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Team Case Selection – Toyota
Your report should follow this structure (yet models should not be presented, only to be in
appendix):
1. What is the key strategic issue? (2 points)
•
with justification
2. How do you see your organization’s situation today? (10 points)
• describe the organization
• external/internal analysis
• any other aspect relevant to your definition of the key strategic issue
3. What should be done to address the issue? (6 points)
• provide three (3) alternatives
• with justification
4. Recommendation (2 points)
• your preferred alternative
state why your preferred alternative is superior to the other two
Generally, the best candidates for study are publicly traded corporations, public institutions, and
non-profit organizations with publicly available data, however I will accept local small companies
that are facing strategic challenges due to Covid-19. In this case it would be expected that you
speak directly with the company for information and provide them with your document upon
completion.
Our team has decided to study Toyota for the semester-long Team Case Project. Recent
media coverage regarding Toyota suggests the car manufacturer has been impacted negatively
by supply chain disruptions, which recently led to a decline in production at a manufacturing
facility in San Antonio, Texas. Also, Toyota recently made headlines for the rollout of the firm’s
first electric vehicle, bZ4x; however, the vehicle is only available in select states and at a
minimum quantity. The firm has also dealt with high volumes are vehicle recalls in recent
months, causing more problems for the vehicle manufacturer. Our team will focus on supply
chain shortages from the past several years have continued to impact the firm from the quantity
and quality of vehicles sold. It will be important to determine how Toyota’s recent setbacks have
impacted the firm’s reputation, customer satisfaction, employment satisfaction, and financials of
the firm.
To study Toyota, our team will rely heavily on reliable sources such as news articles and
public financial data, which can be found on sites such as Morningstar. Understanding the firms
decision making in relation to the firms financial health will be important to determine the
company’s outlook.
Plan of Action
1. Determine 2 to 3 keys issues Toyota has continued to face in the past several years
a. Collect information on those key issues (news articles, set up meetings with
former or current employees, etc)
2. Determine how competitors have also been impacted by similar issues at Toyota
a. How have competitors been addressing issues
3. Determine a strategy Toyota could implement to combat the issues addressed
4. How would Toyota implement the suggested solutions
5. Impact of solution implementation
Strategic Management
Jeff Dyer
Third Edition
Chapter 6
Corporate Strategy
Corporate vs. Business Unit Strategy
Business Unit Strategy- The search for competitive advantage within a single industry,
market, or line of business.
Corporate Strategy- The search for value and competitive advantages through
participation in several different industries and markets.
Vertical Integration- Movement into adjacent markets by a firm along its own value
chain. Movement in the direction of raw materials is backward integration. Movement in
the direction of sales, service, or warranty operations is forward
integration.
Horizontal Diversification- The movement into an adjacent, or unrelated, market that is
not along a firm’s own value chain.
Copyright ©2020 John Wiley & Sons, Inc.
2
Moving along the value chain
• Vertical
• Backward integration
• Forward integration
• Horizontal
• Diversification
• Alliances
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3
Two Ways To Diversify
1. Go at it alone—Greenfield
2. Buy your way in—Acquisition
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4
Levels of Diversification
Single Business- A firm earning more than 95 percent of the revenues from a single line of business.
Dominant Vertical Business- A firm that earns more than 70 percent of its revenue from its main line
of business and the rest from businesses located along
the value chain.
Dominant Business- A firm that earns more than 70 percent of revenue from its main line of business
and the remainder from other lines across different value
chains.
Related-constrained Diversification- A firm that earns less than 70 percent of its revenue from its
main line of business and its other lines of business share product, technological, and distribution
linkages with the main business.
Related-linked Diversification- A firm that operates in related markets, but fewer linkages exist
between the new and existing markets than the elements create
separately.
Unrelated Diversified Firm- Competes in product categories and markets with few, if any, links
between them.
Copyright ©2020 John Wiley & Sons, Inc.
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Adding value
• Why is this business more valuable because we own it
than if it operated alone?
• Do the combined businesses to deliver greater value
and utility to new or existing customers than the firm
could without being diversified?
• Do the combined businesses reduce the firm’s overall
cost of producing goods or services.
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Adding Value Through Diversification
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The Eight S’s
Employing Slack- Unused resource capacity.
Synergy- Action between different elements of a system that creates more value
together than the elements create separately.
Shared Knowledge- Collective knowledge that can be distributed throughout the
organization to create value.
Similar Business Model- when dominant logic exists, the conceptualization of a
business that applies to seemingly unrelated product markets or industries
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The Eight S’s
Spreading Capital – using an internal capital market, the movement of funds,
talent, or knowledge from unit to unit directed by the leaders of the firm.
Providing Stepping Stones- Works to enhance capabilities through “long leaps”
and “short leaps”, and “short hops”
Stopping Competitors – in markets with fierce competition and evenly matched
competitors, strategic managers might choose to diversify to forestall a competitor from
entering
Staying ahead of technology – diversification can reduce overall costs of
technology development
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Destroying Value Through Diversification
Hubris
Sunk-Cost
Fallacy
Imitation
Poor
Governance
and Incentives
Poor
Management
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The BCG Matrix
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BCG Matrix
Cash cows- High share but low growth and can generate large cash flows that can
be used to fund growth businesses.
Stars- combine high share with high growth and smart managers should invest
heavily in these units to maintain or improve their position over time.
Question marks -represent a conundrum for management because they require
significant investment and effective strategic management if they are to become
stars.
Dogs- low share and low growth and add little profitability to a company’s overall
portfolio businesses
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Entry mode
Greenfield
• Existing resources move
from existing to new
business
Acquisition
• Resources don’t move
from existing to new
business
• Brand
• Customer knowledge
• Technology overlap
• No brand equity
• New customers
• New technology
• Speed not essential
• Speed essential
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Acquisition Integration Strategies
Bury— A takeover – completely absorb target
Build— A merger – a new organization, best of breed
Blend—loose coupling, leverage target
Bolt-on—two companies, one owner
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General Integration Strategies
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Chapter 7
Jeff Dyer
Third Edition
Vertical Integration and Outsourcing
Strategic Management
What is Vertical Integration?
