Tesla Accelerating to Market Automobile Firm Case Study Analysis Tesla Case Study Read the Tesla Case Below. analyze the case by answering three or more o

Tesla Accelerating to Market Automobile Firm Case Study Analysis Tesla Case Study

Read the Tesla Case Below. analyze the case by answering three or more of the following questions and indicate which ones you are responding to:

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1.Is there an advantage to being a first mover? What drawbacks are there to pursuing first-mover advantage? Is Tesla pursuing a first-mover advantage with their product launches?

2.Which product, or products, should Tesla focus on? What justifies your recommendation?

3.Is the tight association of Elon Musk to Tesla beneficial or problematic? Under what conditions might you change your assessment?

4.Is Tesla a technology or automobile firm and does the distinction matter?

5.The Tesla Semi is geared toward a very different audience than the rest of Tesla’s lineup. How should Tesla’s marketing strategy differ for the Semi?

Write a Case Study Response (i.e, Report) 2-3 pages long answering these questions in your essay response, and not a summary of the case. Review the rubric. Make sure you cite any references used properly (APA style) and submit your report by wednesday before midnight. Tesla: Accelerating to Market
Matthew Fisher & Mary Beth McCabe
June 2018
James was senior marketing manager at Tesla, Inc. and was asked to present to the board of directors a
reassessment of their marketing strategy. Tesla’s marketing communications strategy largely relied upon
influencers driven by their social media savvy CEO, Elon Musk. However, the position of the brand as a
leader in electric vehicles was being challenged both internally and externally. Internally, the move to
launch a mass-market electric vehicle, with a range sufficient to serve as a primary vehicle, was not
going smoothly. Externally, nearly every major car manufacturer had introduced an electric model or
had announced that it was in the very near future.
James’ responsibilities had largely focused on the strategy formulation and execution of opening
showrooms and service centers. Additionally, James had enjoyed his tenure at Tesla and felt as though
he was a part of Elon Musk’s vision of transforming the transportation and energy industries to a
renewable and sustainable future. James felt that he was part of a movement.
Following several high-level marketing departures, James was summoned to offer a new perspective on
the way forward and an opportunity to shine. While Elon Musk’s personal brand had driven what many
media outlets referred to as a ‘cult-like following,’ the rollout of the Model 3 and the announcement of
the upcoming semi truck seemed to necessitate a pivot in their marketing strategy.
The Tesla Brand Shapes the Consumer
Brands are frequently used as a bridge from the fulfilled promises of the past and present to the future.
However, Tesla’s approach to their brand differs by using their associations to Silicon Valley, high tech
design, and innovation to shape consumer perceptions. Tesla products recruit people to support a
movement larger than just the product. The products are not simply high-performance electric
transportation, but embody values and a lifestyle that technology is capable of solving the most
intractable problems of humankind. According to Musk, “brand is just a perception, and perception will
match reality over time.”1 Musk’s optimism inspires consumers to focus on the seemingly immediate
future. A promise of an electrified, high performance, transportation and laden with high-tech gadgetry,
available now. Furthermore, the next product, whatever that may be, is announced well in advance of
market delivery and drives consumers to begin envisioning owning it. The steady stream of “new”
product announcements supports a view that innovation is synonymous with Elon Musk and delivered
through his the various firms he is involved with (Tesla, SpaceX, The Boring Company, Solar City,
Neuralink, and others). However, innovation and the latest tech gadgetry didn’t come cheap, and Tesla’s
current product line, the Model S and Model X, was aimed at affluent consumers.
Elon Musk
Elon Musk held degrees in both economics and physics from the University of Pennsylvania.2 Musk
then enrolled at Stanford to study for a PhD in energy physics, but dropped out on the second day to
launch ZIP2 Corporation, a company that provided online city guides. ZIP2 Corporation was sold to
Compaq, in 1999, for well over $300 million. Thereafter, he launched X.com, which would go on to
become PayPal. Ebay would acquir PayPal, in 2002, for 1.5 billion.3
Following the acquisition of PayPal, Musk turned his focus to the ventures that would catapult him to
worldwide fame. Musk launched both SpaceX, in 2002, and joined Tesla, in 2003. Solar City was
founded by Musk’s cousins, but was acquired by Tesla in 2006. As Musk’s notoriety grew, so did his
efforts to make his investments become successful.
Elon Musk’s 2013 TEDx talk illuminates his vision for Tesla and the need to transition to renewable
energy.4 The talk is inspirational in that it highlights the electric powertrain vehicles of Tesla, the solar
