Analysis of Tesla Inc.

MANAGERIAL ECONOMICS ABOUT TESLA INC.

Class Name

Professor’s Name

Name of the University

University Location

Date
 Analysis of Tesla Inc. 2

Tesla Inc.

Tesla is the leading manufacturer of electric vehicles in the world, and the demand for its

products is increasing every year. The corporation was founded in 2003, and the founders aimed

at developing innovative electric cars that would be sold in different regions around the globe.

Tesla Inc. capitalized on the emerging need for eco-friendly vehicles, and it is focused on

producing battery-electric cars with zero-emission. Tesla strategically entered the market by

developing a luxurious sports car, Tesla Roadster, and its target market was people with income

levels. It later entered the sedan market, where it took advantage of the technological advantage

to produce luxurious vehicles that it sold at a lower price compared to similar cars produced by

its competitors. Tesla Inc. adopted a unique way of selling its products where it sells its cars

directly to its customers (Mangram, 2012, pp.8). By doing this, the corporation is able to reduce

the retail prices of its products by eliminating margins that could be added by dealers. Regardless

of Tesla being a young company, it has been able to establish itself firmly in the automotive

industry, and its technological prowess in making top-notch vehicles has led to its growth. Also,

the company also manufactures battery packs and powertrain components, and all these products

are offered in different markets around the globe.

Tesla's vehicles are the most preferred electric vehicles in different markets in the US and

several countries in Europe, and this is evident in the sales volumes of these cars. According to

different sources, electric vehicles are the future, and this implies that Tesla has huge

opportunities to expand and to dominate the automobile industry in the future. However, it is

critical to understand that other companies have ventured into manufacturing electric vehicles,

and this means that Tesla is likely to face stiff competition in the future. The progress that Tesla

is making is remarkable because, in the beginning, it had only one retail store, and now it has
 Analysis of Tesla Inc. 3

numerous stores worldwide (Praem, 2015, pp. 20). Tesla has used the proceeds from its previous

sales to manufacturing new models. Tesla's growth increased when it began to mass production

of vehicles, especially Model Y and Model 3. These vehicles were cheaper, and they were

targeted for normal people, and thus they generated high sales volumes in different markets. The

fact is that Tesla is competing with brands that have been in existence for around two centuries,

and this means that the competition is fierce. However, the competitive advantage that Tesla has

is that it has introduced innovative and unique products in the market, creating new markets

where it is the market leader.

Some of Tesla's major vehicle models include Model 3, Model X, Model S, Model Y,

and Roadster. The company is currently producing other models, such as Cybertruck and Tesla

Semi. As stated, the company also produces battery products, solar panels, and glass. The

company has facilities in different regions around the globe, and some of these facilities are in

the US, China, the Netherlands, and Germany. Tesla also has showrooms and stores in North

America, Asia, Europe, South America, Australia, and the Middle East. All operations of this

corporation take place in galleries and stores, but customers purchase Tesla's vehicles from its

website. Therefore, it sells its products directly to its customers, and this strategy has several

benefits because it enables the company to have a direct link and interaction with its customers.

However, in its early years, the corporation was struggling with the high costs of batteries, but it

was able to reduce these costs to affordable levels with time. Vertical integration in Tesla has

allowed it to manufacture the most critical components in-house, and this has enabled it to have

undisrupted production (Moritz, 2015). The main reason why Tesla's consumers are likely to

purchase another vehicle from the company is because of the high-quality standards maintained

in the company, which results in high-quality vehicles.

Tesla's pricing strategy is based on ensuring that brand loyalty is established by making

sure that pricing reflects value. In this case, the company does not offer any room for discounts

and price negotiation. According to Musk, who is one of Tesla's founders, this pricing strategy is

aimed at promoting marketplace integrity because it is critical for all customers to purchase the

same products at the same price. Therefore, maintaining the same price of every product ensures

that the investments of the early adopters are protected, and this ensures that brand loyalty is

established. Value proposition is critical in Tesla, and the adopted pricing strategy ensures that

value proposition in every market segment is known. For vehicles, Tesla uses a premium pricing

strategy where it puts high price points on its cars because of the high value and uniqueness

attributed to these products (Yasinskyi, 2017, pp. 7). In this case, Tesla's management sets its

prices based on the perception that customers will be willing to pay high prices for their

automobiles. For other products such as solar panels, Tesla uses market-oriented pricing, and this

strategy enables the company to sell these products according to the current market prices. These

pricing strategies enable the company to maintain its competitiveness and to make high-profit

margins in industries characterized by rapid change and high competition.