Outsourcing- The process where a firm
contracts out a business process or
activity to an external supplier.
Vertical Integration (or insourcing)Bringing business processes or activities
previously conducted by outside
companies in-house.
Value Chain- The sequence of all
activities that are performed by a firm to
turn raw materials into the finished
product that is sold to a buyer.
Copyright ©2020 John Wiley & Sons, Inc.
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Reasons for Vertical Integration 3C’s
CAPABILITIES
Conduct the activity internally when the firm has or can develop better
capabilities to perform it than other firms.
COORDINATION
Conduct the activity internally when effective coordination and tight
integration of the activity with other firm activities provides product
performance (differentiation) advantages.
CONTROL
Conduct the activity internally to control scarce inputs or specialized
assets
Copyright ©2020 John Wiley & Sons, Inc.
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Dangers of Vertical Integration
2F’s
Loss of Flexibility to move the activity to a
company or supplier that offers lower costs or
better technology.
Loss of Focus associated with managing too
many activities may result in poor performance
because the firm can’t do them all well.
Copyright ©2020 John Wiley & Sons, Inc.
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Advantages of Outsourcing
Flexibility to move to new suppliers that offer lower costs or better
technology.
Lower costs or better performance from a company that
specializes in that activity and benefits from economies of scale.
Focus: Keeps the firm focused on a narrower set of core
competencies
Minimizes capital investment
Copyright ©2020 John Wiley & Sons, Inc.
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Dangers of Outsourcing
Loss of Control/Power. May give an outside
supplier undue power or control if the
outsourced activity is critical to success.
Loss of Capabilities. May set in motion the loss
of capabilities that may be important for the
future—and create a future competitor.
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Outsourcing can set in motion the loss of
capabilities—and creation of a competitor
Dell v. AsusTek
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How to Prevent a Subcontractor from
Becoming a Competitor
Build barriers to imitation
Don’t allow subcontractor to know everything about making a
product
Do a joint venture or take a minority equity stake
Use multiple subcontractors
Copyright ©2020 John Wiley & Sons, Inc.
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Jeff Dyer
Third Edition
Chapter 8
Strategic Alliances
Strategic Management
What is a Strategic Alliance?
Strategic Alliance- A cooperative arrangement in which two or more firms combine their
resources and capabilities to create new value, sometimes referred to as a
partnership.
Make
Buy
Ally
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Strategic Inputs
1. Inputs that can differentiate your product in the minds of
customers.
2. Inputs that influence your brand or reputation.
3. High value inputs or activities that make up a high percentage
of your total costs.
4. Inputs or activities that require significant coordination in order
to achieve the desired fit, quality, or performance.
Copyright ©2020 John Wiley & Sons, Inc.
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Figure 8.1
Types of Strategic Alliances
Contractual Alliance
Equity Alliance
Joint Venture
Cooperation between firms
is managed directly through
contracts
Cooperative contracts are
supplemented by equity
investments by one or both
partners into the other
partner.
Cooperating firms combine
resources to form an
independent firm in which
they invest.
Preferred when:
•
•
•
Interdependence
between partners is
low (e.g., pooled)
It is easy to measure
the contributions of
each partner and write
it in a contract.
•
Interdependence between
firms is moderate (e.g.,
sequential).
Firms bring knowledge or
difficult to measure
contributions but each can
perform their roles
separately.
Copyright ©2020 John Wiley & Sons, Inc.
•
•
Interdependence
between firms is very high
(e.g., reciprocal).
Firms bring knowledge or
difficult-to-measure
contributions that must
be combined into a single
organization to coordinate
effectively.
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Vertical and Horizontal Alliances
Vertical Alliance- An alliance between firms who are
positioned at different stages along the value chain,
such as a supplier and a buyer.
Horizontal Alliance- An alliance between two firms
that do not have a supplier-buyer relationship and
are typically positioned at a common stage of the
value chain.
Copyright ©2020 John Wiley & Sons, Inc.
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Ways To Create Value In Alliances
1
Combine Unique Resources
2
Pool Similar Resources
3
Create New Alliance-specific Resources
4
Lower Transaction Costs (Build Trust)
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Combine Unique Resources
• Pixar Animation Studios
• Walt Disney Pictures
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Ways To Create Value In Alliances
1
Combine Unique Resources
2
Pool Similar Resources
3
Create New Alliance-specific Resources
4
Lower Transaction Costs (Build Trust)
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Pool Similar Resources
• Disney
• OLC Group
• Tokyo Disneyland
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Disney-Oriental Land Co. Alliance
Disney Resources &
Capabilities
• Disney brand
• Disney theme park rides
and designs
• Park management
processes
• Ongoing stream of Disney
characters from movies
• Disney consumer products
to sell at the park
OLC Resources &
Capabilities
• Land for the park near
Tokyo
• Financial resources to
build the park
• Relationships with
construction firms to build
the park
• Knowledge of Japanese
culture and how to
manage Japanese workers
Copyright ©2020 John Wiley & Sons, Inc.
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Ways To Create Value In Alliances
1
Combine Unique Resources
2
Pool Similar Resources
3
Create New Alliance-specific Resources
4
Lower Transaction Costs (Build Trust)
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Types of Alliance-Specific Resources
(dedicated assets) that create value
Dedicated Site Investments (locating plants in close
proximity to economize on inventory, transportation,
coordination costs).
Dedicated Physical/Process Investments (making
relation-specific capital investments in machinery, tools,
processes)
Dedicated Human Investments (dedicating personnel to
develop relation-specific know-how and improve
communication/ coordination)
Copyright ©2020 John Wiley & Sons, Inc.