and battery storage industry, and the many other goals that Elon has set out to achieve, but has little to do
with the success of the car manufacturer itself. He’s creating schools, rockets, and underground
transportation tunnels, in addition to merging his firm with Solar City, one of the largest solar energy
firms in the world.
Musk’s steady stream of product announcements and embracing large scale pioneering projects has
resulted in a base of admirers and an outsized share of voice from the press. Casual observers might be
compelled to think that Musk and Tesla commands a large market share and sizable profits based upon
the amount of news coverage. Illustrative of Musk’s cult-like status is a t-shirt sold by RedBubble.com
that professes, “In Musk We Trust” with Elon’s picture superimposed over the planet Mars (See Figure
2). The t-shirt company offers 52 versions of similar, hero praising, Elon Musk clothing. Several other
sites exist that sell ‘Elon Musk’ products, with many employing various forms of religious idolatry and
employing phrases as though he could, “save us.”
All of the praise surrounding Elon has enabled Tesla, as well as other companies affiliated with Musk, to
benefit from a ‘halo effect.’ When Tesla announces something new, this also boosts Elon’s personal
brand. Similarly, when SpaceX has a successful launch, Elon, and Tesla by association, benefit from the
positive press coverage.
Tesla, Inc. and the NUMMI Plant
Martin Eberhard and Marc Tarpenning founded Tesla, Inc. in 2003 in Palo Alto, California.5 Located in
the heart of Silicon Valley, the firm benefits from association with high-tech and innovative firms of
Northern California. Tesla’s primary factory is located in Fremont, California, purchased during the
depths of the Great Recession for just $42 million, when the facility was valued at $1.3 billion.6 The
Fremont Assembly plant, breaking ground in 1961 and producing autos in 1962, was owned and
operated by General Motors (GM) to manufacture small cars and pickup trucks. However, the factory
was known for turning out defective vehicles, so GM shut the plant in 1982. GM was eager to practice
lean manufacturing techniques and Toyota, who needed to circumvent import quotas, reopened the
Fremont plant as a joint venture under the New United Motor Manufacturing, Inc. (NUMMI) in 1985.7
Under the joint venture, the NUMMI plant production peaked at approximately 430,000 units in 2006.8
The joint venture was disbanded in 2010, when Toyota was able to shift production to facilities with
lower labor costs while GM faced bankruptcy. GM sold the facility that cost more than $1 billion to
construct for a mere $42 million to Tesla, while Toyota took a $50 million dollar stake in common
stock.9
The new Tesla production facility is the site of assembly for the Model S sedan and the Model X sport
utility vehicle. While the NUMMI plant was projected to have a capacity for 500,000 units of annual
production, Musk reported in 2017, that the facility was, “bursting at the seams.”10 As Tesla looks to
expand their product line to include the upcoming Model 3, Mike Ramsey, an analyst with Gartner Inc.
noted:11
1
While Tesla has taken a Silicon Valley approach to everything from product
development timelines to sales, the decision to invest in more real estate brings it closer
to its Detroit rivals.
“If they’re going to be a real automaker like the rest of them, they’re going to have to
spend billions of dollars on new plants,” Ramsey said. “They’re becoming less of a tech
company and more of a manufacturer.”
To build a factory from the ground up, Tesla will have to invest more than $1 billion, in
addition to developing a new vehicle in the next two years. But as long as there is
demand for Tesla vehicles, Ramsey said, Musk will be able to raise that cash from
capital markets.
“There seems to be no appetite for cutting off their capital,” Ramsey said. “As long as it’
s related to growth, they’re not going to have any problem selling it.”
Musk’s vision for Tesla in 2015 was to build a car company capable of producing one million units
annually by 2020.12 However, the vision represented a doubling of his earlier production projections for
2020 and accelerating his previous production goal of 500,000 to 2018.13 Tesla’s production would have
to increase at more than 50% per year to achieve these numbers (see Table 5). While Tesla fans were
excited by Elon’s promises to bring scaled production and lower priced offerings, analysts and investors
were beginning to become wary of such ambitious forecasts. Most notably, while Tesla was projecting
aggressive growth, short-term production was falling short. In 2016, Tesla forecast production numbers
of 80,000, but fell short, delivering just over 76,230.14
Reconciling the Model 3 with Production Hell
Elon Musk had unveiled the Model 3 sedan in July 2016, and began taking $1,000 reservations in 2017.
The Model 3 was a lower priced sedan with margins that would require a significant ramp up in
production in order to be profitable.
High performance electric sedans priced for the affluent was a niche market, but the Model 3 was aimed
at the mass market. An affordable electric vehicle, the Nissan Leaf, had been on the market for several
