose, is built on the organization’s core values, and briefly summarizes what the organization does (Coulter, 2011). Tesla’s self-described “mission” matches each of these criteria. By comparison, a mission statement will provide focus to the actions and implementation of strategy for the organization, and mission statements may differ by each of its business units, in pursuit of the vision (Coulter, 2011). The closest resemblance to a mission statement one might find from Tesla, ironically, is a self-described “vision statement” Musk provided in an investor presentation from 2011: “create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles” (Tesla, 2011). This mission statement is clear in what Tesla does, driving the world’s transition to electric vehicles, and what it hopes to accomplish, creating the most compelling car company of the 21st century (Coulter 2011). In a nod to the clear broadening of the company’s mission and vision, and widely noted in the press as part of the company’s recently updated vision and mission statements, the registered corporation of Tesla Motors rebranded its website and URL from teslamotors.com to tesla.com on July 17, 2016.

In terms of a formal statement of the company’s core values, it is difficult to find anything on Tesla’s corporate website or in the popular press. From the earlier cited 2011 investor presentation, two key statements were made: “second place should need a telescope to see us,” and Tesla has “a company culture of relentless innovation” – both quotes from Elon Musk (Tesla, 2011). These are as sufficient to a vision statement as any statement of values one might find in a corporate handbook or explained in a business textbook:

An effective organizational vision should include four components. One is that the vision be built on a foundation of the organization’s core values and beliefs…. Although a statement of values doesn’t guarantee success, it does provide employees behavioral expectations. For example, if employees know that outstanding customer service is valued by the organization, they can act in ways that champion customer service. (Coulter, 2013)

Also worth noting is that the mission statement page on the company’s website published by Musk indicates that the company’s “primary concern is not for the safety of the vehicle, which can easily be replaced, but for the safety of our customers and the families they entrust to our cars” (Tesla, 2016a). The comment regarding safety was presented in the context of the company’s first major product failure, a battery fire sparked by a Model S after a collision. There is an unanswered question for this author: does the company’s stated primary concern represent the core values and beliefs that are the foundation of the company’s vision, or is the statement a response to an investor and public relations crisis? And with new features such as autonomous, self-driving modes for the vehicles, what are the company’s mandates regarding the safety of other drivers or pedestrians who are not customers? The mission and vision statements described above do not speak at all to safety. Perhaps the omission of a clear statement of values, other than those provided above, is an indication of Tesla’s implied directive to its employees. It is conceivable that Tesla’s culture ultimately values winning at transformative innovation, and this culture is the key to understanding its strengths, weaknesses, opportunities, and threats, as we will explore in the rest of this paper.

SWOT Analysis

A culture of winning and relentless innovation means that leaders’ understanding of risk and reward – where weaknesses belie threats that strengths can turn into opportunity – is critical. To start, the following SWOT represents a summary of Tesla’s key Strengths, Weaknesses, Opportunities, and Threats:

Strengths

  • Intense brand affinity in the company’s target markets
  • Strong engineering expertise and intellectual property portfolio
  • Transformational leader compelling employees and investors to support the company vision

Weaknesses

  • Financial: High rate of cash burn and debt levels
  • Operational: Supply chain and inventory buildup Issues
  • Sales/Service: Disappointing pre-order reservations and showroom experiences

Opportunities

  • Addressing safety issues
  • Growing into international markets
  • Developing meaningful and highly collaborative partnerships

Threats

  • Negative investor sentiment – safety issues, questions of Musk’s decisions on spending
  • Competition from automakers and ride-sharing companies, releasing new all-electric vehicles, self-driving vehicles, and alternatives to buying a vehicle
  • Government intervention both in terms of safety issues but also market-making for competitors