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Ways To Create Value In Alliances
1
Combine Unique Resources
2
Pool Similar Resources
3
Create New Alliance-specific Resources
4
Lower Transaction Costs (Build Trust)
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The Paradox of Trust
• Alliances are fraught with risk even though they look
good on paper
• Things often don’t work out because of the issue of
trust and equity
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BUILDING TRUST
• Formal Contractual Mechanisms
• long term contracts (position as an “expectations” document),
• stock ownership (align incentives),
• collateral bonds (signal credible long-term commitment).
• Processes and Information
• Trust is often built on company processes and information, not people.
A partner is trustworthy if its interorganizational processes are
understandable, predictable and stable and information flows freely.
• Informal Mechanisms (Affect) such as:
• Reputation (give gifts as a signal of benevolence),
• Personal trust
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THE VALUE OF TRUST
• Increases learning (greater information sharing)
• Increases customized investments (willingness to
risk tailored investments)
• Increases speed to quickly respond to market
changes
• Lowers transaction costs
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Example:
THE COST OF MISTRUST
50%
47%
Negotiating price/contract
Assigning blame for problems
40%
Percent of faceto-face contact
time with suppliers
28%
30%
21%
21%
Chrysler
Toyota
20%
10%
0%
GM
Ford
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Strategic Management
Jeff Dyer
Third Edition
Chapter 4
Cost Advantage
Two Generic Strategies
Cost
advantage
Differentiation
advantage
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The Cost Advantage Strategy
A firm reduces its prices below all of its competitors,
thereby allowing it to gain market share.
Cost Advantage
Strategy
A firm may choose the same price as competitors, which
results in greater profits rather than higher market share.
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Sources of Cost Advantage: Economies
of Scale
1 Economies of Scale and Scope
2
Learning and Experience Effects
3
Lower Costs due to Proprietary Knowledge
4
Lower Input Costs
5
Different Business Model
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Economies of Scale
Economies of scale- A reduction in costs per unit due to increases in
efficiency of production as the number of goods being produced increases.
Economies of scale arise from four principle sources:
Ability to Spread
Fixed Costs of
Production
Ability to Spread
Nonproduction
Costs
Specialization of
Equipment
Specialization of
Tasks & People
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Cost per Unit of Production
Figure 4.1: Economies of Scale
Economies of Scale
Minimum Efficient Scale Dis-economies of
Scale
(optimal quantity)
Low
Q
1
Volume of Production
Copyright ©2020 John Wiley & Sons, Inc.
High
6
Economies of Scale
Scale Curve- A graphic representation of the relationship between cost per unit
and scale (volume) of production in a given time period.
Minimum Efficient Scale- The smallest level of output (unit volume) that a plant
or firm can produce to minimize its long run average costs. In a graphic
presentation of output/unit volume (x-axis) and cost per unit (y-axis), it is the
output level where costs per unit flatten and no longer continue going down
with increased output.
Diseconomies of Scale- An increase in marginal cost when output is increased.
Economies of Scope- The average total cost of production decreases as a result
of increasing the number of different goods produced.
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Economies of Scope
Economies of Scope- The average total cost of production decreases as a result
of increasing the number of different goods produced.
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Disadvantages of Scale
Firms with scale have an advantage in economic upturns
but may be at a disadvantage during downturns.
They have more difficulty spreading fixed costs when demand
declines.
Firms with heavy fixed assets can respond to this concern by:
Shifting more of their cost structure from
fixed cost to variable cost (e.g.,
outsourcing to make costs more variable;
using labor instead of capital).
Diversifying into businesses that are
countercyclical
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Sources of Cost Advantage: Learning and
Experience Effects
1
Economies of Scale
2
Learning and Experience Effects
3
Lower Costs due to Proprietary Knowledge
4
Lower Input Costs
5
Different Business Model
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Learning and Experience
Learning Curve- The concept that labor costs per unit decrease with
increases in volume due to learning.
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Sources of Cost Advantage: Lower Costs
due to Proprietary Knowledge
1 Economies of Scale
2
Learning and Experience Effects
3
Lower Costs due to Proprietary Knowledge
4
Lower Input Costs
5
Different Business Model
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Proprietary Knowledge
Proprietary Knowledge- Information that is
not public and that is viewed as the property of
the holder.
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Sources of Cost Advantage: Lower Input
Costs
1 Economies of Scale
2
Learning and Experience Effects
3
Lower Costs due to Proprietary Knowledge
4
Lower Input Costs
5
Different Business Model
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Lower Input Costs
Inputs- Resources such as people, raw materials, energy, information, or
financing that are put into a system to obtain a desired output.
There are four primary ways that companies achieve cost advantage through
lower-cost inputs:
Exercising Strong
Bargaining Power
Over Suppliers
Cooperating
Especially Well
With Suppliers
Getting Inputs
From Low-Cost
Locations
Arranging Better
Access to Inputs
than Other
Companies Have
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Sources of Cost Advantage: Different
Business Model
1 Economies of Scale
2
Learning and Experience Effects
3
Lower Costs due to Proprietary Knowledge
4
Lower Input Costs
5
Different Business Model
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Business Model and Value Chain
Business Model- The plan and set of activities implemented by
a company to offer unique value and generate revenue and
make a profit from operations.
Value Chain- The sequence of all activities that are performed
by a firm to turn raw materials into the finished product that is
sold to a buyer.
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Different Business Model
Reconfigure the Value Chain
Eliminate Activities/Steps in the Value
Chain
Example: Eliminate Retail Stores
i.e., Netflix and Amazon.com
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Sources of Cost Advantage
Economies of
Scale
Greater unit volume allows firms to have
lower costs by spreading fixed costs across
more units.
Learning and
Experience
Effects
Greater cumulative volume drives cost
differences due to greater learning and
experience within companies with more
cumulative experience in production.
