Strategic Analysis of Tesla Motors: Loopholes and Recommendations

This report analyzes the internal and external environment of Tesla Motors using SWOT, Porter and PESTEL framework. It suggests that Tesla needs to increase its product and service range and cut its cost for attaining profitability. The report further suggests that Tesla may create a strategic alliance with Apple Inc. and enhance its supply chain to decrease the cost of production.

Strategic Analysis

Executive Summary
Tesla Motors has ridden its status as growth company, as led by Elon Musk. The true financial
health of the organization is fragile than what is portrayed. The purpose of his paper is to
determine the loopholes and recommend strategies for Tesla. Based on the findings of internal
and external analysis using SWOT, Porter and PESTEL framework, opportunities and threats are
determined. The findings suggest that Tesla needs to increase its product and service range. Tesla
needs to cut its cost for attaining the profitability level.
The analysis from PESTLE suggests that there is a continuous research and development activity
going in Tesla. Tesla must avoid breaking regulatory laws that are related to unhealthy emissions
into the atmosphere. It is found that Tesla has experienced growth in the automobile industry.
Tesla has to pay higher interest for expanding in the overseas market. The findings of the report
suggest that Tesla nearly had $2.5bn long term debt and capital lease on their balance sheet. The
firm has a great scope for international expansion. The findings from Porter suggest that the
automobile industry faces intense competition. The performance and availability is not that much
of concern for Tesla however they do need to work on the costing factor.
It is suggested that Tesla needs to increase its revenue streams by greater marketing efforts. Tesla
may create a strategic alliance with Apple Inc. As Tesla intends to develop cars, they may use
their financial resources to build an affordable car while providing zero emissions. The report
further suggests that the supply chain needs to be enhanced in a manner that shall decrease the
cost of production, resulting in higher profitability.

Table of Contents
1. Introduction 3
2. Environmental Analysis 4
2.1 PESTEL Analysis 4
2.2 SWOT Analysis 5
2.3 Porter’s Five Forces Analysis 7
3. Organizational Analysis 9
3.1 Strategy Analysis 9
3.2 Performance Analysis 9
3.2 Customer Performance 13
3.3 Internal Current Performance 14
3.4 Internal Long Term Development 14
4. Capabilities 15
5. Recommendations 16
6. Conclusion 17
References 18

1. Introduction
Strategic analysis may be defined as the process of developing strategy for a business by
exploring the business environment. It is the process of conducting research on the business
environment and analyzing the company’s position in relation to the internal and external
environment (ArbabKash et al. 2014). This report shall conduct an environmental analysis using
PESTEL, SWOT and Porter’s framework. These frameworks shall help in analysing the
companies using external and internal forces. As a result, the strengths, weaknesses,
opportunities and threats shall be determined. Further, the organizational analysis shall be
conducted using value chain and VIRO analysis. The strategic issues may be determined so that
ethical and social considerations can be built.
Tesla was founded on 1st of July, 2003 in Delaware, US and it was founded by Martin
Eberhard and Marc Tarpenning but the company also considered JB Straubel, Ian Wright and
Elon Musk as their cofounders. The headquarters is in Palo Alto, California and they have been
working on electric vehicles, solar panel manufacturing and energy storage. Their main aim is to
make the world less dependent on fossil fuels. Tesla believes that the world needs to reduce their
reliability on fossil fuels and work for a zero-emission future. Their CEO, Elon Musk, who has
been the face of this company, sees this company as an independent automaker and aims at
providing electric cars at an affordable price to the average customers. The aim is to accelerate
the era of sustainable transportation by introducing more and more compact electric cars in the
market as much as possible. Tesla’s continuous growth confirms that the market is ready for this
change and responding so well to the organisation’s energy storage products and electric
vehicles. Under Elon Musk’s leadership back in mid 2016, the company’s corporate mission was

“to accelerate the world’s transition to sustainable energy” addressing the renewable resources
and its related market opportunities (Gamble and Thompson 2014).
2. Environmental Analysis
Environment analysis is one of the strategic tools to identify all the internal and external
elements which can affect the organization’s performance. It shall be useful in identifying all the
opportunities and threats.
2.1 PESTEL Analysis
PESTEL Analysis
Political For reducing the dependency on oil, the government is providing incentives to the
electric automotive companies. Therefore, there is a wide opportunity for Tesla for
expanding its market or conducting research and development (Grant 2016).
Economic The consumers are likely to purchase electric vehicles when the gas prices increase.
Tesla has high opportunity of sales as the gasoline prices are on a hike.
Social The consumers are becoming conscious about the environment. Therefore, there is an
increase in preference in the cars that add to fuel efficiency, safety and sustainability.
Technological Tesla is rapidly conducting research and development activities. There is a scope that
they develop innovative technologies while partnering with Apple or Google for
creating software for self-driving vehicles (Shahan 2017).
Environmenta
l
The automobile industry affects climate and natural resources. Tesla is enhancing
sustainability as it produces zero emission vehicles. Therefore, there is a push for