In terms of its weaknesses, Tesla’s are as great as its strengths, which we will explore shortly. While Musk is peerless as a visionary and showman in the auto industry, his capabilities as an operating executive have been just short of lackluster. Recently, the company has encountered a raft of challenges. In 2015, Tesla recalled its entire fleet of Model S sedans (Steele, 2015) and most of its newly shipped Model X SUVs earlier this year (LeBeau, 2016) because of critical consumer safety issues. Beyond safety issues, on sales of just over $4 billion in 2015, the company posted a net loss of nearly $900 million, and burned through $708 million cash (Tesla, 2016b), which means it may need to raise even more equity or increase debt to continue funding its expansion plans. Lastly, the company again will miss its annual production goals, resulting in a shortfall of the 80,000 to 90,000 vehicle target for 2016, and its latest Model X is reported to be selling far less briskly than originally forecasted (DeBord, 2016). Some media speculation suggests that customer disenchantment may be setting in because the company’s reservation system lacks transparency in terms of production and customer billing cycles (Batenchuk, 2016), and industry reports utilizing mystery shoppers rank Tesla dead last in terms of showroom sales experience (Willems, 2016).

In extremely sad news, pointing to a key relationship in which the company’s weaknesses in safety belie its threats, a Tesla owner was killed when the ‘autopilot’ feature in his automobile apparently failed to brake for a tractor trailer turning into the lane of the car. This potential failure in the company’s quality control of its supply chain has resulted in both the National Traffic and Highway Safety Administration and the National Transportation Safety Board investigating Tesla (CBS, 2016), and the company has been asked to appear before the US Senate to report on its autopilot technology at the time of this paper’s drafting (Schultz, 2016). Consumer Reports, who as mentioned earlier named Tesla the number five overall auto making brand in North America, just published an article officially requesting the Tesla turn off its autopilot feature (Consumer Reports, 2016). This negative sentiment in public relations on both the company’s weakness in performance and safety fronts is resulting in the threat of growing negative investor sentiment, with analysts beginning to downgrade Tesla’s stock. Analyst guidance on non-GAAP earnings per share have dropped to $.35/share from nearly $4/share just a year ago (Maurer, 2016). Because of risk to public perception of Tesla’s vehicle safety/quality, traditional automakers who have the operational scale, capital base, and clear strategy to deliver electric vehicles represent a tremendous threat to Tesla’s success (“Harvard Business Review: Disruptive Innovation,” 2015). While regulations like some in California and at the federal level have forced traditional automakers to deliver more energy efficient vehicles, some automakers like GM have made EV production a top priority (Davies, 2016). US government mandates which force automakers to produce electric vehicles are also met with direct support like the recently announced $4.5 billion commitment by the US government to build a nationwide charging station network (Surran, 2016), which will effectively compete with Tesla’s proprietary nationwide charging network. And as mentioned earlier, Lyft, Uber, and other ride-sharing companies have presented an alternative to buying a car at all (Shephardson, 2016). These situations represent existential risk to Tesla, but ironically they also present unique opportunities as a springboard for the company’s growth.

Before we speak to the company’s opportunities, we first must understand its core strengths and competitive advantage. Tesla’s greatest strength is in the brand it has developed through its founder, Elon Musk. Musk’s aforementioned image as a visionary, coupled with an organization of engineering genius that he has assembled at Tesla, has resulted in a cult-like following among the young, techno-savvy, and newly rich (Korosec, 2015). While this cultishness might have been considered a limiting factor on Tesla’s success in the past, it has become a key strength for the company. This core group represents the early adopters that are influencing the now early majority for Tesla, an early majority who are snapping up used Model S’s and reserving preorders of the mass market Model 3 (Korosec, 2015). As a result of tapping the early adopters, Tesla has enjoyed intense excitement among a new, larger customer base, as evidenced by the 400,000 paid, pre-order reservations for its mass market Model 3 electric vehicle (Edelstein, 2016b). Lastly, Musk’s appeal isn’t only bounded by his vision, but his confidence and pride in his organization. Musk is widely reported as having stated, “Apple hires the engineers that we’ve fired” (Kharpal, 2015), and as stated earlier Tesla has developed “a company culture of relentless innovation.” This engineering-driven culture has resulted in the awarding of nearly two dozen patents, with two hundred more under review by the US Patent & Trademark Office (Tesla, 2011). The company’s engineering-based culture and ability to protect its intellectual property have given it significant leverage when working with partners or licensing its intangible assets.