Proprietary
Knowledge
Cost advantage from developing
proprietary knowledge in the production
of their product or service
Lower Input
Costs
Some companies may have lower input
costs than others due to bargaining
power, superior cooperation, low cost
locations.
Different
Business Model
Eliminating steps in the value chain or
using a different activity set may offer
lower costs
Copyright ©2020 John Wiley & Sons, Inc.
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Chapter 5
Jeff Dyer
Third Edition
Differentiation Advantage
Strategic Management
Differentiation
o Differentiation means providing unique value that allows a
firm to command a premium price for its product or service
(relies on the consumers’ willingness to pay more).
o There are four primary ways that companies differentiate
their products from competitors:
Superior Product
Features
Better Reliability
Convenience
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Brand/Image
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Differentiation Advantages
• Differentiation strategies require a deeper
understanding of the customer’s needs than costbased strategies.
• This typically requires:
• Customer segmentation analysis
• Consumption chain analysis
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Customer Segmentation
Definition
Customer segmentation is the analysis of customer needs to identify
groups of buyers who are similar in the way they discriminate among
(and value) product or service offerings
Objective
To identify a profit and market share maximizing strategy for
each need-based customer segment to minimize:
– Over-satisfying some customer segment needs (excess
financial cost)
– Under-satisfying others (market share cost)
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Segmentation Opportunities
Different Ways to Segment the Market
Product Attributes
Features of the
product
Customer
Demographics
Attributes of the
customer
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Job-to-be Done
Attributes of the
circumstance and job
to be done
24
Identify key “jobs-to-be-done” through
customer empathy and discovery
“People don’t want to buy
a quarter-inch drill…
…they want a quarter-inch hole!”
– Theodore Levitt
Solution
Job
What?
Why?
Discovery
Empathy
Get the job done by providing a
solution that offers greater simplicity,
convenience, cost, and access
Understand customer functional,
social, and emotional
jobs-to-be-done
Look for jobs that are important, unmet, and widely-held
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Mapping the Consumption Chain
How do consumers become aware of a need for your product/service?
How do consumers find your offering?
How do consumers make their final selections (priority of attributes)
How do consumers order and purchase your product?
How is your product/service delivered?
How is your product/service paid for?
How is your product stored/moved around?
What is your product really used for (what “job” does the consumer want done)?
What do consumers need help with when they use the product?
How is your product repaired, service, disposed of?
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Differentiation
• The essence of differentiation is to make choices that are
different from those of rivals.
• Successful differentiators create offerings that “delight”
customers (“that was awesome”).
• Delight and awesome products come from doing
something unexpected or surprising….perceptively better
than competitive offerings. (NPS helps here)
• Differences in positioning are necessary but not sufficient
to create a competitive advantage
• Sustainable advantage depends on barriers to imitation
Copyright ©2020 John Wiley & Sons, Inc.
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Barriers to Entry
B
A
C
•
•
•
•
Barriers to Imitation
A
D
5%
ROA
7%
ROA
B
C
15%
ROA
Barriers to entry shared by all industry competitors; barriers to imitation are firmspecific.
Barriers to imitation are created by firms through developing unique resources and
capabilities.
Barriers to imitation are primarily of two types:
– Barriers to cost imitation (e.g., access to inputs, scale, experience)
– Barriers to product/service imitation and accessing customers (e.g., features,
patents, brands, convenience, etc.)
Barriers to imitation also act as barriers to entry.
Copyright ©2020 John Wiley & Sons, Inc.
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Strategic Management
Jeff Dyer
Third Edition
Chapter 3
Internal Analysis: Strengths, Weaknesses, and
Competitive Advantage
The Value Chain
Value Chain- A visual description of the steps required to turn raw materials into finished
products and/or services. The value chain also describes key functions of
the firm linked to each stage and functions that span the productive activities of the firm.
Copyright ©2020 John Wiley & Sons, Inc.
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Activities Drive Value
Apple
•
•
•
•
Technology Development – Ipad, Iphone
Procurement – Gorilla Glass
Operations – Apple Stores
Marketing and Sales – Logo
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3
The Resource-Based View
Resources – what a firm employs to create value and competitive advantage
Physical
Resources
Financial
Resources
Human
Resources
Intangible
Resources
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4
The Resource-Based View
Capabilities- The procedures, processes, and routines firms employ in their activities.
• Operating Capabilities- Procedures, processes, or routines for delivering value to
customers, employees, suppliers, or investors.
• Dynamic Capabilities- Procedures, processes, and routines that continuously expand
existing resources or improve operating capabilities.
Priorities- A firm’s values and rankings of what is most important.
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5
VRIO Model
• Valuable
• Rare
• Inimitability
• Organized to exploit
profits
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6
Reducing Imitation
• Path Dependency
• Tacit Knowledge
• Causal Ambiguity
• Complexity
• Network Effects
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VRIO
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Assessing Competitive Advantage with VRIO
Competitive Failure- When firms that can’t create value for their stakeholders
don’t survive.
Competitive Parity- When a company survives but has no real competitive
advantage over rivals.
Sustained Competitive Advantage- When firms combine the legal elements,
intellectual property rights, administrative elements, and cultural elements,
allowing them to capture high profits that come from their valuable, rare, and
inimitable resources, capabilities, or priorities.
Copyright ©2020 John Wiley & Sons, Inc.
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VRIO leads to competitive advantage: DeBeers in 1990s
VRIN
Needed for
SCA*?
Link to strategy
Valuable
Yes
Culture. Symbolic value.
Hardest known substance can cut
through anything.
Rare
Yes
Geologically not too rare. Cartel buys up
and stockpiles all supplies to create
rarity.
