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The Business Model of Tesla Motors: Analytical Essay

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This article is about Tesla, Inc., which was founded in 2003 by a group of engineers in Silicon Valley whose objective was to create zero-emission electric cars better than gasoline automobiles and to accelerate the advent of sustainable transport by providing compelling, mass-market electric cars as soon as possible. Tesla is not just an automaker. It is also a technology company with a focus on energy innovation. Its CEO is American’s most well-known entrepreneur, Elton Musk.

1. Introduction:

The inception of the automotive industry is rooted back to the formation of Ford motor company by Henry Ford, in which the manufacturing units consist of moving assembly line and interchangeability of equipment brought a concept of mass production procedures. The basic design of the car at that time till date has not been much changed as the cars still have two pair of wheels at front and back with similar type of chassis. However, the competitive advantage of Ford motors had not much lived long and soon took over by the General Motors despite being the founder of commercialized cars. Alfred P. Sloan, who was the founder of General Motors brought a new concept of decentralized structure of organization and advanced management concepts which offered customers with ease to select their desired car type and design from vast product portfolio (Holweg & Pil, 2001). From the introduction of commercialized cars till date, the technology used in the cars have given edge to the companies who can provide better solutions and efficient systems that can provide fuel efficiency and better performance. In modern world, it has become difficult to survive for those companies who still practicing traditional management tactics and not commencing technological advancements in their designs and manufacturing. Acquiring advanced technology has now become a necessity rather than luxury in modern world. The automotive giants are now working in change management concept to introduce better solutions that are different and efficient from their competitors. Hence implementing system capable of fulfilling the requirements of the market with respect to advance technology requires effective and efficient management. These changes in the system are like changing the overall operations of the company regarding its marketing, services, productions and sales (Dessler & Phillips, 2007). The change management concept consists of modification in the actions of the company as well as technologies and methods to obtain the desired goal of the company just as changing the business environment of the company from inside and outside in order to attain high profitability. These changes are associated with the adaptation change, control change and effecting change. In this report, we will examine the business model of Tesla Motors, the journey of the company in terms of introducing novel concept in traditional automotive industry and the change management concept.

2. Background of Tesla Motors:

Tesla Motors is the company that is pioneer in designing, manufacturing and selling battery electric vehicles (BEV) along with other equipments related to BEVs such as battery chargers and powertrain technology. Tesla Motors came into being existence in San Carla, California, 2003, by the founding members Marc Tarpenning and Martin Eberhard. Soon the company was purchased by Elon Musk by investing $7.6 million with only one aim to manufacture totally battery based electric car that can generate 0% toxic emission and perform efficiently with minimum energy consumption, that is why Tesla Motors is totally different from traditional car manufacturing companies as its cars have state-of-the-art highly integrated technology with eco-sustainability (TeslaMotors.com, 2017).

3. Products Overview of Tesla Motors

Tesla motors initially launched its first electric car “Roadster” in low volume and high price. Soon after getting recognition from the market, Tesla launched two new models “Model S” and “Model X” fall under the category of sports utility vehicle and sports sedan. Recently, the company has launched its latest electric vehicle “Model 3” having most advanced technology with fully auto driving feature and over-the-air upgrades of software that can make this car safer than the actual human driver (Express, 2017).

Tesla Roadster 2.5 S (2011) Image 2: Tesla Model S P90D (2013)

Tesla Model X P90D (2016) Image 4: Tesla Model 3 (2017)

4. Production Facility of Tesla Motors:

The first production facility of Tesla Motors is situated at Fremont, California. This facility was purchased from Toyota Motors which has total area of 370 acre. The company has expanded its tentacles in Tilburg, Netherlands, where it opened its second assembling facility that can supply its products to whole Europe (TeslaMotors.com, 2017). Now the company is planning to launch its first Gigafactory that will have the capacity to produce over 500,000 vehicles and enough battery packs that can meet the demand of its electric cars per year by 2020 (Business insider, 2017a).

5. Organizational Structure of Tesla Motors:

Tesla Motors is based upon the functional organizational structure where the divisions of the company are headed by their respective chief operating officers and vice presidents. However, the other forms of organizational structures are present in bottom line of the management hierarchy. The functional structure is also termed a centralized hierarchical structure where the command and control of the whole company can be monitored from a central point consisting of all departments’ heads (Julian et. al., 2010).

Figure 1: Typical structure of Functional Organization

Tesla Motors consists of three major pillars of management which are as follows (TeslaMotors.com, 2017):

  1. Elon Musk (C.E.O, Chairman of Board, Product Architect).
  2. JB Straubel (Chief Technical Officer).
  3. Deepak Ahuja (Chief Financial Officer).