In terms of opportunities, while a culture of relentless innovation has brought risk, it has presented a great potential reward. One might assume that Tesla’s addressing of negative press on safety issues by making it one of its new company missions, as we will explore shortly, would lead one to think the company is looking at ‘renewal’ opportunities; however, the company isn’t yet isn’t yet in a mode where customers are buying less of their products or cost and debt increases are putting the company’s existence at risk (Coulter, 2013). And in terms of these updated mission statements, Musk is doubling-down on transformational growth opportunities in general. While Tesla’s existence isn’t at risk, according to recent reports at the time of this paper’s authoring, inventory for the company’s more expensive configuration of the Model S is piling up:

Figure 1: Tesla – More Evidence of Demand Problems

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Figure 1. Inventory Units. Copyright 2016 by SeekingAlpha.

The company has already instituted some techniques such as limiting the driving range of batteries in order to justify offering a lower-priced version of the same P90D vehicle, without resorting to discounting. While this is one opportunity to spur growth, a systematic opportunity for Tesla to liquidate its inventory and spur growth in general is to leverage partnerships. These partnerships could be domestic, whether through rental agencies, franchising of its showrooms, or embracing ride-sharing services, or the partnerships could leverage international markets, where sales could benefit from dollar weakness or discounting that wouldn’t be available in Tesla’s domestic market. Additionally, in utilizing partnerships, the company could simultaneously overcome weaknesses related to its production throughput, need for additional capital to fund growth, or to reduce the burn rate associated with production. These partnerships could include automakers in international markets that are inefficient for Tesla to sell into directly (especially for their charging or solar networks) or courting weaker competitors in its existing markets. Beyond addressing the company’s inventory and supply chain risks, partnerships with experts in governmental and NGO groups who specialize in vehicle safety are essential to the company’s long-term viability. Whether it be consumer perception, investor perception, or government perception, as stated earlier regarding threats, any and all of these stakeholders could undermine the company’s long term operating viability if they feel Tesla isn’t a responsible corporate citizen. The details regarding these opportunities, both domestic and international, will be explored fully in the last three sections of this paper.

Organizational Growth Strategy

Based on this internal and external analysis, there are three key growth strategies this author would recommend and Musk has already begun to pursue: a diversification strategy, a vertical integration strategy, and an international strategy.

In terms of international strategy, Tesla has already expanded into the Chinese market for both car sales and the development of a Gigafactory (Yu, 2016), but competition there will be extremely stiff with BYD, as mentioned earlier in this paper. The next best opportunity for Tesla would be in India, a country which is already courting Tesla not just for selling its cars, but developing Gigafactories as well (Manchanda, 2016), or Tesla could continue to pursue opportunities in Australia, where it has already begun the development of “micro grids” for its battery storage and solar products (Williams, 2016). And effectively, by taking an International approach to its diversified businesses in India, Musk is outsourcing some of his production labor to lower-cost labor markets, and thereby reducing costs, without technically resorting to a renewal/cost-cutting exercise. In both cases, the critical reason for Tesla to enter India or Australia as international markets isn’t merely to sell more cars, it is to increase government support in funding and ultimately growing the profitability of the diversified aspects in its business.

In terms of Tesla’s diversification strategy, it has followed a concentric, related diversification model:

An organization using related diversification to achieve its growth goals is looking for some type of strategic “fit” where it can transfer its resources, distinctive capabilities, and core competencies to the new industry and apply those in such a way that a sustainable competitive advantage results. This search for strategic “synergy” is the idea that the performance of combined operations will be much greater than the performance of each unit separately. How does synergy happen? Through the interactions that occur as operations are combined and resources, capabilities, and core competencies are shared. (Coulter, 2013)

That synergy comes not only from the innovation consumers experience with the auto product – various features like driving range of 200+ miles on a single charge, a tech-ready interior driver console, and luxury appointments – each of which can be found in vehicles like the Chevy Bolt (Davies, 2016) or BMW i8 (BMW, 2016). This synergy speaks to the development of Tesla’s battery-producing Gigafactories, nationwide charging networks, direct-to-consumer/ non-franchised showrooms, and its entry into the solar power industry. And in diversifying, rather than continue to buy final component technologies from suppliers like Panasonic for its batteries, in the same way Apple controls the design of all its component technologies (“Knowledge@Wharton: Vertical Integration Works for Apple,” 2012), Tesla has developed the Gigafactories for its batteries. Rather than hand over the consumer relationship to franchisees or distributors, like Apple with its Apple Stores and Genius Bars, Tesla opened and operates its own showrooms. That said, Musk’s ambitions for Tesla have also propelled the business into areas so distant from its core business of automaking, that one could argue it is beginning to pursue unrelated diversification, headed towards becoming a pure energy conglomerate. One could envision a day where auto making becomes the smallest part of Tesla’s business in terms of revenue or profitability.