It is a fact that the automobile industry is already a mature industry, and there are major

players who dominate the industry, and Tesla is a young company. However, the electric vehicle

segment is currently in its early stages of development, and Tesla is the global leader, and this

means that it has major opportunities for growth and expansion. As stated, electric cars are the

future, and currently, the government is giving incentives to encourage both customers and

manufacturers to use and make environmentally friendly cars. This presents an opportunity for

Tesla because more people will be inclined to purchase electric vehicles, and they will choose

the most reputable brand in this market segment, which is Tesla. Also, the upsurge of crude oil
 Analysis of Tesla Inc. 5

prices will make people shift to Tesla's electric vehicles, which are more cost-effective

(Moorhead, 2020). Tesla is also experiencing continuous technological advancement, and this

means that it will be able to manufacture better performing vehicles at lower costs which will

lead to lower prices. This will increase Tesla's competitiveness, and it will make more revenues

and high-profit margins. Also, Tesla has the capacity to manufacture its own lithium batteries,

and this presents a huge opportunity for lowering its production costs, which will lead to

economies of scale. The company can also set-up a manufacturing facility in other regions such

as China, which will enable it to supply vehicles locally without paying heavy import duties.

This will strengthen its competitive position in different markets around the globe.

The future of Tesla’s success is not certain because it faces a lot of threats that may

inhibit its growth and expansion in different markets. It is expected that more companies will

enter the electric vehicle market, and this means that Tesla will face fierce competition in the

future, and this may limit its expansion and profitability. The government will also withdraw the

incentives it is offering to manufacturers and customers of electric vehicles once more people

have purchased these vehicles. This will affect the prices of these vehicles, and people may

decline to purchase electric vehicles. Also, the prices of different commodities used by Tesla are

likely to increase, and the company may be inclined to pass these costs to consumers leading to

high prices (Zucchi, 2015). This will reduce the competitiveness of the company, and this will

result in the reduction of demand for these vehicles. High bargaining power of suppliers is

another threat to Tesla because it will lead to high production costs and reduced profit margins.

Also, its selling strategy may be affected because of legal implications that may render the

strategy illegal because many states prohibit the direct selling of vehicles to customers. Also,
 Analysis of Tesla Inc. 6

Tesla's business model is a threat because it limits the number of vehicles produced, and once the

demand for electric cars has soured competitors will take a significant market share.

Factors Influencing Demand

After evaluating the trends of different markets of electric cars around the globe, it is

clear that Tesla's models are dominating these markets. The demand for Tesla vehicles is

increasing every year, and the number of vehicles sold by Tesla is increasing a high rate every

year. In 2019, 14% of all-electric vehicles sold around the globe were Tesla's Model 3. Many

people classify Tesla's vehicles as luxury cars, and according to the current trend, Tesla's models

are starting to compete with dominant brands of luxurious vehicles such as BMW, Jaguar, and

Mercedes-Benz, among others (Mangram, 2012, pp.13). In the US, Tesla was ranked ninth

among the best-selling cars, and this shows how the demand for these cars is increasing in

different markets. Model 3 dominated the premium -class of all midsize and small car market

sales in the US. Of all-electric cars sold in 2019, Tesla gobbled around 78% of these sales. Tesla

also sold a significant number of Model 3 in different countries in Europe, such as the

Netherlands, Portugal, Switzerland, and Norway. In China, Tesla's Model 3 is the most

purchased electric vehicle this year. It is clear that Tesla's brand is dominating different markets

around the globe.

Tesla is one of the most-pricey electric cars, and yet it is the highest seller in different

markets around the globe. There are numerous reasons why the demand for Tesla's vehicle

vehicles is on the rise, and it is critical to evaluate different factors that are influencing this rise.

