Tesla Inc. Five Forces Analysis
Tesla Inc. Five Forces Analysis
Tesla Inc. is an American international clean energy and electric vehicle firm with its headquarters in Palo Alto, California (Liu et al., 2014). The company thrives in the highly-competitive automotive industry since it probably relies on a suitable management strategy. Since Tesla has various major competitors that entail BMW, Nissan, Toyota, Volkswagen, Ford, General Motors, and Honda, it should adequately address the external forces to gain more resilience and competitive advantage (Cheong, Song & Hu, 2016). Accordingly, this Five Forces analysis (Michael Porter’s Five Forces analysis) would reveal and elaborate on the intensities of external forces facing Tesla and influencing the automotive industry landscape.
The threat of New Entrants/ New Players
Tesla Inc. faces a weak threat of new players primarily due to the presence of many barriers to entry. One, the high cost of establishing an automobile firm and manufacturing vehicles makes acts as a barrier to new companies. Interested organizations must invest heavily to participate in the manufacture and sale of vehicles. Specifically, new firms use lots of financial, human, and technological resources to establish their businesses. Besides, the manufacture of electric cars like those made by Tesla demand further research studies, knowledge, skills, and advanced technologies (Wilberforce et al., 2017). Also, Tesla has a great competitive advantage because of the popularity of its brands. For instance, Tesla’s Elon Musk is very popular across the globe (Mair, 2016). Accordingly, limited organizations would afford to raise the high costs of developing and marketing new brands. Also, Tesla enjoys rising economies of scale because it is well-established. Thus, new firms would be disadvantaged since they must surpass the production threshold to realize increasing economies of scale. Hence, new players could be discouraged because they may not realize profits from the business during their first few years of operations because of the high-costs of production. Therefore, Tesla’s strategic management would exhibit little concern over new entrants.
The Threat of Substitute Products/ Substitution
Substitutes in the energy and automotive industries impact significantly on Tesla. Specifically, a low cost of switching from one product to the other exists. Some clients could opt to use alternative products such as public transport and the other conventional vehicles rather than Tesla’s electric ones. Fortunately, a moderate presence of substitute products allows Tesla to maintain a reasonable market share (Hoelzlhammer, 2018). Moreover, clients would not attain maximum satisfaction from the available substitutes for certain reasons that could entail versatility. For instance, public transport vehicles are less versatile compared with private ones. Consequently, Tesla has the upper hand in developing products that meet or exceed the expectation of customers. Therefore, the threat of substitute products serves as a moderate strategic concern for Tesla.
Bargaining Power of Suppliers
Tesla experiences a moderate bargaining power of suppliers due to a mixture of strong and weak forces. First, the suppliers have minimal influence on the automobile industry’s environment since the majority of them are medium-sized. Besides, most of the suppliers engage in the moderate supply of certain products, thus exhibiting limited effects on Tesla. Since Tesla, and many other automobile firms, rely on more than one supplier, it tends to be difficult for such suppliers to gain adequate bargaining powers for increasing prices of their products. That is, Tesla would handle every supplier separately, depending on what they offer. Similarly, Tesla could choose and transact with suppliers that offer suitable raw materials at reasonable prices. Moreover, the capacity for Tesla’s suppliers to unite and control the distribution and sale of their products is limited. For instance, some suppliers engage in direct transactions with Tesla, while others rely on third parties to sell their products to Tesla. Accordingly, some suppliers, especially those with direct transactions with Tesla, could pose a significant threat of forging forward integration. Luckily, those that use third parties have low forward integration because they have limited control over their products’ distribution and sale (Hunold & Schlütter, 2017). Subsequently, the bargaining power of suppliers serves as a medium-level concern for Tesla’s strategic management.
Bargaining Power of Customers
Tesla experiences moderate bargaining power of buyers due to a combination of weak and strong forces. One, Tesla, and other automotive companies experience low influences from clients because each customer tends to acquire a limited number of vehicles. Contact between the firm and its clients could end once a client has purchased their products, thus discouraging undesired influence on the company’s future operations. Besides, customers exert low forces on Tesla due to the relatively few numbers of manufacturers of electric cars (Tuan et al., 2018). However, a strong force against Tesla and other automobile and energy firms exists following the low cost of switching products. The customers’ ease of switching products could result in Tesla’s loss of significant market share and revenues. Fortunately, the limited availability of suitable alternative products, especially in the automotive industry, lessens the effects of the force. For instance, public transport may be unavailable or inconvenient in some areas, thus encouraging the use of private vehicles. Additionally, a strong force from a few clients who need high quality, efficient, and sustainable vehicles at reasonable prices face Tesla. Collectively, the force of the bargaining power of customers appears to be of moderate concern to Tesla’s strategic management.
Tesla experiences a strong competitive rivalry from other multinational automobile firms. First, customers could purchase their vehicles from competitor firms due to the low switching costs. Clients could opt to transact with firms that offer alternative or similar vehicles at lower prices. Moreover, virtually every automotive company exhibits high levels of innovation to manufacture quality products (Fathali, 2016). As such, more automobile firms would manufacture quality vehicles that meet the specific demands of clients. Besides, virtually every automobile firm relies on aggressive marketing programs to promote and sell their products in different niche markets. Luckily, the limited number of firms in the automobile industry, especially those manufacturing electric vehicles, lessens the effects of competition in the industry. Even so, Tesla’s solar energy systems and energy storage products face increasing competition from the global market where international firms such as LG Chem, Siemens, and AES Energy operate. Overall, the strong competitive rivalry is Tesla’s strategic management main concern.
Conclusion and Recommendations
Porter’s Five Forces analysis provides invaluable details about Tesla’s external environment and the automobile industry environment. Precisely, the study elaborates factors in the external business environment that impact on the profitability of the automotive industry. Specifically, Tesla is facing intense competitive rivalry, moderate bargaining powers of customers and suppliers, and a weak threat of new entrants. Accordingly, Tesla should prioritize on the strong force of competition while developing its strategic plans. As such, Tesla should strive to gain more competitive advantage by employing suitable strategies such as substantial investment in research and innovation to facilitate diversification of products and generation of products of exceptional quality. Moreover, the firm should review and revise its sales and marketing strategies to ensure that it remains more aggressive to convince and persuade potential customers to purchase its products. Even so, Tesla should not ignore but rather consider the other four forces and act as per their intensities to ensure that it continues enjoying high and increasing profits.
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