years, but held a battery range of only 100 miles, so it was viewed as a second vehicle by many or simply
impractical for areas without wide access to charging stations. The Model 3 was Tesla’s move into the
mainstream with a price starting at $35,000 and a battery range of 220 miles.15 If the price and range
was attractive, then mass-market consumers might set aside notions of “range anxiety” and embrace
electrified transportation as their main vehicle. Following Tesla’s announcement of the Model 3, over
455,000 pre-production reservations were collected. 16 Being the first automaker to market by
announcing a mainstream electric vehicle allowed the firm to capture significant earned media coverage,
in addition to early revenues. Following several delays, the first Model 3 vehicles were delivered to
Tesla employees in August 2017. However, the first deliveries to regular customers didn’t begin until
December 2017.17
Musk’s social media engagement and steady pace of new product announcements, whether for Tesla or
any of Musk’s other companies, enabled Tesla to largely forgo traditional marketing. In fact, Tesla did
not engage any paid media to promote the brand or the products. Meanwhile, Musk promised another
model, not yet available for reservation or named, but widely referred to as the Model Y for production
2
in 2019.18 Furthermore, the firm unveiled the Tesla Semi and Roadster 2, both to be available in 2020,
and currently accepting reservations.
However, recent production and quality issues presented a challenge and vulnerability to the brand.
While consumers may be willing to overlook production and quality issues for newer firms and products
that seem to deliver the future today, Tesla was beginning to face some very real present day issues.
The attractiveness of a Tesla auto was rooted in design and performance, and to these aspects the firm
excelled. However, quality of the product was seriously lagging behind its competitors. While the Tesla
Model S enjoyed significant fanfare upon its launch in 2013, with Consumer Reports ranking the car as
the highest scoring vehicle they had ever reviewed, the endorsement was subsequently removed when
persistent quality issues arose.19 Consumers may initially regard a well-designed, high-tech car as
synonymous with quality, but the reality is that the build construction and reliability ranks below rival
firms. Tesla’s 50,000-mile warranty covers many of the issues that arise, but it raises the question of
what impacts out-of-pocket repairs will have on the brand when the warranty expires. Quality and
reliability issues are persistently plaguing the Model X sport utility vehicle, receiving the distinction of ‘
least reliable’ vehicle for 2017.20 Furthermore, the quality issues facing Tesla are not just limited to ‘after
the sale’ problems, but are the source of considerable headaches that complicate their efforts to scale
production. Nine workers, both current and former, noted in November 2017, that, “Quality checks have
routinely revealed defects in more than 90 percent of Model S and Model X vehicles inspected after
assembly. ” 21 Additionally, flawed component parts have further hindered production and drain
profitability as, “one current Tesla engineer estimated that 40 percent of the parts made or received at its
Fremont factory require rework.” 22 Lean manufacturing specialist Matt Girvan, founder of MAG
Consulting, noted:
Even during what is considered ‘launch’ mode, if a company is selling its cars to
customers, it should not be experiencing large amounts of rework. This speaks to an
internal quality issue that is on a magnitude that is not normal for most car
manufacturers.23
As it stood, just 9,766 Model 3 sedans had been assembled by the end of March 2018.24 The first
deliveries of the Model 3 began in August 2017, and Tesla projected production numbers of 5,000 units
per week by December. However, supply bottlenecks, quality defects, and difficulties in automation
held the current pace of production to approximately 800 units per week. Munro & Associates, a firm
that disassembles new vehicles for analysis, notes that, “Mechanically, I don’t have much good to say,”
and, “if it would have come out even decent, they’d have mopped the floor with everybody,” however the
assessment was that the build quality of a Tesla was subpar.25
Market Strategy: The Road Ahead
James left the office to clear his head and develop an objective perspective to guide his plan. Tesla had
benefitted from being perceived as a ‘first mover’ and innovator, but James also noted that Tesla had yet
to make any money. Silicon Valley startups frequently lost money while the business scaled operations,
but a firm that was now in its fifteenth year of operations was hardly a startup. Additionally, James
noted that financial markets had seemed to sour on Tesla, and the stock price was down approximately
20% since peaking in the summer of 2017. Furthermore, James sensed that the cash position of Tesla
was starting to cause concern. As a result, James realized his plan needed focus and may require some
painful tradeoffs.
3
How important was being first? James kept circling back to this question and while he had studied the
descriptive factors that lead to achieving a first mover advantage, he noted that what he really needed