creating hybrid and electric vehicles.
Legal The US government is providing loan and incentives for the automobiles creating
environmental friendly vehicles. Tesla must avoid breaking regulatory laws that are
related to unhealthy emissions into the atmosphere (Frynas and Mellahi 2015).
2.2 SWOT Analysis
Tesla Motors has been designing, developing, manufacturing and selling the energy
storage products and fully electric vehicles. They have their own network of supercharger
stations, service centres and vehicle sales all around the globe (Frynas and Mellahi 2015).
Strengths
Tesla has been delivering new, highly advanced and innovative technologies
transforming the driving experience. They have a distinguished and unique status in the market.
They are not the only company providing such cars but they have dominated the market
thoroughly when it comes to high end luxury electric cars. Their growth shows how rapidly they
have increased their sales over the last few years. The sales increased 59% in 2014 and then 27%
in 2015 (Shahan 2017). The growth came from the demand of their Model S and Model X cars.
It is hard for new companies to enter the market which is already being dominated by Tesla, Inc.
Weaknesses
Tesla has been working on the development of their technology but it comes at a cost.
They have been burning through their cash over the time which is not significantly a very good

sign for a company. They are also in a position where they have to pay off a lot debt. This is due
to the investments made in their research and technology over the years and for developing the
technologies being used in the cars. As of March 31, 2016, they nearly had $2.5bn long term
debt and capital lease on their balance sheet. The interest payments are fairly high. Tesla’s
revenue from countries except The US is not great and they need to expand their overseas market
cap and go global on a larger scale.
Opportunities
One of the biggest opportunities is to increase their global production and sales by
expanding their operations globally specially in the Asian market. Tesla works according to their
strength and they have launched Model 3 back in March, 2016 after Model X and Model S which
was sold at nearly half the price of their first two models. The Model 3 was aimed to be
manufactured and sold more than the earlier two models. Tesla has been expanding their market
by introducing lesser expensive car for the average customers. They absorb more opportunities in
the field of technologies being used and optimise their use (Fisher and Oberholzer-Gee 2013).
Threats
The price of the raw materials used for manufacturing such cars and energy storage
devices increases evidently. Lithium, steel, aluminium, graphite and many other materials are
subject to change their cost according to the global demand and supply. There are other threats
such as their competitors working on making their cars better and Nissan Leaf gave them a tough
fight to their car Model S back in 2015. Government regulations can also decide the future of a
company’s goals. If the government regulations favour the company then it will help them

achieve their goals easily and if it does not then the delay in work can lead to losses as well
(Harrison and John 2013).
2.3 Porter’s Five Forces Analysis
Porter’s Five Forces High/Low Analysis
1. Competitive
Rivalry
High The market is highly competitive. The automotive
companies which are bigger tend to be aggressive in their
approach. The competitive aspects of five forces analysis
points towards the rivalry as highly prioritized consideration
for the strategic management (Epstein and Buhovac 2014).
2. Supplier Power Moderate Tesla’s business is highly dependent on their suppliers. The
suppliers’ quality of work, reliability, punctuality and
efficiency would be a big factor for Tesla’s success. The
supply level, forward integration and size of suppliers, these
are all a moderate force. The suppliers’ forward integration
is low level. The suppliers determine the reputation of the
company and builds on trust.
3. Buyer Power Moderate In this aspect, the customers’ buying power determines the
sales revenue of Tesla. The Low switching cost for
consumers from one brand to another is a strong factor but
the substitutes available and purchase of low volume are
moderate and weak force respectively. For the same reason,
for Tesla customers reduce the barrier if they want to
purchase from other companies. Tesla has been working on

developing cars for their average customers as well
(Govindan et al. 2014).
4. Threat of
substitution
Moderate Tesla has been facing their substitutes’ impact on their
electric cars and energy storage industry environment. The
availability and performance of the substitute is a moderate
factor for them. The performance and availability is not that
much of concern for Tesla however they do need to work on
the costing factor. The substitute factor matters when the
option offered is good (Harrison and John 2013).
5. Threat of New
Entrants
Low This business is not easy to enter because of the cost related
to brand development and cost of doing business. The
technology used has to be advanced or at least at par with the
companies already existing in the market. The external
factors determining the weak force of this threat analyses
that the cost of developing brand and continuing the business
is high. Tesla has been working on this for years and it is
hard for other new entrants to compete with (Fisher and
Oberholzer-Gee 2013).

