Porter’s Five Forces Application at Tesla
Strategic management is a critical process a leader should undertake to outline an organization’s direction. One of the elements in this area of study is an assessment of the environment within which the company operates. Scholars have designed various tools to achieve the objective, including Porter’s Five Forces, which is used to evaluate the industry and understand the fundamental levels of performance related to the forces that influence the firm (Dobbs, 2014). Although various performance indicators are applicable, Tesla’s management team can apply Porter’s Five Forces to comprehend the competitive factors that affect profitability and devise a strategy to enhance its advantage over its rivals.
Corporate Threats of New Entrants
The electric vehicle industry uses cutting-edge technology that creates considerable barriers to entry. As a result, the competitive force is low due to the small number of automobiles operating in the sector (Kissinger, 2018). Additionally, the technical aspects require huge capital and great venture in research and development. Tesla’s top executives have developed a reputation for networking capability that allows for raising more significant investments than other companies as well as attracting talented engineers. The firm has focused on electric vehicles, which gives it a significant advantage over its rivals, especially those operating in the traditional automotive sector. Additionally, the management team collaborates with other manufacturers, including Toyota, further minimizing the threat of new entrants (Rothaermel, 2015). In fact, only a few companies are capable of competing at the same level as Tesla.
Corporate Threat of Substitutes
Tesla operates in an industry with a relatively common threat of substitutes, including planes, buses, trains, and bicycles, among other modes of transport. The combination of entirely electric high-performance vehicles, such as those manufactured by the company, is not universal. Hence, the industry has other power-driven automobiles, including the Ford Focus Electric and the Nissan Leaf, but they cannot match the performance capability of Tesla’s model. The rivals are not keen on manufacturing entirely-operated electric cars any time soon (Rothaermel, 2015). Affordable and compact cars are not a real threat to Tesla since upper-class environmentally-conscious consumers are the primary target, making the company excel in the market. The products would continue to grow in popularity and enter other segments before real competitors emerge.
Tesla operates in an industry with minimal supplier power. The battery cell is the main component of electric cars. As a result, the company has a considerably high level of control over other producers due to the lack of alternative providers of power batteries (Kissinger, 2018). The management has faced challenges in dealing with short-term supply disruptions. Therefore, Tesla has the plan to invest in in-house battery cell production to further limit supplier power and maximize its profitability (Rothaermel, 2015). The company has successfully developed engine and transmission components, indicating that it can manufacture other parts effectively. The management maintains limited long-term contracts with other manufacturers, making engaging various producers to meet its diverse needs flexible.
Tesla operates in a seller’s market, having carved an exceptional niche. The demand for electric cars has increased, and the company is expected to meet 100,000 deliveries of Model S and Model 3 in 2018 (Yoney, 2018). It has a long wait list for the newest model in the United States and Europe, especially for upper-class consumers. Regardless of the high cost of the car, the firm still experiences high demand (Kissinger, 2018). However, other manufacturers are putting efforts into producing electric vehicles and beating Tesla in the industry. The company would continue to enjoy market dominance since it has operated in the sector longer than its rivals, gaining reputation and customer loyalty.
The car sector is characterized by high competition due to the existence of long-established household names such as Ford, Honda, Toyota, and Daimler-Benz, among other brands. However, Tesla does not face direct rivalry with those companies due to its focus on electric cars, an area that has not been saturated (Rothaermel, 2015). The firm has become famous for its high-performing automobiles, making it a reputable organization to customers demanding environmentally-friendly products. The focus on a single line of manufacture has the benefit of practical research and development, bringing the exact products that customers need to the market. Despite that, the leading competitors could easily bridge the technological gap with more and better resources. The management has focused ahead while considering the decision to build an in-house battery and possibly sell it to other manufacturers.
The management should use the analysis’s outcome to develop the company’s strategic direction. Porter’s Five Forces reveal the areas where critical changes are necessary to make Tesla profitable and competitive. Therefore, the information should lead to immediate decision-making by the company since other manufacturers are making efforts to design electric cars. Accordingly, Tesla should prepare for the future to remain competitive and continue leading in the automotive industry.
Dobbs, M. E. (2014). Guidelines for applying Porter’s five forces framework: A set of industry analysis templates. Competitiveness Review, 24(1), 32-45.
Kissinger, D. (2018). Tesla Inc. Five Forces analysis (Porter’s model) & recommendations. Retrieved from http://panmore.com/tesla-motors-inc-five-forces-analysis-recommendations-porters-model
Rothaermel, F. T. (2015). Strategic management (2nd ed.). New York, NY: McGraw-Hill Education.
Yoney, D. (2018). Are Tesla Model S sales dropping due to Model 3? Retrieved from https://insideevs.com/tesla-model-s-sales-dropping/