Inimitability
Yes
Diamonds are very difficult to artificially
create (nature has helped here)
Organized to
exploit profits
Yes
Create it with processes, systems
(marketing)
*SCA: sustainable competitive advantage
Competitive Advantage Pyramid
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Gathering Data for Company Diamond
Analysis
Data to complete a diamond profile come from a number of sources. You can use three
main types of data:
Archival Data
Interviews
Observations
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Tesla Company Report
Tables of Contents:
Executive Summary ………………………………………………………………… Page 3
Issue Statement ………………………………………………………………………. Page 4
Company Background……………………………………………………………….. Page 4
External Analysis ……………………………………………………………………. Page 6
Internal Analysis ……………………………………………………………………………………………. Page 7
Financial Analysis…………………………………………………………………… Page 9
2
Value Chain Analysis…………………………………………………………………Page 9
SWOT Analysis………………………………………………………………………Page 10
Porter’s 5 Forces Analysis…………………………………………………………….Page 11
Recommendations ……………………………………………………………………Page 13
Action and Implementation Plan ……………………………………………………..Page 14
References……………………………………………………………………………..Page 16
Appendix………………………………………………………………………………Page 18
3
Executive Summary
In 2018, Tesla Motors got approval from Shanghai’s mayor to acquire a plot of land that was
intended to be used for an automobile manufacturing factory (Cheng, 2018). In 2019, the
Giga Shanghai factory opened. This factory allowed Tesla to become the first wholly foreignowned car company to have an automobile factory in China (Cheng, 2018). China currently
has the largest automobile market in the world in terms of both supply and demand (Carlier,
2021). Tesla’s mission is to accelerate the world’s transition to sustainable energy (Tesla,
2019). To achieve their company mission; entering into the Chinese market was the right step
for Tesla.
The issue Tesla is facing in the Chinese market is the level of competition. The
strategies that Tesla uses in North America where they have a dominant brand position won’t
work the same in the Chinese market. Decreasing the price of their electric vehicles in China
has the potential to weaken Tesla’s brand premium in the long run by making the brand seem
less of a luxury car and more of a standard car.
To combat these issues, we have come up with three alternative solutions for Tesla to
carry their brand premium into the Chinese market without lowering their prices.
1. Building their brand premium in the Chinese market by starting a strategic alliance
with a Chinese-owned company and gaining brand recognition.
2. Leveraging new technology to make them stand out before other well-known
companies such as Toyota joins the electric vehicle market in China.
3. Start franchise dealerships, instead of only offering direct online sales.
4
In the short run, we believe a stronger media presence and trade shows with CEO Elon
Musk will help gain brand recognition in the Chinese market. In the long run, Tesla needs to
increase the number of available stores and charging stations to form an ongoing relationship
with their Chinese customers to create a brand premium.
Issue Statement
China is the world’s largest automobile market, competition is high for new entrants. The
average price for an electric vehicle in China before subsidies and incentives is below
$30,000 (Â¥180,000) (Levin, 2020). When Tesla first started producing cars in China, they
priced their standard range Model 3 at ¥355,800. As Tesla started to get competitive in the
Chinese market with a 15% share in the market (Brown, 2021); they lowered the price of the
Model 3 to as low as ¥249,900 in 2020 after government subsidies (Levin, 2020). Tesla had
stated that the decrease in the Model 3 prices was because of new cobalt-free batteries, which
decreased the price of manufacturing the vehicles; but with over 300 automobile makers in
China, the price decrease by Tesla could have been a strategic strategy to better compete in
the Chinese market. Although this pricing strategy has its perks, it has the potential to weaken
Tesla’s brand premium in the long run by making the brand seem less of a luxury car and
more of a standard car.
Company Background
Tesla Motors was founded in 2003 by Martin Eberhard and Marc Tarpenning. The company
was named after Nikola Tesla who was notoriously well known for his inventions involving
electricity (Gregersen, 2021). In 2004 Elon Musk became a large shareholder in the company
with a $6.5 million investment that made him the chairman of Tesla (Locke, 2020). The
5
initial goal of Tesla was to produce an automobile manufacturing company that focused on
technology. This technology ranged from batteries to computing, and to their drive units.
Between 2005 and 2009 Tesla started working on their first vehicle: the Roadster. The
goal for Tesla for the Roadster was to get people on board with their brand and to generate
capital for the company. Tesla was successful in generating capital through private
investments. In 2008, when Tesla began the production of the Roadster it only sold 2,450 cars
(Lambert, 2021). Although the Roadster wasn’t successful in terms of performance and
technology, it was very successful in helping Tesla change people’s minds about electric
vehicles as well as helping launch several more electric vehicle programs (Lambert, 2021).
This success showed that Tesla had the potential to be successful in the automotive industry.
In 2010, Tesla purchased a factory from Toyota in California where they produced the
Model S, which was Tesla’s first luxury vehicle (Davis, 2010). The Model S won multiple
awards and became one of the best-selling electric cars in the world during 2015-2016. Tesla
is known for its innovative and sustainable technology; they put emphasis on their vehicle
computing systems. Tesla has always kept up with modern technology and keeps generating
strategic ideas to keep evolving and growing their brand with technology. In 2014, Tesla
introduced an autopilot system in their vehicles as an optional feature (Lambert, 2021).
Tesla began shifting their focus to a different market instead of focusing mainly on
electric vehicles. In 2016, Tesla purchased a company called SolarCity (Hawkins, 2016); this
company focused on solar solutions for regular consumers and industrial customers. This
company was renamed Tesla Energy and is now a subsidiary of Tesla Inc. After Tesla
acquired SolarCity, they began focusing on battery storage for grid use; they also released the
Powerwall, which was a battery pack that was intended to be used in consumers homes.
These were often desirable for consumers who had solar panels installed on their homes.
6
2017 was a big year for Tesla as they began to roll out their new relatively affordable
EV, known as the Model 3. It is widely known that the release of the Model 3 was a gamble
for Elon Musk, the Model 3 is what determined the future for the company as if it were to
fail, Tesla would have most likely gone under. The Model 3 was a disaster at launch, there
were many issues with the build quality, mainly the paint and panel gaps (Acoba, 2018), it
took a while for Tesla to sort things out, and even until this day they still have issues with
panel gaps. Overall, the Model 3 was a success and is the number one selling plug-in electric
vehicle on the market in North America.