Tesla’s diversification strategy relates directly to its vertical integration strategy. The synergies Tesla benefits from are also the result of backward and forward vertical integration:

In backward vertical integration, the organization gains controls of its inputs or resources by becoming its own supplier….In backward vertical integration, the organization gains controls of its inputs or resources by becoming its own supplier. (Coulter, 2013)

As mentioned above, Tesla partnered with Panasonic in the design and production of its vehicle batteries, before moving to build its own battery factory. In terms of forward integration, Tesla historically has operated its own showrooms. More recently, Musk has announced that Tesla would begin to produce fully electric, self-driving buses (Halvorson, 2016). This change is important because it represents a forward vertical integration strategy in which, long-term, it is even replacing the need for consumers to purchase cars at all. While seeming like something from science fiction, based on a Harvard Business Review analysis cited earlier in this paper, the author contends that Tesla’s strategy is actually not that novel, and is similar to the strategy employed by Thomas Edison over 100 years ago:

Contrary to popular belief, Thomas Edison did not invent the lightbulb…. What Edison really invented was affordable and accessible electric light. Edison’s breakthrough was guided by a fundamental insight: any given product is only as powerful as the system in which it is deployed. As he set out to design his lightbulb, he simultaneously sketched out an integrated set of plans for generators, wiring, meters, light switches, and more. An electric lightbulb without ready access to electricity is a novelty; with it, it’s a world changer. (Suskewicz, 2015)

While arguably not novel, the advantage of integrated internationalization, diversification and vertical integration strategies, which is the foundation for the recommendation in the next section of this paper, is what Suskewicz in the HBR analysis described as the creation of a “value network,” a disruptive system of innovations that eventually displace legacy systems and this author has called a next-generation “ecosystem.” Like the way in which Edison reinvented artificial light, Musk growth strategy isn’t merely based on reinventing automobiles. Musk is relentlessly focused on inventing the next global ecosystem for generating, storing, and transporting the one utility essential to supporting modern civilization and industry: electric power. It is this unified growth strategy to internationalize, diversify, and vertically integrate an electric energy ecosystem that represents the platform the for three strategic recommendations this paper will describe next.

Strategic Recommendations

Beyond growth, Tesla could choose to pursue a renewal strategy to address the weaknesses and threats related negative investor, public, and governmental sentiment mentioned earlier. One might argue that it would be imprudent for Tesla to take on further growth opportunities in light of the debt and leverage it has amassed, its supply chain challenges, and without having tackled safety concerns. In Tesla, there exist textbook signs of declining corporate performance (Coulter, 2013):

  • Excess number of personnel, too-high costs, and too-rapid growth as described at the outset of this paper
  • Lack of clear vision, underpinned by values, and mission, as referenced earlier
  • Ineffective or poor communication within various units, as evidenced by supply chain and safety issues

But Tesla doesn’t exhibit every category of declining performance, such as fear of conflict or taking risks, tolerating work incompetence in the organization, and unnecessary administrative procedures, as Musk’s aforementioned actions and comments make clear. Likewise, each of the three signs mentioned could also be the result of the company not being in decline; rather, these signs may represent the natural outcomes of the company being in the process of transforming from an automaker to an energy conglomerate. To this point, there exists a corporate strategy put forward by consultants including McKinsey and Bain who emphasizes a hybrid of corporate growth and renewal in terms of transformation. This is not just the kind of transformation a company is forced to undergo when it finds itself under attack by changes that are primarily external (Isern et al., 2009). McKinsey’s consultants specifically posit a framework of progressive versus wholly defensive transformation. They argue that wholly defensive transformations are unlikely to succeed, while progressive transformations, the kind which Tesla is taking on, are the most likely to succeed:

Figure 2. Corporate Transformation Under Pressure

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Figure 2. Defensive vs. Progressive. Defensive Transformations Are Less Likely to Succeed. Copyright 2009 by McKinsey & Company.