6. Elon Musk as a Leader:

The Leadership is a characteristic of the person that drives the motivation of the followers in order enhance their capabilities and influence them to work together to achieve the desired goals beneficial for all (Vroom & Jago, 2007). Elon Musk (C.E.O of Tesla Motors) have proved that he is a successful entrepreneur and influential leader who converted his dreams into reality by achieving every single target one by one from the success of PayPal to SolarCity and from Tesla Motors to SpaceX. There are two types of leadership, in which one is transactional leadership and other is transformational leadership. The transactional leadership concentrates on receiving rewards in exchange of the efforts of subordinates. On the other side, the transformational leadership concentrates on intrinsic needs; in other words, going beyond the acquirement of short term goals. The transformational leaders have four features such as inspirational motivation, idealized influence, individualized consideration and intellectual stimulation (Podsakoff et al, 1990). Consequently, Elon Musk has all these four features making him a transformational leader.

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7. Overall Performance and revenue generation of Tesla Motors:

Despite being the most innovative company, Tesla Motors is still trying hard to penetrate in the market in order to change the concept of external stakeholders by avoiding the use of conventional gasoline car and start using new fully electric vehicle. But the market is vast and the product is still in the development phase. By only considering the overall sales of passenger vehicles in 2016, it has been observed that over 74 million vehicles were sold and three major players of automotive industrial segment (e.g. Toyota, Volkswagen and Daimler) earned revenue more than $600 billion. The major producers of cars were China, Japan, Germany and U.S. This shows that the automotive market has much potential but introducing such novel product can be difficult for companies like Tesla. The product lifecycle of Tesla Motors’ new cars are still in the initial level of growth phase but crossed the introduction phase (see figure 2). Within the introductory phase, the company has few or no competitors so that the resources are allocated for the development and marketing of the new product as shown in the valley of death curve (figure 3) but the risk of product failure is high. However in growth stage, the product become commercialized and company start making profit from the launch of its product (Onkvisit & Shaw, 1986).

Figure 2: Product Lifecycle Curve

Figure 3: Valley of Death Curve

However, it is an alarming situation for the management of Tesla Motors that the company has reached at growth phase and still not earning the desired amount of profit. The target of Tesla Motors is to produce 500,000 cars every year by 2020. In that case, the company should take further steps with change management strategies and result-oriented environment that can help in achieving the desired target. The fact is that the production of such amount of vehicles by 2020 per year is not so farfetched according to the size of the market if proper steps are taken. But at this stage, the overall sales of Tesla Motors can contribute only 1% to the total sales of cars in 2016 (Statista, 2016).

Figure 4: Stats of total Cars sales in Billions of Dollars (Statista, 2016)

Being a revolutionary company does not mean that all odds will be in favor of that company, but there are always loopholes and gaps present between the desired outcome and actual outcome. In case of Tesla, the company is currently facing tremendous amount of pressure in terms of sales, revenue and manufacturing. The third quarter earnings report have shown very disappointing figures which forced the C.E.O to review his decisions and implement change management strategies that can help the company to overcome the issues (NBC News, 2017).

8. Supply Chain Analysis

Supply chain analysis helps to see how the industry is growing and what decisions has to be made in improve it’s growth. This analyze helps to check which suppliers would be the best and which prices would be good for the company. According to According to Ellram (1991, pp.13), supply chain management represents a network of firms interacting to deliver a product or service to the end customers.

8.1Gap Analysis on Tesla Motors:

The process or tool “Gap Analysis” is implemented within the organization to explore the variations and gap between the current working conditions of the system and what actually the system should work according to desired plans. The major function of the gap analysis is to first identify the gaps and root causes for the gap and then recommend remedial action in order to fill out the gaps (Anthony, 2012).

The first step of typical gap analysis is to first understand if there is a problem in any segment and the second step to identify what is causing the particular problem. The third step is to do make recommendations or solutions in order to solve the issue.

Figure 5: Typical flow chart of Gap analysis

Gap analysis is used where the performance of current scenario is not meeting the expectations of the company and where the dissatisfaction of the customers are present which enforces the management to mitigate the unhappiness at clients’ end and improve the overall quality of the product (Franklin, 2005).

8.1. Identified Gaps in Tesla Motors:

During the decade, Tesla Motors have faced many challenges as well as positive aspects, such as in 2008, Tesla faced a hard time when Tesla was near to bankruptcy. On the other hand, also become a $30 billion market cap organization. This is considered to be one of the major triumphs in business history that penetration in automotive industry is very difficult but Tesla Motors managed to do so (Business Insider, 2017b). But at present, Tesla motor should do more in order to survive in the market as there are major obstacles present within the company with respect to sales, manufacturing and management. These major obstacles and gaps are mentioned in this report which will be further assessed for better solutions.

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