Running head: TESLA INTERNAL ANALYSIS 1

Tesla Internal Analysis

Name

Institution
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Executive Summary

Tesla Inc is the pioneer company in electric car industry in the United States and the CEO is

revered for his bravery in venturing in a completely new industry. The company enjoys an

intimate relationship with its customers and this is a critical capability since it does not spend

money on reseller agreements and traditional car distribution networks. The manufacturing

activities at Tesla are intense on the use of technology like machine learning and robotics while

its supply chain relies on the build-on-order model that reduces wastage. As the leader in the

manufacturing of electric car batteries, Tesla has the potential to make sales by selling batteries

to peer players in the market. On the flipside, the company has burned a lot of cash in the last

decade and investors have grown impatient regarding the company’s potential for profitability.

Also, recent outburst from the CEO have endangered the company’s brand and there is a need to

avoid similar incidences in future.

Key words: Tesla, electric cars, innovation

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Contents
Executive Summary.............................................................................................................2
1 Introduction and Company Overview...........................................................................4
2 Tesla Inc. Internal Analysis...........................................................................................5
2.1 Value Chain Analysis.............................................................................................5
2.1.1 The framework and strategy............................................................................5
2.1.2 Inbound logistics..............................................................................................6
2.1.3 Operations........................................................................................................6
2.1.4 Outbound logistics...........................................................................................7
2.1.5 Marketing and sales.........................................................................................7
2.1.6 After-sale service.............................................................................................8
2.2 VRIO Framework..................................................................................................8
2.2.1 Focus on Tesla cashflows................................................................................9
3 Conclusion: Summary of Tesla’s strengths and weaknesses......................................10
3.1 Strengths...............................................................................................................10
3.2 Weaknesses..........................................................................................................11
4 References...................................................................................................................12
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Tesla Inc. Internal Analysis

1 Introduction and Company Overview

Tesla Inc. is one of the most iconic companies of the 21st century and the CEO, Elon

Musk, enjoys a celebrity status (albeit divisive) similar to the one enjoyed by former Apple Inc.

CEO, Steve Jobs (Denning, 2019). In the recent past, however, the company has come under

pressure from bookmakers, investors and analysts for its failure to turn positive net income. On

September 28th, the Wall Street Journal published an article with the title; “Tesla Gets Less with

More: Heard on the Street” to poke interest on the company’s expected revenue decline for the

first time since 2012 (Grant, 2019). According to the article, Tesla’s third-quarter results (2019)

will decline from $6.8 billion to $6.4 billion despite car sales increasing from 95,000 to 98,000

compared to the same quarter last year. The article attributes the decline to a weaker product mix

(as Tesla’s cheap Model 3 contributes 80% of revenues compared to 66% last year) and

dwindling tax rebates for buyers of Tesla products (Grant, 2019). The turn of events might have

several effects on the company. First, declining revenues may elicit more fear from investors

amid reports that the company has low cash balances that may last it for ten months only.

Second, the news come at the backdrop of a share plunge that saw Tesla stock go below the $200

mark. Lastly, Investors are keen on the trajectory of the company as other car manufacturers

catch up on electric cars. The following analysis will dig into Tesla’s internal operations to

identify its strengths and weaknesses using two tools; VRIN and Value Chain Analysis.
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Figure 1: Tesla Stock (Yahoo Finance, 2019).

2 Tesla Inc. Internal Analysis

2.1 Value Chain Analysis

2.1.1 The framework and strategy

The value chain analysis is a strategic analysis tool that can be used to explore the

internal activities for an organization and identify most valuable processes or resources. The tool

can help managers and business executives to know the firm’s competitive advantages as well as

sources of competitive disadvantage. The value chain model can also help businesses to pick

their most appropriate business model depending on whether they want to outcompete their

rivals from a cost or differentiation strategy. The model is made up of primary and support

activities where primary activities refer to the processes that affect the production process,

directly. Primary activities include in-bound logistics, operations, outbound logistics, marketing

& sales and after-sale service. On the other hand, support activities include firm infrastructure,

technology, human capital and procurement.

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A look at Tesla’s business model reveals that the company’s main focus is to beat

competitors by using a differentiation strategy. In that regard, Tesla looks at innovation as a key

competency that can influence the way the market responds to its products. Part of the

company’s global status comes from the fact that it was the first company that was fully

dedicated to making cars that do not use gasoline as a source of power. Instead, the company is

dedicated to making clean cars that help in conserving the environment, especially considering

that most modern consumers are conscious of the nature of products as well as processes used in

making them.

