Tesla Porter's Five Forces Analysis
1. Introduction
Porter's Five Forces of Competitive Position Analysis is a simple framework for assessing a business's competitive strength and position. It was developed in 1979 by Micheal E Porter. For example, Tesla Porter's five forces analysis provides insight into a company's current competitive position and the future stronger position that the company may look to move. Porter's five forces analysis also helps to understand areas of strength and identify and improve the weak side of the business. Tesla is probably the most innovative and the most dynamic business in the industry, and it has evolved so much in so little time that it is the example to study Porter's model.
2. Background of Tesla
Tesla Inc was founded by Martin Eberhard and Marc in 2003. Tesla also recognized Elon Musk, JB Straubel, and Ian Wright as co-founders. Though Tesla is not a very old company, it has made a great contribution to the industry with a market capitalization of around $28 billion. In 2006, Tesla revealed its first prototype into the EV market, called the Roadster. After continuous work and development the final production model was launched in 2008. The current model is the Tesla Model 3. Tesla is ahead of its competitors because of its ability to charge at supercharger stations worldwide.
3. Tesla Porter's Five Forces
The automotive industry is a very dynamic business and has its unique challenges, and Tesla is a very successful business that speaks volumes about its strategic competence and effectiveness. Let us review Tesla Porter's Five Forces to understand it in more detail.
- Competition in the industry (Strong Force)
- The threat of new entrants (Weak Force)
- Bargaining power of suppliers (Moderate Force)
- Bargaining power of customers (Moderate Force)
- The threat of substitute products or services (Moderate Force)
3.1. Competition in the industry (Strong force)
The automobile industry is highly competitive, so industry competition is a strong force. Different forces are acting in Tesla competitor analysis, and there are many external factors and strong forces in competitive rivalry. Let us list down possible forces in Tesla competitor analysis.
- The weak force of the number of competitors in the industry.
- The strong force of aggressive competitors in the market.
- The strong force of low switching costs for buyers.
After identifying the forces, let us see how Tesla deals with this intensive competition in the market.
- Innovation and integrated services with charging stations spread worldwide give Tesla an edge over its competitors.
- Supply chain improvement, vertical integration, and a commitment to continuous improvement support lower costs and high profits. Low cost is an attractive attribute for competitive advantage.
- An aggressive media marketing strategy is important for surviving in this competitive environment.
3.2. The threat of new entrants (Moderate force)
The threat of new entrants is a low force in Tesla Porter's five forces. Many factors discourage new entrants from venturing into this industry and let us identify these factors.
- Brand development is expensive as it needs highly innovative and very advanced technology. The high cost is a weak force to discourage new companies.
- The automobile industry requires a fair amount of finance to operate, also a weak force.
- High economies of scale are another weak force. Economies of scale are a positive force for established market players; however, it does not favor new entrants.
3.3. The bargaining power of suppliers (Weak force)
The bargaining power of suppliers is a moderate force in Tesla Porter's five forces. Tesla relies on suppliers for its smooth supply lines. Hence, suppliers influence the business, and the forces involved in this are;
- Forward integration is a moderate force.
- Tesla procures from multiple suppliers, so eventually, it is not dependent on one supplier. So, it is a moderate force.
- A moderate supply level is a moderate force. A bigger volume of orders for suppliers weakens supplier bargaining power.
3.4. The bargaining power of customers (Strong force)
The bargaining power of customers in the electric automobiles industry is a moderate force. Various factors influence the bargaining power of customers in Tesla Porter's five forces model.
- Low switching costs are a strong force because they increase buyers' bargaining power. They can switch to any vehicle without any additional cost.
- Moderate substitute availability is a moderate force. There are not many suppliers of electric cars in the market, and there are a few but very strong indeed.
- Low volume of purchases because every customer can own one or a few cars.
3.5. Threat of substitute products or services (Strong force)
The threat of substitute products in Tesla Porter's five forces is a moderate force because Tesla Inc. has a moderate and limited number of substitute options in the market. Let's have a look at the contributing factors.
- The most important contributing factor is low switching costs, increasing competition between competitors.
- The average or a limited number of substitute availability is a moderate force.
- Moderate performance of substitutes is also a moderate force.
4. Strategies for Success
Tesla is a brand in the electric automobile industry, almost becoming synonymous with electric cars. However, there is great room for flying even higher in this evolving industry. Let us review some strategies for success after we have seen Tesla Porter's five forces.
- Cost leadership
- Differentiation
- Focus
4.1. Cost leadership
High costs are a great barrier for customers to adopt electric cars. Tesla has already identified this barrier and is moving forward in the direction of cost leadership.
For example, they claim their Gigafactory can decrease the battery cost by 30%. This reduction in price helps Tesla take a significant leap in cost leadership.
4.2. Differentiation
Porter's five forces example tesla shows that it can use the broad differentiation strategy for competitive advantage. tesla is already known for its high quality and unique taste of coffee. They also use this differentiation policy in the design of their cafes, where they offer a cozy and friendly environment that makes people enjoy. Product diversity through new types of beverages apart from coffee is a promising strategy to cater to customers who are not always into the coffee. Also, moving into the services industry and product industry can diversify tesla' portfolio.
4.3. Focus
Tesla focuses on its product to gain a competitive edge over other players in the market. It does not spend much on promotion and relies on positive reviews and word of mouth for promotions. It spends most of its resources on research and development, manufacturing excellence, and technological excellence.
Apart from that, Tesla also has a social message of an environment-friendly approach to focus.
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5. Key Takeaways
Tesla Porter's five forces analysis is a testimony to the potential of success in innovation and technology. After a detailed review of this model, you can also implement the success strategies for your business.
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6. References
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adamkasi. 2020. "Porter's Five Forces of Tesla". Porter Analysis. Available at: https://www.porteranalysis.com/porters-five-forces-of-tesla/ (January 21, 2022).