was a predictive tool to help him.
First-Mover Advantage
In 1988, strategic management researchers, Lieberman and Montgomery, wrote that a first-mover
advantage arises from leveraging three sources:26
1. Technological leadership
2. Securing necessary resources
3. Increase switching costs
The leadership in technology delivers an advantage if rivals need to traverse a learning curve before they
can offer up their own alternative offering. The time and resources that laggards expend to copy the
technology gives the leader time to capture market share and scale to deter rivals.
While technological leadership is rooted in the development of what others lack, securing resources is
rooted in exploiting supply chain needs. If certain inputs are limited, then an advantage can be had by
securing supply partnerships that make it difficult for competitors to imitate, even if they have the
technology to do so.
Lastly, switching costs make it more difficult for consumers to abandon the first mover for a competitor
offering. Software that only works with certain hardware increases the switching cost for a consumer
that wishes to switch by increasing the total cost.
The first-mover advantage account offered by Lieberman and Montgomery was used to describe how
some firms found success, but it didn’t account for competitors that quickly entered the market second.
If competitors were nimble, then the first-mover advantage might never materialize sufficiently to
payback the investment in launching a new product.
In 2005, Suarez and Lanzolla offered up a different approach to the first-mover advantage by noting the
intersection of market growth and technology evolution held predictive power as to whether a short-term
or long-term competitive advantage could be had by entering the market first (see Figure 1).27
4
Figure 1: Source – The Combined Effect of Market and Technological Change (Suarez & Lanzolla,
2005)
This market and technology intersection describes the four options for market and tech evolution, and
gives one example of an industry for each of the quadrants, described below.
Calm Waters: A gradual pace of technology change and slow market growth allows little room for the
new entrant followers to differentiate. Innovation is frequently not different enough to allow a foothold
for the new entrant, the second movers, thus the incumbent has the advantage. First movers have a
steady enough position that they can adapt to changes, thereby insulating the firm from competitive
threat. Calm waters are the ideal conditions for start-up firms, due to the fact that they ought to be able
to scale up production to satisfy demand. For example, ‘calm waters’ is descriptive of 3M’s Scotch
Tape, the pace of tech change was slow enough that rivals couldn’t outmaneuver or find a differentiated
niche.
Market Leads, Tech Slow: When the market develops rapidly, firms with significant resources have the
advantage to meet blossoming demand. Small firms are apt to lose their early advantage. For example,
Singer sewing machines were second to market, but used their manufacturing scale to overwhelm the
market first mover.
Tech Leads, Market Slow: Here, nobody is apt to gain a short-term advantage. Firms enter and exit.
Wall Street will become skeptical as well, and is likely to pressure the firm to eliminate underperforming
projects. Only very well capitalized firms, with robust R&D, should enter this market first, but they
must be committed to weathering the storm of lackluster market performance for a long-term durable
advantage to payoff. The rapid pace of technology development in digital cameras was offset by slow
market growth.
Rough Waters: Very difficult to obtain any advantage, short or long-term in nature. Product
obsolescence occurs rapidly and usually new entrants steal the momentum. The personal computing
market of the 1980s illustrates the intense competition that resulted from a rapidly growing market and
rapid technology evolution.
5
Tesla held an advantage in their batteries and electronic components, but much of the rest of their
vehicles were of inferior build quality.28 While Tesla was first to announce the Model 3, GM beat them
to delivering a similar vehicle to the market. GM’s Chevrolet Bolt was priced comparably and delivered
10% greater battery range than the Model 3.29 Additionally, a GM auto could be serviced nearly
anywhere in the country, while Tesla lacked the market penetration to sell or service many markets.
Tesla had no presence in six states, and was very limited in others. For example, Tesla offered just two
service centers for the entire state of Florida, and most independent shops couldn’t service their vehicles.
Additionally, James noted that while media coverage focused on the promises Musk made in announcing
products, Tesla was only delivering Model 3’s configured to cost as much as $78,000.30 Model 3’s priced
at $35,000 were not currently being built and all mention of this price point was removed from the
company web site in July 2018.31 When pressed, Tesla had extended the promised production date of the
$35,000 sedan to, perhaps, early 2019. However, AutoNation CEO, Mike Jackson, accused Tesla of
running a “bait and switch” pricing scheme.32 The…
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