External Analysis
Some of the external factors affecting Tesla include economic, political, and legal factors.
Economical factors that affect Tesla in China would be that China has a focus on electric
vehicles to try to reduce carbon emissions. Some parts of China even allow electric car
owners to drive on certain days that fuel cars would not be allowed. As Tesla expands into
China, it helps the economy by creating jobs. The Shanghai factory currently employs 2000
people and as it grows so does job creation (Hill, 2021). Since Tesla has decreased the prices
of the Model 3, it allows for more potential buyers and for Tesla to become more attractive
and relevant in the Chinese market.
On the other hand, external political factors can contribute to the growth of the
automobile industry. Growth opportunities can be done by government subsidies for electric
car owners that help boost and sustain the electric car industry. The government has also put
regulations on emissions and safety standards in China. As well as subsidies, electric vehicle
owners stand a chance of getting a specific tax credit for using an electric car because they
depend on electricity and not fuels.
7
Regarding the main legal aspects of Tesla, lawsuits would be on top. Tesla faces multiple
lawsuit situations with their autopilot option in their vehicles. They also need to maintain and
recognize the regulations that the Chinese government has put in place for electric vehicles.
Tesla will also need permits and permission from the government to be able to place their
charging stations in and around China.
As previously mentioned, Tesla is the first foreign-owned company to have operations in
China. This can be seen as a disadvantage to Tesla as the potential Chinese consumers might
see the company as lower quality or not up to their standards. Tesla is widely known in the
world (Especially North America) for having some of the top luxurious electric cars that
consumers are willing to pay a premium price for.
Tesla is also known for its advancements in technology and sustainability. Recently,
Tesla has changed the batteries in their vehicles to allow them to be more cost-efficient and
better for the environment. “Technology is what gives a Tesla its edge, from the self-driving
features to the top-of-the-line infotainment system” (Cox, 2020). Tesla states that the main
priority of theirs is to increase the amount of renewable energy in their factories to try and cut
down on their carbon footprint. They have also stated that the factory in China was built to
run on energy from renewable sources (Tesla, 2019).
Internal Analysis
Some of the internal factors considered in this analysis include valuable, rare, inimitable, and
non-substitutable. Research indicates that 23% of the customers contribute to more than 84%
of the sales revenue in Tesla Company. The reason for lowering prices is to attract more
buyers and make more sales. Price lowering might result in a lower margin for Tesla. This is
because the company cannot stand the pressure from its competitors. Pratap (2020) claims
Tesla’s brand image is one of the main differentiators for the brand that sets it apart from the
8
world’s crowd of automobile brands. Innovation, customer experience, product range, and
market position are rare, inimitable, and organised.
Through the table of VRIN (see appendix), shows that the brand image of Tesla is one of
its core sources of competitive advantage, which is also the main difference with other
automobile companies. In the automobile industry, there are numerous competitors, including
companies that manufacture electronic vehicles and hybrids. Tesla gained a distinct image by
creating its innovation and sustainability.
Technological innovation is an important source of competitive advantage for Tesla in the
automobile industry. Companies must conduct more research to develop the innovation to
help companies gain more market share and position. Through the table, we could learn that
Tesla has a competitive advantage in its innovation of products since Tesla has developed the
latest technologies that other competitors do not have such as the self-driving onboard and the
large touchscreen that allows drivers to manage their own driving experience more
conveniently. Moreover, Tesla also invented mobile applications that would allow drivers to
control their vehicles completely. These technological innovations have helped Tesla gain a
major competitive advantage and it would make other competitors hard to catch up in a short
period.
For the product range that Tesla provided, the analysis of VRIN demonstrated that it has
a temporary advantage. Unlike other automobile companies such as Volkswagen and BMW,
Tesla has some limitations in its product range that only offer electric cars. The launch of
Model 3 helped Tesla gain a lot of market share in the beginning and Tesla developed the
series of X, Y, and Z to help Tesla increase its penetration in the middle and upper class. Due
to its innovations and design, Tesla has a temporary competitive advantage in the product
9
range since other companies are manufacturing similar cars to catch up to Tesl while they
have more product range.
Furthermore, Tesla has a large competitive advantage in its market position in the
automobile industry, especially in the EV market. By focusing mainly on the innovation and
the quality of its products, Tesla achieved a strong market position and its competitive
advantage is still climbing due to several factors. Firstly, the need for electric cars will
increase as time goes because of the consideration in vehicle exhaust. Moreover, Tesla
currently accounts for the most market share in the EVs market and it stands for good quality
and reputation in the EVs market. As a result, Tesla’s market position could be the largest
competitive advantage according to the VRIN framework.
Financial Analysis
Based on the Tesla Financial Summary that was published on the website of Tesla, Tesla has
reached a total revenue of $31,536 million in 2020, which is approximately five times greater
than the revenue in 2016 at $7,000 million (TESLA, 2020). While the operating expense only
doubled from 2,267 to 4,636 between 2016 to 2020. Surprisingly we have found that the
operating margin was negative in 2016, at -9.5%. Tesla retained the negative operating
margin until 2020, in which the operating margin has jumped 6.3% while the operating
margin was only at -0.3% in the previous year. To look more closely, Tesla has experienced
continuous growth in terms of its 2020 quarterly revenue. The revenue has increased
dramatically within 2020, with the total quarter revenues boosted from $5,985 billion in 2020
Quarter 1 to $10,744 billion in Quarter 4. Tesla has also released the financial summary for
2021 quarter 3, and Tesla received $13,757 billion that is about $3,000 billion more
10
compared to the revenue in 2020 Q4 (TESLA, 2021). We can conclude that Tesla has faced
little negative impact from panic from the economic perspective.