3. Organizational Analysis
3.1 Strategy Analysis
Tesla entered the market through expensive high-end cars that targeted the high income
people. The business model is based on selling, servicing, and charging its electric vehicles.
Tesla adopts the direct sales strategy rather than selling via franchise dealerships. The company
sells the cars directly to its customers. The brand also introduces internet sales in which the
customers can customize the needs. Tesla follows broad differentiation as the generic strategy.
This generic strategy helps the firm in building competitive advantage as it helps Tesla in
differentiating from other brands (Tseng and Hung 2014). The potential customers are broadly
attracted who are interested in environmental friendly products. Tesla mainly targets the
customers who believe in sustainability. The key stakeholders include the investors, employees,
directors, suppliers, government and public. Tesla maintains constant communication with its
stakeholders and publishes annual report. Tesla communicates with its stakeholders by
communicating in the annual meetings. Tesla also manages its social media pages for keeping
the stakeholders abreast of the latest achievements. The stakeholders at Tesla are highly
committed towards the organization (Johnston and Marshall 2016).

3.2 Performance Analysis
The following table displays the annual income statement for the past few years:
Capital Structure Ratios Debt to Equity Ratio 2.43
(Marketwatch.com

2018)
Return on Equity -60.38%
(Gurufocus.com
2018)
Asset Ratio Debt-to-Total Asset
Ratio
0.33
Return on Assets -9.52%
Overall, the list of ratios for Tesla for the year ending 2017 is determined as under:
Source: (Statista.com 2018)

The current ratio for Tesla is 0.86 that indicates difficulty experienced by the company in
meeting its present obligations. However, if Tesla has good long-term prospects, it shall be able
to borrow against the current obligations. Further, the quick ratio is 0.56 indicating that tesla
cannot pay its current liabilities completely in the present. Tesla had reported a net loss of $889
million in 2015 that resulted in a return on equity of -88.9% in 2015. Tesla requires increasing its
expansion by leveraging debt. The debt increased from $598 billion in 2013 to about $6 billion
in 2017.The debt-equity ratio of Tesla was reported to be lower than the overall industry average
at 2.12% in 2017 (Harrison and John 2013).
Tesla does not have a strong financial position in the market as it has huge debts. Tesla is
expected to balloon another $5 billion within the next few years through equity share or long-
term debt positions. The company already runs in a negative cash flow position with nearly $4
billion in debts in 2017. This position can be recovered only by increasing share-equity. While it
is argued that the increased revenue at Tesla shall provide necessary funds for expansion, at the
same time it is argued that their expansion investment shall never turn into profits.

It is argued that revenues have strongly increased. Till 2012, it is noticed that there is
fluctuations in gross margin, selling, general and administrative and research and development.
Tesla does not include selling, general and administrative expenses in its cost of sales. There was
a loss experienced in 2016 due to the timing difference between expense and revenues (Mitchell
2017).
It is further analysed that for expanding, Tesla may need fresh capital. If the expansion is
done via debt, the interest expense shall reduce the profitability. The interest expense may reduce
if the company grows revenue, specifically in the case where capital is raised via stock
emissions. The capital expenditure does not have a direct effect on the income statement.
However, it shall lead to higher charges for depreciation thereby affecting profits.
3.2 Customer Performance
Tesla has brought elements of luxury within the automobile industry among the
consumers. The brand recognition and perceived elite status has increased the demand for Tesla

electric vehicles. However, Tesla faces troubles relating to market segmentation as there are less
offerings in comparison with other brands. Tesla launched a marketing plan in 2015 that targeted
the entrepreneurs, business executives and wealthy individuals. These customers are always
looking to purchase a luxury segment car. Tesla needs to expand its target market by focusing on
the entry-level luxury buyers, tech-savvy and eco-friendly customers. According to Mitchell
(2017), Tesla is the only automotive company that mainly satisfies its customers.
The Model X has been reported to have quality problems. In a survey, it was reported that
Tesla Model S was highly satisfying in comparison to other brands like Chevrolet, Porsche,
Ford, Mazda and others (Mitchell 2017). According to the figures of March 2018, Tesla is
reported to own 0.2% market share (Statista.com 2018). Tesla moved into the mass market after
launching Model 3. It is analysed that Tesla will never stop innovating and it is the most
attractive feature about the company. Therefore, Tesla mainly targets the customers who like
technology moving faster than their wallet (Sroufe and Joseph 2017).
A recent autopilot related accident that happened in March 2018 after the first one that
happened back in 2016, has sparked a controversy questioning Tesla’s safety feature. Although
Tesla did provide a justification for them but it still became a big issue. Tesla has also recalled
123,000 Model S cars for fixing an issue related to its power steering and this is not a good sign
for such an esteemed company.

