Chapter 4 applies the structure-conduct-performance model to analyze environmental opportunities. This model suggests that the most important determinant for how a firm operates and its performance is the industry in which it operates.

Performing an industry analysis for Tesla is interesting because in one sense Tesla operates in the emerging market of electric vehicles, but also remains entrenched in a fragmented market of traditional auto manufacturers. The text is careful to explain that emerging industries can be newly created or newly re-created industries formed by technological innovations, and that is what the auto manufacturing industry has become – a newly re-created industry focused on electric vehicles and leveraging technology to innovate and create new products.

As a first mover in this industry, Tesla has advantages in that its technology is superior to competitors at this time. Electric vehicles are only as good as their battery technology and being reliant on only a few battery suppliers would create a great threat for Tesla in not being able to control such an important element used in their product. To reduce this threat of suppliers, Tesla has invested enormous resources in backward integration by producing their own electric car batteries and because of this, has burst onto the EV market as an industry leader.

A barrier to entry in the auto industry, however, are the high costs of starting a car company including large investments in factories, supplies, skilled labor, and expertise. The advantages traditional car manufacturers have, such as VW and Toyota, is that they have already achieved scale – which is challenging for a new company to achieve. Recently, Honda and GM formed a strategic alliance in which Honda will two EVs designed and built by GM. In this way, they may have a chance at competing for market share in the EV market.

Another advantage Tesla maintains by being an early entrant into the EV market is the creation of customer-switching costs. Tesla is working on creating a system of charging stations across the US, but this infrastructure is currently broadly lacking. Owning an electric vehicle remains untenable for many people who might otherwise be interested, such as young urban professionals who cannot purchase an EV because their apartments or condos don’t allow the modification required to charge EVs overnight. Auto manufacturers are going to have to address the creation of a charging station infrastructure, which creates opportunity for strategic alliances among auto manufacturers to create a common system. This move would benefit those involved by increasing adoption and sales of EVs and would benefit customers by not requiring them to adopt a proprietary charging system.

One thing Tesla should consider in order to navigate their fragmented industry would be seeking out strategic partnerships. It was recently reported that Tesla was banned from China’s military bases under suspicion that their vehicles were used for spying. There are a couple EV makers in China that Tesla could pursue partnerships with to reduce some of this geopolitical threat while increasing market share in the high growth Chinese EV market. Another strategic partnership opportunity might be with Apple as there have been rumors that Apple is interested in participating in the EV market, but analysts differ on whether Apple is seeking a partnership or to produce its own cars. Because the margins in auto manufacturing are much lower than in pure tech companies, venturing into the EV market would reduce Apple’s overall return on equity, and therefore a partnership with Tesla could be very strategic for Apple as well. As two of the most beloved brands among investors and consumers, a partnership between these two companies could help both of them maintain their positions as industry leaders.

It is important for a company to not only be able to identify its core strengths and weaknesses through an internal review, but to also be able to identify external opportunities and threats such as risks and challenges the business may face. Chapter 3 focuses on how to identify and address environmental threats so they do not become an issue for the company. The structure-conduct-performance model was developed to assess the conditions under which firms would gain an edge over their competition. Structure refers to the structure of the industry, conduct is how the firm operates within that industry, and performance is both the performance of the firm as well as the economy. A key takeaway from this framework is that industry structure completely determines both firm conduct and performance.

Because the industry structure is so important, it is impossible to understand a firm’s strengths and weaknesses without a thorough understanding of the industry in which they operate. This is evident in the case of Tesla in that the auto industry completely defines how Tesla operates as a business and its performance. The auto industry is characterized by much lower margins than industries such as technology, and have higher overhead and manufacturing costs. The text describes the auto industry as a monopolistically competitive industry, meaning many firms carve out niche markets but that their monopolistic position is always threatened by competitors and new entrants. Tesla presents a threat to traditional auto manufacturers and is threatening their market share.

The structure of the industry determines how the products are manufactured, distributed, sold, and marketed. It also determines the firm’s competitors and it is only through understanding the competition that one can see how a firm can leverage their strengths to create competitive advantage.

While Tesla is a leader in EV technology, they operate at nowhere near the production scale of VW and Toyota. However, a major source of cost advantage that is independent of scale is proprietary technology. According to Iman Ghosh on Visual Capitalist, Tesla’s competitive advantage comes from their strong investments in research and development, resulting in electronics that are estimated to be six years ahead of automotive industry rivals such as GM. Other proprietary technology includes their supercharger network of charging stations. Conversely, large traditional automakers may possess know-how and learning-curve cost advantages from their long histories and scale of operations.

References:

The World’s Top Car Manufacturers by Market Capitalization

Tesla’s 5 Biggest Competitive Advantages
https://cleantechnica.com/2020/07/16/teslas-5-biggest-competitive-advantages/

Tesla’s Firm Performance and Competitive Advantage

It is said that visionary firms can out sustain non-visionary firms in the long run. That is acutely true of the performance of Tesla, the electric vehicle company founded by Elon Musk. Telsa previously had negative cash flows, yet investors continued to pile into the stock as a vote of confidence in the firm’s long term vision to revolutionize the auto industry. In fact, Tesla sustained annual losses each year since going public in 2010 before finally becoming profitable in 2019. If the only measure of a firm’s performance were simple accounting measures, then Tesla would have already failed. Instead, the vision of Tesla has sustained the price of shares as they have continued to increase in value, eventually leading to its inclusion in the S&P 500 on Dec. 21, 2020.

Featuring models that range from $35,000 all the way up to $124,000, Elon Musk has created a large amount of economic value for customers by being an early adopter of a desirable technology for eco-conscious (as well as status symbol seeking) customers. Tesla faced many headwinds as one of the first companies to invest heavily in electric vehicle technology research and development. They also face the challenge of producing a product that relies on large-scale adoption of infrastructure that would support charging electric vehicles. As cash flows turn positive and winds seem to be turning in favor of Tesla’s trajectory, the value of being a pioneer in this industry and the goodwill of company actions such as making their research open and available to competitors has created competitive advantage for Tesla in the auto manufacturing industry.

Event study methodology observes the stock market’s reaction to the implementation of a strategy to measure the value created (or destroyed) by that strategy. This method assumes that capital markets are efficient in the semistrong form, meaning the stock price reflects all publicly available information. This assumption, however, is a large one – what if the market takes a long time to realize the true economic value of a strategic decision? How long can it remain inefficient? There are many documented cases of market inefficiencies in the finance literature. For instance, if event study methodology were a perfect measure of the economic value of strategic management decisions, market anomalies such as surprise earnings announcements would not occur as the value would have already been reflected in the price at the time the strategy was implemented rather than when the results are reported.

In the case of Tesla, it went public at the beginning of the longest running bull market in stock market history, one that has grown increasingly bullish to the point where some analysts are beginning to call the market over-risked and speculative. This general market exuberance has helped lift Tesla shares in a risk-on atmosphere. Tesla stock also benefits from brand name recognition among novice stock traders and investors which may contribute to increased interest in the stock that extends beyond what an analysis of the company’s fundamentals might support. If the economy were to stagnate or contract, Tesla would be at risk of not being able to attract additional capital or to produce as many revenues due to lower consumer demand. In order to thoroughly consider the many risks and opportunities Tesla faces, we need to apply multiple measures of firm performance in order to identify and leverage Tesla’s strategic advantage.