Tesla has made Elon Musk the richest person in the world beginning in 2021. The American multinational automotive and clean energy company has been at the forefront of technological developments for electric vehicles and battery energy storage while also expanding further its photovoltaic solutions for residential and commercial applications.
It has also been considered one of the most valuable companies and one of the most valuable automakers in the world with a market capitalization of more than USD 700 billion. Nevertheless, understanding the success of Tesla requires understanding its business strategy that takes into consideration the importance of innovation and efficiency.
Key Principles in the Business Strategy of Tesla
Tesla was founded in 2003 by American engineers and entrepreneurs Martin Eberhard and Marc Tarpenning. Their goal was to become an automaker and also a technology company at the same time. Note that electric vehicles during the early 2000s were expensive. Eberhard and Tarpenning aspired to commercialize these vehicles.
A series A round enabled the company to raise USD 7.5 million in February 2004. Musk entered the company during the same time using a portion of the proceeds he received from the sale of PayPal in 2002. His initial investment an amount of USD 6.5 million. This made him the largest shareholder of Tesla and the chairperson of its board of directors.
The PayPal founder took a more active role beginning in 2005 until he became its chief executive officer and product architect in 2008. Tesla saw the introduction of the Roadster, its first electric sports car, in 2008, and the four-door battery-powered Model S in 2012. It also ventured into energy storage technologies and further into photovoltaic solutions.
Understanding the evolution and expansion of Tesla from a small and aspirational electric vehicle manufacturer to a full-blown tech company involves taking a look at the intentional steps and tactics developed and undertaken by Musk and his executives. The following are the key principles in the business strategy of Tesla:
1. Safeguarding the Supply Chain Through a Vertical Integration Strategy
Remember that electric vehicles were expensive compared to gas-powered vehicles. The costs associated with manufacturing these vehicles were too high due to the lack of a substantial market and undeveloped technological requirements. Part of the business strategy of Tesla is to cover all the grounds needed to manufacture electric vehicles.
Achieving the aforementioned involves a vertical integration strategy. Note that vertical integration is rare for automakers. Most of these companies outsource more than 50 percent of their supplies and other business requirements to third-party providers. Of course, outsourcing has notable advantages but it also has disadvantages and limitations.
Vertical integration addresses the drawbacks of outsourcing and issues related to supply chain management. Tesla does not only build electric vehicles but also produces specific vehicle components. Remember that the company also develops and manufactures battery technologies both for its vehicles and for commercial and residential markets.
Having better control over its supply chain allows Tesla to lessen its dependence on third parties or other providers of production inputs. This translates to a competitive advantage due to a better control over the production schedule and the absence of reliance on the bargaining power of suppliers. It also lowers transaction costs, removes switching costs, and captures profit margins.
2. Maximizing Profitability Through Business and Product Diversification
Aligned with the vertical integration strategy of Tesla is its diversification into several business lines outside the manufacturing of electric vehicles. Tesla Energy is the clean energy subsidiary of Tesla responsible for developing, manufacturing, and marketing energy storage technologies and products and photovoltaic or solar cell solutions.
The clean energy brand was founded in 2015 with the launch of the Tesla Energy brand of energy storage products. and the specific Tesla Powerwall product. It has expanded its capabilities and product offerings to include photovoltaic solutions and systems after the acquisition of SolarCity Corporation in 2016.
It now targets residential, commercial, and industrial segments. Its product offerings include the home energy storage device Powerwall and the large-scale energy storage systems Powerpack and Megapack, as well as the Tesla Solar Roof and Tesla Solar Inverter. It has also developed software for monitoring and controlling its clean energy systems.
Tesla also generates revenues from its after-sales services for its electric vehicles. These include overall vehicle servicing, charging through its Supercharger and Destination Charging networks, software upgrades, wireless connectivity services, and insurance. These services earned a combined revenue of USD 1.47 billion in the first quarter of 2022 alone.