3.3 Internal Current Performance
The productivity of Tesla is difficult to compare with other companies. Tesla tries to be
more vertically integrated than the others. Tesla does not focus on its losses of $0.68 per share of
2017 but it launched its compact electric sedan (Dron 2017). Tesla experiences poor productivity
levels but Elon Musk has formulated certain tips for its employees to overcome such issues.
Tesla is increasing its production levels to 6,000 units weekly by June 2018 for attaining
profitability (Dron 2017). The middle-managers at Tesla are adding to the cost as they need to be
paid salary, but their inefficiency is resulting in low productivity. There is poor communication
between the departments at Tesla (Dron 2017). It is estimated that the production goals shall
ramp up to 10,000 per week by the end of 2018 (Yvkoff 2017). Moreover, the production shall
aggressively increase to 100,000 in 2020 (Yvkoff 2017).

3.4 Internal Long Term Development
Tesla constantly strives for innovation. Tesla makes electric vehicles that are affordable
by the people. Tesla was founded in 2003 and launched its first electric sports car in 2008. The
company innovated Model S in 2015 that became the best selling electric vehicle in 2015 and
2016. Tesla has partnered with leading competitors such as Mercedes Benz and Toyota for
expanding in the market of electric cars. They are innovating in the field of battery technology
thereby contributing to success. In this company, if technical employees desire to get promoted
to management level, they need to undergo training. To ensure constant product development
and innovation the company is focusing on encouraging diversity along with developing an
inclusive surrounding which leverages diversity in communities (Govindan et al. 2014).
4. Capabilities
The capabilities can be evaluated using the VRIO analysis as under:
Capabilities Valuable Rarity Imitability Organization Competitive
Advantage
Large
production
facility
Yes No - - Competitive
parity
Central location
of stores
Yes Yes Yes Yes Sustained
competitive
advantage
Technical Yes Yes No - Temporary

expertise competitive
advantage
Green market
trend advantage
Yes No - - Competitive
parity
Tesla has the most valuable assets and capabilities in its production facility. The location
of stores is increasing the amount of customers. Elon Musk opened its patents to its coveted
automobiles allowing the market segment to bring a niche customer segment. Tesla now serves
customers in certain areas and has the ability to grow exponentially over the coming years. The
biggest halt is the consumer and governmental regulations on electronic vehicles.
5. Recommendations
Tesla needs to increase its revenue streams by greater marketing efforts. Firstly, Tesla
needs to improve its multinational presence. It needs to enhance the business by laying new
foundations in new facilities and sales operations. Also, there is a need for significant investment
in research and development for manufacturing products that are competitive (Blomback et al.
2014).
Secondly, Tesla may create a strategic alliance with Apple Inc. As Tesla intends to
develop cars, they may use their financial resources to build an affordable car while providing
zero emissions. It is known that Apple is engaged in creating ‘Titan’, its electric car project. As
Apple is moving in the same line as Tesla, it shall be beneficial for Tesla to strategize partnership
with Apple (Grant 2016).

Thirdly, Tesla may continue investment for product innovation as there is intense
competition in the automobile industry. Innovation shall help in creating market needs and
improve market reputation for Tesla. Lastly, Tesla must diversify its supply chain to enhance it
and reduce risks. There is a need to create better visibility in the supply chain that shall enable
the supply chain. The supply chain needs to be enhanced in a manner that shall decrease the cost
of production, resulting in higher profitability.
6. Conclusion
Tesla’s continuous growth confirms that the market is ready for this change and
responding so well to the organisation’s energy storage products and electric vehicles. For
reducing the dependency on oil, the government is providing incentives to the electric
automotive companies. The consumers are becoming conscious about the environment. Tesla is
enhancing sustainability as it produces zero emission vehicles. Therefore, there is a push for
creating hybrid and electric vehicles. Tesla has been delivering new, highly advanced and
innovative technologies transforming the driving experience. Tesla has been working on the
development of their technology but it comes at a cost. Tesla has been expanding their market by
introducing lesser expensive car for the average customers. The automotive companies which are
bigger tend to be aggressive in their approach. The performance and availability is not that much
of concern for Tesla however they do need to work on the costing factor. Tesla has been working
on this for years and it is hard for other new entrants to compete with. The potential customers
are broadly attracted who are interested in environmental friendly products.

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