Strategy notes for sessions 5-6 at LBS (MBA programme) covering the different types of strategic innovation, barriers to entry and competitive positioning of Tesla and the importance of a dedicated innovation strategy.
Strategy: Strategic Innovation
Case:
Tesla Motors
Q1. What is your assessment of Tesla’s entry strategy? What barriers had to be overcome?
Tesla Motors, founded in 2003, entered the automotive industry with several unique
strategies and had to overcome numerous barriers:
Entry Strategy
1. Founding and Initial Capital: Co-founded by Elon Musk and JB Straubel, Tesla was
funded largely by Musk, who became its chairman and head of product design.
Musk's previous success in ventures like Zip2 and PayPal provided the capital for
Tesla's initial phase.
2. First Production Car - Tesla Roadster: Tesla's first production car was the high-end
Tesla Roadster. The company designed and produced the car's powertrain in
California and collaborated with Lotus for its body and chassis, assembled in the U.K.
This marked Tesla's first step as a manufacturer of high-end electric vehicles (EVs).
3. Designing Model S: The Model S was Tesla's first attempt at a mass-produced vehicle,
designed entirely in-house. This car featured an evolved version of the Roadster's
powertrain, with a focus on efficient design and cost-effective battery technology,
offering features like an all-glass panoramic roof.
4. Manufacturing Strategy: Unlike the Roadster, Tesla brought the entire assembly of the
Model S in-house. Despite skepticism due to their lack of experience, Tesla benefited
from the automotive industry crisis by purchasing equipment at a discount and
leveraging the capacity of the NUMMI plant in Fremont, California. This strategy
significantly reduced operational costs.
5. Sales and Service Model: Tesla diverged from traditional dealership models by
establishing company-owned stores with salaried salespeople. This approach was
based on the belief that traditional dealers had a conflict of interest when selling
electric cars. Tesla faced legal challenges in some states due to dealership lobbies
opposing this direct-to-consumer model.
6. Marketing Approach: For the Model S, Tesla emphasized performance, comfort, and
handling, focusing less on the environmental aspects. The marketing highlighted the
cost savings from reduced gas and maintenance expenses. The total cost of
ownership was compared to luxury cars like the BMW 5-series, with higher upfront
costs but lower long-term expenses.
, Barriers Overcome
1. Lack of Industry Experience: None of Tesla's founders or its original engineering team
had prior experience in the car industry. This was a significant challenge, especially in
a complex and established field like automotive manufacturing.
2. Production Delays and Capital Issues: In its early years, Tesla faced product delays
and dwindling capital, leading to Elon Musk taking over as CEO and implementing
cost-cutting measures.
3. Skepticism about Manufacturing Capabilities: There was widespread skepticism about
Tesla's ability to successfully manufacture cars due to their lack of experience in car
design and assembly. However, Tesla managed to turn this around by acquiring and
efficiently using the NUMMI plant.
4. Legal Challenges in Sales Model: Tesla's direct sales model put it at odds with the
established dealership structure and led to legal challenges in several states. This
required Tesla to adapt and find alternative ways to sell its cars, such as online sales in
certain regions.
5. Technical Challenges: Tesla encountered technical issues with its vehicles, such as
problems with handles and windscreen wipers. These were addressed innovatively,
often with wireless software updates, showcasing Tesla's unique approach to car
maintenance and customer service.
Tesla's entry into the automotive industry demonstrates a blend of innovative design,
strategic use of resources, and a willingness to challenge traditional industry norms, all
while navigating and overcoming significant barriers.
Q2. At the time of the case, and compared to major luxury car makers such as BMW, is
Tesla at a competitive advantage or disadvantage? How might that change over time?
At the time of the case, Tesla's position in comparison to major luxury car makers like BMW
was a mix of competitive advantages and disadvantages, with potential changes over time:
Competitive Advantages
1. Innovation and Technology Leadership: Tesla's focus on electric vehicles (EVs)
positioned it as a leader in this segment. Its technological advancements, particularly
in battery technology, set it apart from traditional luxury car manufacturers.
2. Cost Structure: Tesla's cost structure was more favorable compared to traditional car
manufacturers. The electric powertrain had fewer moving parts than internal
combustion engines, leading to lower manufacturing costs once scale was achieved.
3. Brand and Market Perception: Tesla's brand was perceived as innovative and forward-
looking. This perception, coupled with the growing environmental awareness among
consumers, worked in Tesla's favor.
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