The demand for eco-friendly cars is rising, fueled by sustainability policies, advances in technology, and changing consumer needs. Tesla has been a major automaker in this segment, where Ford and GM are the dominant players. It designs, manufactures, and sells compelling electric cars for the mass market. This paper reviews Tesla’s strategy/business model and explains how it differs from that of other automakers.
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Tesla Motors’ uses a generic strategy to compete in the automobile industry. According to Thompson et al., the generic strategies that can give a company competitive advantages include low-cost provider, best-cost provider, broad differentiation, focused differentiation, and focused low-cost provider (56). Tesla uses broad differentiation to compete in its industry. The strategy entails developing unparalleled car models that differentiate Tesla from other automakers. Its car models, e.g., Model S, come with eco-friendly technology, making them attractive to a growing environmentally conscious market.
Tesla’s initial generic strategy was focused differentiation. In 2013, the firm built sleek premium Model S and sports car (Tesla Roadster) based on its pioneering technology to target early adopters in the affluent market (Stringham et al. 46). After gaining brand popularity, Tesla switched to broad differentiation as its competitive strategy. In this case, the firm capitalized on its low production costs and reputation to build cheaper products, e.g., a low-priced Model 3, for the mass market.
The fundamental objectives supporting Tesla’s broad differentiation strategy include R&D to design and produce high-performance products and market development through alliances with players in other countries. Tesla also uses product diversification, i.e., storage batteries like Powerwall 2 for households, to sustain its business growth (Tesla). Its other intensive growth strategy is market penetration through aggressive marketing.
Tesla’s Business Model
Tesla’s unique business model differs from the traditional approaches used by other leading automakers in relation to marketing, servicing, and recharging of electric cars. Most automakers – Ford and GM – sell via franchise dealerships. In contrast, Tesla employs direct sales that involve 159 showrooms in strategic locations in major cities in the U.S., Germany, UK, etc. (Stolze 296). In this way, Tesla owns the distribution chain, and thus, can provide a superior customer experience and support to acquire competitive gains. Further growth in sales is derived from its Tesla online platform.
Tesla’s service is also unique. Its service centers are within the 159 sales locations. The firm has developed a ‘Service Plus’ retail plan, whereby it offers car servicing through its retail centers. In addition, Tesla uses the ‘Tesla Rangers’ (technicians) to provide vehicle servicing on site or in homes. Technicians can also directly access data from Model S and diagnose the problem prior to servicing.
Unlike other automakers, Tesla owns and operates a supercharger network in North America and Europe to help customers can recharge their electric cars on the go (Stolze 298). The stations provide free car charging and their locations reflect the adoption rate of the Tesla cars. This approach will help accelerate the adoption of the Tesla vehicles.
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Rationale for Tesla’s Strategy
Tesla is not only an electric carmaker, but also a global leader in renewable energy solutions. It applies advanced technologies – storage batteries and autopilot systems – in its cars. The business rationale for its current broad differentiation strategy is that the initial differentiation focus allowed Tesla to develop a unique product – electric sports car (Model S) – for the high-end market (Stringham et al. 59).
The high-end customers are more receptive to unique products introduced in the market for the first time. In this way, the company established itself as a unique, premium brand. Later, after becoming a strong brand in its industry and reducing its production costs, Tesla had to switch to broad differentiation strategy to build low-priced cars for the mass market. The growing demand for eco-friendly cars and products also makes a strong business case for Tesla’s broad differentiation strategy.
Tesla has also ventured into the renewable energy sector as part of its broad differentiation strategy. In 2015, the firm released its first “at-home Powerwall and Powerback” energy storage systems – capacity of 210kWh batteries – to target households (Tesla). It also collaborated with Panasonic to establish its Giga factory plant to develop battery cells for its electric cars and homes. The plant has enhanced Tesla’s capacity and lowered the production costs. Therefore, the efficiency gains made through ownership of the battery technology, vertical integration (battery plant), and autopilot systems enable Tesla to pursue a broad differentiation strategy to reap from related economies of scale.
Response to Strengths and Weaknesses
Tesla’s unique strengths lie in its proprietary technologies for electric car designs and batteries, first-mover advantage, distribution network, and brand reputation (Mangram 294). Its primary weaknesses relate to immature market, limited capacity, and low brand recognition in the low-end segment. Unlike established automakers that use franchise dealerships, Tesla sells through its showrooms. This enables the firm to manage its distribution network in an optimal manner.
It has also responded well to the challenge of an immature market by producing low-cost vehicles (Model 3) to stimulate demand and strengthen its brand position in the low-end market. Further, through the vertical integration of its electric car and storage battery segments, Tesla has been able to make optimal use of its proprietary technologies to enhance its capacity to serve the mass market.
Tesla’s overall strategy of broad differentiation has enabled the automaker to offer low-cost products for the mass market. Its business model centers on direct selling, servicing through owned service centers, and free recharging via its supercharger stations.
Mangram, Myles. “The Globalization of Tesla Motors: A Strategic Marketing Plan Analysis.” Journal of Strategic Marketing, vol. 20, no. 4, 2012, pp. 289–312.
Stolze, Eric. “A Billion Dollar Franchise Fee? Tesla Motor’s Battle for Direct Sales: State Dealer Franchise Law and Politics.” Law Journal, vol. 34, no. 3, 2015, pp. 293-309.
Stringham, Edward, et al. “Overcoming Barriers to Entry in an Established Industry: Tesla Motors.” California Management Review, vol. 57, no. 4, 2015, pp. 45-103.
Tesla. Annual Report on Form 10-K for the Year Ended December 31, 2016. Tesla Motor’s, Inc. 2017. Web.
Thompson, Arthur, et al. Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases. McGraw-Hill Education, 2015.