2.1.2 Inbound logistics

For inbound logistics, Tesla’s business model requires a constant supply of raw materials

needed o make cars and the company has invested in a logistics center in Livermore that spans to

an area of 1.3 million feet, squared. In the storage facility, the company keeps raw materials like

steel, aluminum and cobalt. The company also purchases tons of materials from dozens of

suppliers on a build-on-order basis, an approach that helps in cutting costs associated with

storage. While the model of ordering raw materials when they are needed is good, it may pose

challenges with timeliness of delivery especially when suppliers have to make sudden

adjustments to their manufacturing volumes. The delay could be blamed for some of the Tesla

failures in the recent past like missing on targets to deliver vehicles to customers or missing

revenue targets.

2.1.3 Operations

As an innovation-intensive company, Tesla uses a lot of modern technologies in its

assembly plants in the United States and Europe. In its main manufacturing plant at Fremont, the

company had integrated technologies like machine learning, artificial intelligence, language
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processing and decision-making into robotics to make work flow easier (Markman, 2018). The

company does not just look at automation as a modern manufacturing buzz work; rather, it uses

intelligent automation to pick on processes that would best be done by a robot and the ones that

require human input. While the company has received criticism for favoring artificial

intelligence and forsaking “human sociology”, it also has been lauded for being at the front line

of reducing the human limitations in the factories. Recently, Tesla announced an investment into

a mega battery manufacturing factory in Shanghai in a move that aims at creating an industry

standard where other entrants into the electric car industry will purchase the batteries from Tesla.

2.1.4 Outbound logistics

In an industry that depends on car dealers and resellers, Tesla’s outbound logistics offer

great savings to customers since the company depends on pre-sales. A pre-sale (or pre-order

from customer perspective) is a situation where people pay deposits to purchase products that are

expected to be made in future. By using this model, Tesla can identify its customers in advance

and focus on improving internal processes without getting worried whether its products will

appease customers. Also, instead of using complex networks to deliver the cars to customers,

Tesla can use its direct link to the customer to deliver the cars at customer doorsteps, ensuring

that the customer does not pay extra costs for non-core processes in the making and distribution

of the cars.

2.1.5 Marketing and sales

Just like outbound logistics, Tesla’s marketing and sales function uses a radical approach

that does not depend on agencies or huge advertising costs. As noted earlier, the company enjoys

great reputation among modern consumers who are conscious about conservation and narratives

around climate change. Also, the celebrity status of Elon Musk, the CEO, ensures that there is a
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direct communication between consumers, potential consumers and the company regarding

future product. The company has enjoyed success in this front as it does not spend a single cent

on advertising, option to rely on word of mouth to make car sales.

2.1.6 After-sale service

The experimental nature of Tesla’s business model creates high expectations among

consumers as they not only expect products that have groundbreaking efficiency, but also ones

that have cutting-edge designs. In the recent past, the gap between expectations and reality has

sparked complaints from customers (Fiegerman, 2018). In 2018, Tesla was forced to recall

123,000 Mosel S cars that had a problem with the steering component (Wang, 2018). On one

hand, this recall can be viewed as a good customer service commitment by the company as it is

ready to right its wrongs. From a different viewpoint, it can be viewed as a failure by the

company to make good its promise for a great product.

2.2 VRIO Framework

The VRIO framework seeks to establish the competitive strength for a company by

putting its resources over the prisms of value, rarity, imitability and organization. The value

aspect of the model looks at how the operations of an organization create value or benefits for

customers while rarity refers to how the resources that a company controls can be accessed by

competitors. An organization would consider its resources or capabilities competitively

advantageous if they cannot be imitated by competitors while the possession of efficient

management systems and structures shapes the way the company can readily compete with

rivals.

Table 1 presents a summary of Tesla’s capabilities under the VRIO framework.

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Table 1: VRIO Analysis Tesla Inc.

Resource/Capability VRI Strategic Implication Needs for Priorit Resources Needed

O Improvement y
(H, M,
L)
Batteries VRI The bedrock of electric car No. H Giga factories
industry and potential source of
competitive advantage.
Direct sales VRO Saves on marketing and sales No H Continued direct link
costs. with customers by
encouraging eWOM
Can reduce costs by up to 10% as and direct
many companies spend 8%-10% communication
of gross revenues on marketing between management
and sales and employees.
Financial strength VIO Financial war chest is needed for Yes. Making H More sales, efficient
success in electric car markets. tough supply chains, cost
decisions that restructure.
Better when cash flows are can save costs
generated internally. and spur Tesla
to profitability.
Technology VRIO While companies can obtain a Yes. Tesla H Focus on excellent
competitive advantage from needs to play a talent, modern
technology, new innovations and market leader workplace culture and
discoveries often become the norm in electric car engineering
after a few years (Boudette, 2019). technology experimentation.
Reputation VO A negative reputation (caused by Yes. Better Professional PR team.
irresponsible decision-making) can communicatio
hurt the chances of growth for a n of business PR strategy
company (Higgins, 2018). activities to
customers.