McKinsey’s argument is that companies under duress tend to make decisions in secret and have a small group of individuals planning the corporate change strategy instead of engaging the entire organization (Isern et al., 2009). Furthermore, when a company is in crisis, the senior leadership team will tend to focus on the short-term response needed rather than the longer-term planning seen in most successful corporate transformations (Isern et al. 2009). Therefore, there are three specific strategies this author would recommend for Tesla that blend the Growth and Renewal strategies in the context of Transformation. These strategies, based on Tesla’s move to develop its ecosystem, address these internal weaknesses and external threats by turning them into new, external opportunities and enduring, internal strengths:

  • Horizontal integration to improve and grow autopilot technology
  • Concentration in the form of integrated, cross-functional product development across its business lines
  • Retrenchment for some or all of the existing business functions once the SolarCity acquisition has been approved by federal regulators

In terms of horizontal integration, the critical theme in Tesla’s corporate strategy lies in the aforementioned ‘ecosystem’ and platform strategy that Musk has pursued. First, we should clarify the definition of an ecosystem and how it is closely related to the strategy of horizontal integration:

A business ecosystem is a community of companies, organizations and individuals that: share a desire for achieving high-impact, system-level results; deliver benefit to their customers, partners and community members from their interactions using a multi-sided platform; contribute to maintaining the health of their community. (Bailetti, 2010)

Horizontal integration is a strategy in which an organization grows by combining operations with competitors. It can be a good growth strategy as long as it enables the company to meet its growth goals, it can be strategically managed, and it satisfies legal and regulatory guidelines. (Coulter, 2013)

By focusing on greater goods, ecosystems address the critical legal/regulatory risk present in horizontal integration. On this point, it is important to note that Tesla’s aforementioned issues with safety, especially as related to its autopilot technology, exist for its competitors as well. During the time of drafting this paper for review, Musk released revised mission statements for Tesla, in a release titled “Master Plan – Part Deux,” and one of these missions stated that Tesla would “develop a self-driving capability that is 10X safer than manual via massive fleet learning” (Musk, 2016). Regarding ecosystems and horizontal integration, technology that could make auto-piloted driving 10x safer than manual should be leveraged by all members of the ecosystem in order to “contribute to maintaining the health of their community,” as Bailetti (2010) stated above. The safety of drivers, passengers, or pedestrians is in every ecosystem competitor and member’s best interest; without it, the threat of government agencies and the judiciary stepping in looms for all. Furthermore, the level of complexity in this technology would benefit from multiple stakeholders, like Uber, Ford, Google, Lyft, and Volvo, who are already working together, offering their engineering and design talent. Not coincidentally, the second mission statement Musk put forward in “Part Deux” was to “enable your car to make money for you when you aren’t using it” (Musk, 2016), conceivably by leveraging autopilot technology. While this is the same business Uber and Lyft are ultimately in, both companies today require the owner of the car to be driving it to make money. The Deloitte research mentioned earlier asserts that ecosystems “form to achieve something together that lies beyond the effective scope and capabilities of any individual actor…. these relate to large societal problems that no individual organization is able, or incented, to resolve” (Kelly, 2015). While Musk may assert that Tesla alone is able to deliver safe and reliable autopilot technology, this author would recommend horizontal integration with the company’s stakeholders before his current competitors leapfrog him.

Regarding the second point on a Concentration strategy, we should look again to Musk’s most recent mission statements; specifically, his assertion that Tesla must “expand the electric vehicle product line to address all major segments” and “create stunning solar roofs with seamlessly integrated battery storage” (Musk, 2016). This means that Tesla must gear up for further market development to address all major segments while simultaneously pursuing product development with the solar roof opportunity. This also means that Tesla must develop integrated technology, processes, and people/teams from its SolarCity acquisition, its GigaFactory battery business, and its core auto-making business to achieve the integrated solar roof product in its automobiles. This must happen while the company also capitalizes on the sales and marketing expertise of both divisions to serve the business/industrial market segments. As we will review in the next section, successful execution will require the creation of cross-functional teams that do not yet exist at Tesla, and these teams must have deep experience within the existing businesses.