Nio, one of the biggest competitors to Tesla, received much lower revenue in the third
quarter of 2021 compared to Tesla. In which Tesla reached $13,757 billion-dollar revenue,
while Nio only achieved $1,521.8 million (NIO, 2021). Nio is experiencing a rapid growth
rate, with 116.6% total revenue from the third quarter of 2020. In short, Tesla has a
competitive advantage from the financial analysis, in which it received a higher revenue
compared to the competitors and maintained a high growth rate from the last five years.
Value Chain Analysis
For the primary activities, we will analyse from inbound logistic, operations, outbound
logistic, marketing and sales, and services components. First is inbound logistics, Tesla stored
raw materials for building vehicles in the warehouses, including steel, solar panels, and so on.
Secondly, Tesla markets their product from automotive and energy generations to win the
competitive advantages, which the automotive and energy generations are the key
competencies for Tesla to win the customers. For outbound logistics, Tesla mainly ships
electric vehicles from their warehouse to their stores of final customers. Fourthly, Tesla
rarely markets their products and spends less money on advertising compared to the
competitors. This is also known as Tesla’s “Zero Dollar Marketing” strategies (Dudovskiy,
2021). Lastly, Tesla has improved their customer services in the past few years and increased
its investment in dealing with after-sale services.
In terms of the support activities, Tesla builds up the systematic infrastructure to monitor
the quality, planning, financial, and other related activities. For human resources, Tesla also
maintained and hired skilled workers to innovate high-tech development by establishing a
suitable workers’ retention strategy. Similar to technology development, Tesla has achieved
11
their competitive advantage through its unique technology. To maintain the long-term
competitive advantage, Tesla needs to invest more money in technology innovation. Lastly,
Tesla needs to ensure collaboration and communication with suppliers to improve its
procurement process.
Swot Analysis
Strengths:
One of the qualities of Tesla in the Chinese market is how Tesla is a fully technology-based
and eco-friendly vehicle for its targeted consumers. It’s got a good brand loyalty that
promises a perfect driving experience and satisfaction. Tesla also has the greatest market
sales in electric vehicles in North America. Elon Musk, the CEO of Tesla has made the
greatest influence on its brand image both across China and North America.
Weaknesses:
In terms of the weakness, Tesla’s biggest problems are its weak sales in China due to its bad
publicity arising from customers complaining about the Tesla electric cars. They were unable
to meet their demand mainly due to supply issues in China currently due to China exporting
much of its marketing to other places. Elen Musk has also announced their shortages in the
supply of batteries, this shortage of batteries is a huge weakness to Tesla because it’s slowing
down the production and manufacturing of Tesla.
Opportunities:
Tesla’s advancement in its technology and innovations is what’s putting Tesla in one of the
best-selling electric vehicles in the Chinese market. Tesla has also got a unique brand
recognition which is a great opportunity for Tesla. Around the world, Tesla has become a
well-known brand mainly due to Tesla’s intent to make its own batteries. The move can be a
12
big game-changer as it will help the company to increase its manufacturing rate while
reducing its production cost. Currently, Panasonic is their primary supplier of batteries.
Threats:
Tesla’s biggest threat is its competition from alternative vehicles. Although Tesla appears to
be the most popular manufacturing company creating the most high-end vehicles, other
companies may begin producing vehicles for the same consumer group, putting Tesla in a
complicated competition spot.
Tesla’s Porter Five Force Analysis
Revelry among competitors: (High)
The rivalry among competitors for Tesla motors we believe is high. Due to Tesla’s market
position in the electric vehicle industries it has to compete both with electric and non electric
car manufacturers. Although there may be more companies investing in electrical cars, this
could cause Tesla to become highly competitive. And since Tesla already has a high level of
competitors such as BMW, Porsch, Audi and Mercedes, all of which have strong brand image
in the current market, therefore it is a must for Tesla to ensure good innovations in their
vehicles are followed to effectively compete in the market. In the Chinese EV Market, Tesla
faces competition with China’s SGMW company which is a joint venture between General
Motors, SAIC Motors, and Liuzhou Wuling Motors. SGMW made up 15% of the EV sales in
China during 2020 while Tesla made up 11% (Mobility Foresights, 2020) Other companies
that are not included are Nio and Xpeng.
Power of Suppliers: (Low-Medium)
13
Tesla has low-medium dependency on its suppliers as they work as original equipment
manufacturers. This lowers the supplier’s bargaining power. Although Tesla manufactures the
basic electronic components of their EV motor, battery and charger, other parts are supplied
from the USA, Asia and Europe (Maverick, 2021). Key suppliers that Tesla currently deals
with are: AGC Automotive (windshields), Brembo (brakes), and Fisher Dynamics
(Powerseats) (Maverick, 2021). Another notable company that Tesla has recently started
relations with is Panasonic (Maverick, 2021).
Power of Buyers: Low
Currently, Tesla’s vehicles are considered to be expensive for average consumers. The target
customer segment for the company is wealthy individuals and households who are looking
for an environmentally friendly product. Tesla’s customers are a direct factor that determines
the company’s sales revenues.The bargaining power of buyers for Tesla we would say now is
relatively low especially in the Chinese market.
Threat of New Entrance: (Medium)
The rise of new electric vehicles startups will make it harder for Tesla to expand its foothold
in the Chinese market. New entrants include Qihoo 360 Security Technologies (2021),
Tencent (2020), and Zhigi (2020) (Cheng, 2021).Even the technology company Huawei,
most known for mobile phones, has entered into the electric vehicle market by investments
and partnerships (Cheng, 2021). Compared to other electric vehicles companies in China;
Tesla has already started lagging in sales. As reported by Barrett (2021), China already has
over 300 EV’s makers.