Currently, more people in developed economies opt vehicles that are environmentally friendly,

and this trend has led to the rise of the demand for Tesla vehicles. More people are buying

electric cars, and Tesla is the most dominant brand in the market with a strong reputation for
 Analysis of Tesla Inc. 7

making cars with zero-emission. People also want a car that is convenient, and Tesla vehicles are

more than convenient because they do not require frequent maintenance, and the costs of

charging are less compared to the cost of gasoline (De Pin, 2015, pp.42). Such conveniences are

making more people purchase Tesla's models. The quality of these vehicles is high, and people

are opting for Tesla vehicles because they are better and advanced compared to other vehicles in

the market. The acceleration time is slightly higher than that of other brands, and Tesla vehicles

have more advanced features that makes more people, especially men, to purchase them.

Around 80% of the customers who purchased Model S were male, and this means that

men prefer Tesla vehicles compared to women. The income of those who purchase a Tesla

vehicle range from $50,000 to $100000 and above. People who buy a Tesla vehicle such as

Model S mostly own other luxurious cars such as BMW, and they have taste and preference for

luxurious cars. However, Model 3 is affordable and young people between the age of 18-44

years are more likely to own this model because it fits their income bracket (Moorhead, 2020).

The prices of Tesla’s vehicles are almost the same as other brands in the same categories but

slightly lower. The demand for Tesla vehicles is expected to increase in the near future, and the

company is expected to increase the number of units produced to meet the increasing demand.

Factors Influencing Supply

Tesla mostly depends on single-source suppliers, and this affects its supply of products

because, in some cases, there are delays because these suppliers fail to deliver in a timely

manner. This affects the availability of different vehicles in the market because the lead time is

prolonged. Also, the capacity of Tesla's production is limited, and this reduces the number of

vehicles produced, and the supply falls short of the demanded units in different markets. Tesla

sells its vehicles directly to its customers, and the vehicles are purchased from its online website.
 Analysis of Tesla Inc. 8

Tesla lacks the production capacity of Lithium batteries, and this affects its production costs and

delivery time, which affects its supply in different markets (Nobile, 2019, pp.12). However,

despite these limitations that affect its supply of products negatively, Tesla has expanded its

distribution shopping venues and marketing strategies. It has retail stores and showrooms in

different regions in the world where customers are able to access different models. The design of

showrooms and retail stores is done in a manner that makes customers feel comfortable and

appreciated. Customers are given a differentiated purchasing experience, and this turns potential

customers into active customers. The prices of substitute vehicles are almost the same as Tesla's,

and this does not significantly affect the way customers order these products.

Better and advanced technology in Tesla has, to a huge extent, increased the supply of its

products because of its high quality. However, as stated, the prices of some of the inputs, such as

Lithium batteries, have affected the supply of these vehicles negatively. The production of

electric cars by competitors has affected supply because customers have a huge range of products

to choose from, decreasing the number of customers who purchase these vehicles (Karamitsios,

2013, pp.10). The supply of Tesla vehicles is expected to increase because it has more capital

from current sales, and it is likely to increase its production capacity. Tesla is also expected to

expand to other markets, and this will also increase the supply of its products. Tesla has plans to

increase its retail stores, and this will increase the supply of its products in different markets

around the globe.

Recommendations

Tesla is a young company in the automobile industry, and it is beginning to develop and

expand in larger markets around the globe. Tesla's sales are beginning to expand due to the mass

production of affordable models. The company relies on its technological prowess to beat its
 Analysis of Tesla Inc. 9

direct and indirect rivals. However, the company is facing high competition even if it is the

market leader of the electric vehicles segment, and it needs to make strategic decisions to

maintain and expand its market share. The company does not have a lot of capital, and this is an

inhibiting factor because it relies on the sale proceeds of its existing models to develop new

models. Tesla also receives incentives from the government, but there is high uncertainty

regarding the accessibility of these incentives in the future. The corporation also has partnered

with other companies such as Toyota, Lotus, and Panasonic, and this means that it does not have

the full capacity to build all components in-house. Even if the company possesses several

competitive advantages, its rivals have existed in the industry for more than one and a half

centuries, and they have loyal customers (Nobile, 2019, 17). This means that Tesla will have to

employ strong strategies in order to increase its market share in this industry. The demand for

some of its models is higher than the supply, and this costs the company a huge portion of its

market share because potential customers will turn to other brands that are available. Lastly, its

sales practice is facing a lot of legal challenges because different states do not allow directs sales

of vehicles to customers. This may present major inconveniences to the company in the future.