Finally, to prepare itself to deliver either of these strategies and all four new mission statements, the company will need to retrench — “stabilize, revitalize, and prepare for entering battle again,” (Coulter, 2013), especially as part of integrating the Solar City business. The reason for retrenchment during mergers & acquisitions is well-documented: “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%” (Christensen, 2011). In other words, the odds of failure, financial and more, are stacked against Tesla with the SolarCity acquisition, unless the company plans and prepares for its transformation to a new operating model. And as mentioned earlier, to prepare for the concentration strategy which will result in integrating solar roofs to cars and expanding operations into industrial vehicles, retrenchment will enable the company to reassess the structure of its teams, which we will explore more fully in the following section on Implementation. To achieve Musk’s integrated mission, a proactive retrenchment strategy will absolutely be required.

Implementation of Strategic Recommendations

In terms of implementing the corporate strategy, Tesla can and in some cases has pursued different avenues: merger-acquisition, internal development, strategic partnering for growth, and cost cutting or restructuring in terms of renewal (Coulter, 2013). But as with McKinsey’s points on transformation, the company needs to proactively determine a primary implementation path to ensure that the dependent competitive and functional strategies can be aligned and senior managers can get on with engaging the organization before the SolarCity acquisition closes.

Implementation 1: Concentration Should Come From Merger-Acquisition

Not novel on the part of this author, but clear from Tesla’s actions – to enable product-market diversification to become an energy conglomerate and the cross-functional product development described for integrated solar panel vehicle roofs – the company benefitted from exploiting Musk’s position as chairman of SolarCity and moving towards a merger-acquisition implementation scenario with the company. A question remains: should Tesla stop with the SolarCity acquisition or pursue additional targets? In addition to the SolarCity chair position, Musk is the co-chair of a non-profit researching artificial intelligence technology called OpenAI; he is the founder of SpaceX, a company in aerospace manufacturing and transportation services, and SpaceX in turn has spun out a new company called Hyperloop One, which is developing terrestrial high-speed, electric transportation in tubes (“Elon Musk: A Serial Entrepreneur,” 2016). Both companies are relevant to Tesla: SpaceX is in transportation and energy businesses, and OpenAI’s technology is directly relevant to improving Tesla Motors’ autopilot features. And somewhat ironically, auto-piloting a spaceship or high speed train wouldn’t be that far-fetched a capability to integrate back into SpaceX.

Assuming the company can prove its capabilities integrating Solar City, which is in a very different industry from its core business of auto making, investors could conceivably stomach new acquisitions, even in light of current debt loads and cash burn. The key to Tesla’s success in M&A will require a carefully planned, stepwise approach. While SpaceX and Hyperloop would be out of reach financially in the near term, given SpaceX’s $12 billion valuation (“Elon Musk: A Serial Entrepreneur,” 2016) relative to Tesla’s $1.2 billion in cash and nearly $7 billion in liabilities (Tesla, 2016b), Tesla could conceivably acquire OpenAI. While a for-profit acquiring a non-profit is not without legal and regulatory challenges, the practice is extremely common – hospitals and medical groups, for example, routinely engage in this form of M&A (Gamble, 2011). Without an acquisition, Musk loses leverage and competitive advantage in any potential strategic partnerships to achieve his vision of a truly safe, autopiloted vehicle, as we will explore next.

Implementation 2: Horizontal Integration Should Result In Strategic Partnering

In 2010, Elon Musk and Akio Toyoda, president of Toyota Motors met at Musk’s home in Silicon Valley to discuss a partnership. Within weeks of their meeting, Toyota announced a $50 million investment in Tesla Motors, and the two companies jointly announced a development partnership to reinvent the Toyota RAV4 SUV as a fully electric vehicle. Unfortunately, the two engineering teams could not effectively work together to develop the vehicle, and after four years, the development partnership was dissolved. Both sides were extremely protective of their proprietary technology, and each side had fundamentally different philosophies to the design and underlying power technologies for the vehicle (Trudell, 2014). While this may sound like strategic partnerships should be shelved as a recommendation for Tesla, in reality, this represented a lesson in what makes a successful partnership. Not shortly after the stalled Toyota relationship, Tesla announced that it would be delivering batteries and motors for Mercedes-Benz B-Class all electric vehicle (Trudell, 2014). The critical factor for success in the Mercedes-Benz strategic partnership for Tesla was to not pursue a joint venture on overall vehicle development, as it did with Toyota, but to pursue a strategic alliance that dealt solely with the supply of component parts. The challenge Tesla faces is to design the organization and evolve the culture of winning to one that can embrace a level of collaboration and ensures the success of a strategic alliance at massive scale; we will review this as part of the third implementation recommendation.