2.2.1 Focus on Tesla cashflows

Tesla is often referred as a cash burning company and many people still wonder how the

company has managed to stay afloat for so long without creating consistently positive cash

flows. Figure 2 shows the company’s cash flows since 2010. The figure shows how Tesla has

relied on borrowings to sustain its business with the only time when the company made positive

cash flows being 2014 and 2017 (Griswold, 2019). The fear among many investors is that the
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company may not manage to make positive returns with the rate at which it burns capital. On the

positive side, the continued confidence from investors shows that Tesla invests its cash into

assets that may provide prolonged growth in future.

Figure 2: Tesla cash flows (Hull & Recht, 2018).

3 Conclusion: Summary of Tesla’s strengths and weaknesses

3.1 Strengths

From the above analysis, it is apparent that Tesla Inc. enjoys a few competitive

advantages in the electric car market. First, as the pioneer company in the industry, Tesla has a

strong connection with its customers and it relies on word of mouth to sell its cars. Second, the

company makes huge savings on advertising and marketing, a factor that enables it to sell its cars

at competitive prices. The focus on pace-setting for the electric car industry has seen Tesla invest

heavily in battery manufacturing as it looks to cash in on the expanding electric car industry by

selling batteries to peers. Lastly, the culture at Tesla promotes innovation and this capability has
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seen the company come up with cutting -edge technologies like robotics, machine learning and

industrial AI that make it manufacturing and other operations more efficient.

3.2 Weaknesses

In the recent past, Tesla has had alterations with the public especially in 2018 when the

CEO, Elon Musk, tweeted that the company would be better off as a private entity. The car

recalls, also, did not do good for the reputation of the company because the legion of followers

who place preorders were disillusioned by the probability of having to deal with potential

technical problems in future.

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4 References

Boudette, N. (2019, June 10). Tesla, Facing Setbacks and Skeptics, Tries to Get Back on Course.

Retrieved October 2, 2019, from https://www.nytimes.com/2019/06/10/business/tesla-

elon-musk-outlook.html

Denning, L. (2019). Tesla's ‘Game of Thrones’ Approach Leaves Its Audience Cold.

Retrieved October 2, 2019, from https://www.bloomberg.com/opinion/articles/2019-05-

20/tesla-stock-below-200-as-game-of-thrones-approach-falters

Fiegerman, S. (2018, July 17). Tech analyst tells Elon Musk: Time to take a break from Twitter.

Retrieved October 2, 2019, from https://money.cnn.com/2018/07/17/technology/elon-

musk-twitter-investors/index.html

Grant, C. (2019, September 28). Tesla Gets Less with More: Heard on the Street.

Retrieved October 2, 2019, from https://www.wsj.com/articles/tesla-gets-less-with-more-

heard-on-the-street-11569668400

Griswold, A. (2019, April 24). Tesla is burning cash at a frightening pace. Retrieved October 2,

2019, from https://qz.com/1604080/tesla-is-losing-money-at-a-frightening-pace/

Higgins, T. (2018, July 16). Elon Musk's Twitter Rant Against Cave Rescuer Extreme Even for

Him. Retrieved October 2, 2019, from https://www.wsj.com/articles/tesla-ceo-elon-

musk-lashes-out-at-critic-in-latest-twitter-outburst-1531752197
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Hull, D., & Recht, H. (2018, March). Tesla Doesn’t Burn Fuel, It Burns Cash.

Retrieved October 2, 2019, from https://www.bloomberg.com/graphics/2018-tesla-burns-

cash/

Markman, J. (2018, February 28). Tesla Revolution Is the Factory, Not the Car.

Retrieved October 2, 2019, from

https://www.forbes.com/sites/jonmarkman/2018/02/28/tesla-revolution-is-the-factory-

not-the-car/#15fa16917547

Wang, C. (2018, March 29). Tesla voluntarily recalls 123,000 Model S cars over faulty steering

component. Retrieved October 2, 2019, from https://www.cnbc.com/2018/03/29/tesla-

recalls-123000-model-s-cars-over-potential-power-steering-failure-reports.html

Yahoo Finance. (2019). Yahoo Finance Tesla Quote. Retrieved October 2, 2019, from

https://finance.yahoo.com/quote