The first recommendation that Tesla should implement within the next three to five years

is to expand and improve its multinational presence. Currently, Tesla makes most of its sales in

the US and other nations in Europe and Asia (China). Therefore, if Tesla expands into more

international markets, it will increase its sales volumes and profitability. In this case, it needs to

add new facilities and increase its sales operations in countries that have a high potential of

demanding its vehicles. This will enhance its business growth, and it will have the capacity to

expand its operations and meet the increasing demand. It is also critical for Tesla to continue to

invest in product innovation because its innovative ideas have enabled it to have an established
 Analysis of Tesla Inc. 10

brand (Karamitsios, 2013, pp.13). Therefore, it is important for Tesla to continue producing

superior vehicles because it will be able to increase the demand and sale volumes of its products.

Tesla also needs to diversify its supply chain because it is currently facing supply-side risks, and

they are affecting the company negatively. Tesla should also increase its production capacity and

become a kingpin in the electric vehicle segment in the next five years. This will enable the

corporation to set standards of the industry and force other companies to adopt them. It is also

recommendable for Tesla to make strategic alliances with other high-tech companies such as

Google and Microsoft to develop and integrate artificial intelligence and big data in its vehicles.

The success of Model 3 shows the importance of product differentiation, and it is

recommendable for Tesla to continue entering new markets with new products that meet the

needs of target markets. Tesla should take advantage of its competitive advantage as the market

leader of electric vehicles to enter and dominate different potential markets in developing

countries. Tesla is already ahead of its competitors in the electric vehicle markets, and to

maintain this reputation and increasing sales; it is recommendable for it to invest heavily in

research and development. The only way that Tesla will be able to maintain the high demand for

its vehicles is by ensuring that customers continue to feel the automated capabilities of their

vehicles (Birk, 2015, pp.4). Tesla should establish another mode of selling its products,

especially in the US, where it is having legal problems due to its current selling practice. The

best way to deal with this is by contracting dealers who will sell their vehicles because there is

high uncertainty of its current sales practice to survive in the next five years. Tesla should also

introduce huge facilities to ensure that it produces its products in bulk. This will make it to have

economies of scale because it will enjoy reduced costs of production and high-profit margins.

Tesla should also diversify its range of products because it currently produces electric cars, solar
 Analysis of Tesla Inc. 11

panels, and glass. It is, therefore, critical for the company to introduce other products to increase

its revenues and expand in new markets.

References

Birk, D., 2015. Tesla Motors, Inc. Market Analysis and Definition. GRIN Verlag.

De Pin, F., 2015. How Tesla integrates Shared Value principles with Ecosystem Innovation to

build sustainable competitive advantage (Bachelor's thesis, Università Ca'Foscari

Venezia).

Karamitsios, A., 2013. Open innovation in EVs: A case study of Tesla Motors.

Mangram, M.E., 2012. The globalization of Tesla Motors: a strategic marketing plan

analysis. Journal of Strategic Marketing, 20(4), pp.289-312.

Moorhead, P., 2020. Tesla is years ahead of competitors with no signs of stopping.

Moritz, M., Redlich, T., Krenz, P., Buxbaum-Conradi, S., and Wulfsberg, J.P., 2015, August.

Tesla Motors, Inc.: Pioneer towards a new strategic approach in the automobile industry

along with the open-source movement? In 2015 Portland International Conference on

Management of Engineering and Technology (picmet) (pp. 85-92). IEEE.

Nobile, L., 2019. Hype factor, and DCF evaluation: Tesla Inc. case study.

Praem, N.E., 2015. Valuation of Tesla Motors Inc.

Yasinskyi, V., 2017. Tesla Inc.: Innovation bears efficiency.

Zucchi, K., 2015. What drives consumer demand in Tesla?