Given Tesla’s auto competitors have already begun to scale up mass-market production and pursue their own ecosystem partnerships, plus its capital reserves and investor goodwill have been exhausted with the GigaFactory buildout and SolarCity acquisition, it would be prudent for Tesla to pursue strategic partnerships for its automobile business as soon as possible. Partnering with dealerships for sales and service of its consumer business would allow the company to focus its resources towards these new ventures, while bringing in franchise licensing revenues. Additionally, its lack of predictability on the sales front for consumer automobiles, even with Musk’s celebrity, may only amplify when the company begins to sell industrial vehicles, which have a higher unit price and longer sales-to-fulfillment lead time. Moreover, if Musk hopes to keep the existing SolarCity government and utility line of business after the acquisition, he will need to address vehicle safety and security concerns in a significant and public way. No legislator will expect his or her constituency to tolerate doing government business with a private sector company that puts individuals at risk of injury or death for the sake of “accelerated” energy innovation. Imagine the unknown significant safety issues that can arise with a systemic in-home or in-business Powerwall storage failure or a fleet of light utility vehicles in autopilot driving mode that suddenly go haywire in the middle of a weekday. In terms of mitigating partnership risks, Tesla maintains an impressive patent portfolio to protect its intellectual property.

Implementation 3: Retrenchment Should Result in Restructuring

Tesla faces two distinct challenges from its updated mission statement: the need to support the creation of integrated, cross functional products, and staffing for the likely resource duplication to occur as horizontal and vertical integration strategies take hold with strategic partnering. As a part of a retrenchment strategy, the company must proactively plan for a restructuring implementation. In times of duress, companies will restructure to achieve cost efficiencies (Coulter, 2013). Given Tesla’s position, the company should carefully plan its restructuring not in terms of cost efficiency but to reduce its risk of failure from the SolarCity acquisition and increase its likelihood of success of integrating its people, processes, and technology across its multiple business lines. Success in this case would be measured in terms of meeting or exceeding the goals for all of its mission statements in Musk’s “Master Plan – Part Deux.” With a well-integrated, new company, one might imagine a quadra-fecta of newly released industrial vehicles, perhaps taxis, owned but never driven by Tesla’s buyers, that are 20x safer than manual drivers, soaking up power from the sun during the workday, and whose excess batteries are unloaded each night for power redistribution back into the grid. But this kind of integrated vision isn’t possible without a tightly integrated operation that is executed by a tightly integrated team. This is the benefit the comes from a well-planned, proactive, multi-stage organizational restructuring, as McKinsey noted in its analysis of progressive corporate transformations (Isern et al., 2009).

Beyond the product integration described, Tesla must restructure to be ready to integrate tightly with new partners both horizontally and vertically. Again, in the spirit of proactivity, to successfully build its ecosystem, Tesla needs teams that are able to collaborate with external stakeholders. This capability comes not only from employee attitude, which can be influenced through training, but organizational design which makes it possible for teams to achieve their goals only by utilizing external support. This organizational design around partnership must come from at least the company mission statements, which Musk’s “Part Deux” and even his first “vision” statement unfortunately do not speak to. Ironically, SolarCity represents a mirror image of Tesla regarding partnerships. It does not produce its own solar cell component technology; it partners with home builders and resellers for last-mile installation; it has partnered with Google Nest and BMW on co-marketing and product integration, and it touts its partnership network as foundational to the company’s next-generation grid engineering project on SolarCity’s corporate website (SolarCity, 2016). To succeed, Tesla may need to look to the leadership coming onboard from the SolarCity acquisition to establish a corporate executive who executes this restructuring program. In many ways, restructuring could be beneficial in addressing not only the functional teams but Tesla’s C-suite as well. It’s likely that current investors, at the very least, would be pleased.

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