14
Threat of Substitutes: ( Low)
Low switching costs can enable both competition and substitutes such as public
transportation (Kissinger, 2019). “For example, customers have only a moderate and limited
number of substitute options in the market. In relation, many substitutes have only a moderate
level of performance in satisfying customers’ practical needs. For instance, public
transportation is not as versatile as a private car” (Kissinger, 2019). Another example of this
would be electric cars versus fuel-ran cars. The substitute would depend on the customer’s
needs.
Recommendations for Tesla
1. Tesla should take advantage of higher prices for their EV’s in the Chinese market to
support the quality of their vehicles. Building and working on their brand premium in
China could give Tesla the opportunity to differentiate itself from the lower quality
EV makers in China. One way Tesla could become more attractive in the Chinese
automobile market is to start a strategic alliance with a Chinese-owned company.
2. Tesla should focus on improving their technological electrical parts, as other big
automobile brands such as Toyota will soon be entering the electric car market.
Therefore Tesla should be prepared for a technological advantage in the Chinese
market as well as overall.
3. Tesla only offers showrooms and stores with all its sales coming from online. We
believe that franchised dealerships would benefit Tesla so their Chinese consumers
can get the full experience of buying a new car.
Implementation plan:
15
We believe in order for Tesla to take advantage of higher prices in China for their electric
vehicles, they need to first start on gaining higher brand recognition in China. Tesla only
started producing vehicles in China in 2019 from their Shanghai factory; so they haven’t been
in the market for as long as some of their biggest Chinese competitors such as Nio and
XPeng. We chose this strategy because Tesla has already shown that they can compete in a
competitive market such as North America, as they are the most dominant electric vehicle
company there. We believe Tesla has the potential to also dominate the Chinese market with
the right strategies to boost their brand recognition in China. Brand recognition leads to
people recognizing the company which leads to support and brand premium.
As mentioned. Tesla in North America has a huge following and brand premium but
Tesla in China has not yet achieved this. Tesla needs to ensure they gain the public’s trust in
China by advertising and manipulating public opinion instead of just focusing on developing
their vehicles. One way Tesla can become more attractive in the Chinese automobile market
is to start a strategic alliance with a Chinese-owned company. This would allow Tesla to
become more attractive to Chinese car owners as they would recognize their partnership with
a home-owned company. As of October 2021, Tesla has started developing a partnership deal
with the leading battery company CATL in China (Hanley, 2021). This deal involves the
purchase of lithium-iron-phosphate batteries for 800,000 vehicles, which is the expected
demand of Model 3’s and Model Y’s in China in 2022 (Hanley, 2021).
One of the best ways to gain brand recognition is to connect with your target audience.
Tesla’s target audience is consumers with an above-average income looking for an ecofriendly vehicle. Social media marketing has become very popular in captivating consumers
and benefiting companies’ online reputations. Tesla needs to maintain their online presence to
stay relevant in the online world. One way Tesla would be able to build brand recognition in
16
China is by doing trade shows. Trade shows offer reliable short-term ways of promoting their
vehicles within their target market. These would provide opportunities for potential
consumers to experience the vehicles in-person and to see what they would be investing in if
they were to purchase a Tesla. Trade shows would also give Elon Musk an opportunity to
speak; as the face of Tesla, he could provide consumers with the confidence they need to be
able to invest in Tesla by talking about how Tesla differentiates from their competitors in
terms of technological advances and sustainable ideas.
As Tesla doesn’t believe in dealerships and offers showrooms and stores instead to
showcase their vehicle lineups, we believe to fully reach brand recognition in China there
needs to be an increased amount of stores across the country in the long run. Currently, China
has 31 stores compared to the 160 available in the United States (Optiwatt, 2021). Increasing
the number of stores will enable customers to have the same experiences they would if they
were to go into a competitor’s dealership; these experiences would include sales, test drives,
and customer service. Along with increasing stores, we also believe it’s important to increase
the available amount of charging stations for Tesla’s vehicles so the vehicles can be driven
anywhere in the country.
17
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Appendix
Political
– Subsidies
-Regulations on
emissions and safety
standards
Economical
Social
Technology
-China has a focus
on EV’s to reduce
carbon emissions
-Tesla is an
outsider in the
Chinese market
being the only
foriegn owned
company operating
in China.
-Improvements in
car batteries
– Potential growth
in China leads to
-Tesla electric vehicles
job creation
depend on electricity
and not fuels.These
-The price
eco-friendly car
decreases allows
buyers stand a chance for more potential
of getting a specific
buyers
tax credit for using an
electric car.
-Charging stations
Legal
Environment
-Lawsuits
-Awareness of
carbon footprint
-Government
rules and
regulations
-Top performing
computer systems
-Sustainable ideas
-Renewable energy
in factories
-Tesla is known for
having luxurious
electric cars that
consumers are
willing to pay a
premium price for.
Value
Rarity
Inimitability
Non-substitutability
Competitive implications
Brand image
Yes
Yes
Yes
Yes
Competitive advantage
Innovation of products
Yes
Yes
Yes
Yes
Competitive advantage
Product range
Yes
No
Yes
No
Temporary advantage
Market position
Yes
Yes
Yes
Yes
Competitive advantage
20
Strengths:
Weakness:
●
Elon Musk
●
Expensive models
●
Technology, Fully focused on evolving the
electrical vehicle
●
Manufacturing problems
●
Elon Musk – What is Tesla without him?
●
Eco-friendly
●
Lack of liquidity
●
Brand loyalty and reputation, people willing to
pay a premium for their products.
●
Unable to meet demand – shortages in batteries,
etc.
●
Dominates EV sales in North America
Opportunities:
Threats:
●
Newer models with lower costs
●
Threat of new and existing competition in China
●
Produce more cars in different international
locations
●
Decrease price of oil
●
Liability (lawsuits) – autopilot
●
Defects
●
Working with the government.
●
Being the first to focus on EVs, creating change
in the automotive industry
●
Should decrease both the cost of its batteries
and renewable energy to attract more buyers
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