It makes sense for Tesla to create its Tesla Energy subsidiary and capitalize further on its after-sales services for its electric vehicle customers. Expanding its business and product offerings behind electric vehicles allows the company to take full advantage of its vertical integration strategy and maximize its earning potential by capitalizing on its capabilities.
3. Expanding Tesla and its Capabilities Through Strategic Acquisitions
Acquisitions are an important aspect of the specific vertical integration and expansion strategies of Tesla. Its acquisition of solar energy solutions provider SolarCity Corporation in 2016 for about USD 2.6 billion has allowed it to venture further into the clean energy business and expand its specific photovoltaic solutions business.
The company also acquired several entities for its energy storage business. These include the acquisition of Hibar Systems in 2021 and SilLion Company in 2014 for undisclosed amounts, and Maxwell Technologies in 2019 for USD 218 million to obtain relevant technologies and capabilities for designing and producing rechargeable lithium-ion batteries.
Other acquisitions intended to build its manufacturing capabilities include the American stamping die manufacturer Riviera Tool in 2015, the German engineering automation company Grohmann Automation in 2016 for USD 136 million, and the Canadian ATS Automation Tooling Systems in 2020 for an undisclosed amount.
Tesla has two reasons for acquiring other companies. The first is to expand its product lines or offerings through the acquisition of companies and their products or technologies. The second is to cut down costs and lessen its dependence on the bargaining powers of its suppliers by purchasing businesses that feed into its supply chain.
4. Capturing the Market and Customers through an Evolving Marketing Strategy
Must laid down the primary marketing strategy for Tesla in 2006. He was aware that electric vehicles are more expensive than gas-powered vehicles. Hence, to capture the market and appeal to its target customers, the company focused on low-volume but high-priced luxury vehicles to target specific customers that are less sensitive to price,
The initial strategy worked. It allowed the company to generate enough revenues from minimal sales to explore technologies and solutions that would allow it to cut down the cost of rechargeable batteries. Tesla eventually succeeded in bringing down the cost of its electric vehicles, thus enabling high-volume production and cheaper end-use price.
Note that the Roadster was priced at over USD 100,000. There were fewer than 2500 units produced. The Model S and Model X retailed at more affordable price points although they are still positioned as luxury vehicles. More recent models such as the Model 3 and Model Y have lower price points and are produced at high volumes each quarter.
Another important principle in the marketing strategy of Tesla is its refusal to course its sales through auto dealerships. It sells through company-owned stores and its websites. The company also has minimal to zero advertising expenses because it focuses on setting up stores or “galleries” in high-traffic locations such as retail districts or inside malls.
Tesla has also brought in strategies utilized by Apple. Some observers noted that its electric vehicles are the “iPhone on wheels” because it has created a close ecosystem in which it can sell other products or services to Tesla vehicle owners. The fact that the company generates billions of dollars each year from its after-sales business is a testament.
5. Positioning Tesla as a Tech Company Further Through Continuous Innovation
Another critical component of the business strategy of Tesla is its strong technological innovation. Remember that the company has positioned itself as both an automaker and a clean energy company, as well as a technology company. At the heart of its business is innovation. It has even branded itself as an energy-innovation company.
Of course, most companies can claim that they are also technology companies. However, Tesla takes its innovative pursuits seriously. It has its own chief technical officer responsible for spearheading research and development, guiding its team of engineers and scientists, and partaking in overseeing production and other related processes.
The company is at the forefront of developing and introducing technologies relevant to electric vehicles. Furthermore, it has been developing true self-autonomous vehicles through artificial intelligence that involves both hardware and software capabilities. Note that Tesla vehicles have operating systems that are continuously improved by Tesla employees.
It is also worth reiterating the fact that the company also develops and produces other technologies outside of its electric vehicle business. These include battery storage technologies that it has opened to its competitors for licensing. It has also developed solutions for improving charge speed, as well as products relevant to its photovoltaic solutions.