POTTER'S FIVE FORCES AT TESLA INC. (2024)

Sandro Henrique Peixoto Saboia

ABSTRACT

Porter's five forces provide an analysis and understanding of the competitive environment in which companies operate, identifying opportunities and threats. This article aims to analyze the application of these five forces by Tesla in its business strategy. The literature review is intended to demonstrate the use of the five forces individually by Tesla, evaluating the rivalry between its competitors, the negotiating power of its suppliers, the threat of new entrants in its market, and the emergence of product substitutes. Considering Telsa's success, it is possible to assume that the company has been implementing the five forces effectively to face competition, maintain lean and efficient manufacturing and distribution processes, increase its market share, and retain its customers.

KEYWORDS: Porter's Five Forces, Electric Vehicles, Autonomous Driving.

INTRODUCTION

Porter's five forces represent a model for analyzing the competitiveness of a sector. It was developed by Michael Porter in 1979 and is one of the most used frameworks by companies and management professionals. The five forces analysis allows companies to understand the competitive environment in which they operate and identify opportunities and threats. Based on this understanding, companies can develop strategies to improve their performance. Porter's five forces model propelled strategic management to the center of the management agenda (Grundy, 2006).

The five forces comprise:

The rivalry between competitors: It represents the strength of competition existing in an industry—the more intense the rivalry between competitors, the lower the companies' potential profits. Porter points out a series of factors that determine the intensity of competition, including many competitors in a given sector, slow growth of the industry in question, high fixed costs, little differentiation of products or services, and relevant increases in production capacity.

Rivalry between existing competitors takes the standard form of jockeying for position – using tactics such as price competition, advertising battles, product introductions, and increased services or customer guarantees (Porter, 1996).

Buyers’ bargaining power: It represents the ability of buyers to negotiate prices and conditions with companies. The greater the buyers' bargaining power, the lower the companies' potential profits. A group of buyers is robust if it meets the following criteria: Makes large purchases; the products they buy from the industry are standardized (commodities); quality is not an essential purchasing factor; are well-informed about market conditions.

Buyers engage with the industry by forcing prices down, bargaining for better quality or more services, and pitting competitors against each other – all at the expense of the industry's profitability (Porter, 1996).

Bargaining power of suppliers: It represents the ability of suppliers to negotiate prices and conditions with companies. The greater the negotiating power of suppliers, the lower the potential profit for companies. Suppliers can pressure participants in an industry, forcing them to increase their prices or reduce the quality of the goods and services they deliver. A group of suppliers is robust if it meets the following criteria: It is dominated by a few companies; cannot find substitute products with which to compete; the industry in question is not your primary customer; its products are crucial to the sector's business; its products are differentiated.

Powerful suppliers can consequently suck profitability from an industry unable to pass on cost increases in their prices (Porter, 1996).

Threat of new entrants: It represents the ease with which new competitors can enter a given industry. The easier it is, the lower the potential profit for established companies.

New companies entering an industry bring new capabilities, the desire to gain market share, and often substantial resources. As a result, prices may fall, or participant costs may be inflated, reducing profitability (Porter, 1996).

Threat of Substitute Products: These represent substitute products or services that can equally meet customer needs. The greater the threat of substitute products, the lower the potential profit for companies. All companies in each industry can compete with other sectors that provide substitute products or services.

Substitute products reduce an industry's potential returns by lowering the prices firms can set for profit (Porter, 1996). The more attractive the price-performance alternative substitute products offer, the firmer the pressure on industry profits (Porter, 1996).

Figure 1: Porter's Five Forces Model.

Tesla, founded in 2003, is a leading manufacturer of electric vehicles, solar panels, and batteries for residential and automotive energy storage. Tesla and its flamboyant and sometimes erratic CEO, Elon Musk, have transformed the automotive industry in just 16 years. Traditional car manufacturers are not prepared to compete today with embedded software as the central part of their development. Unlike the nimble Tesla, traditional manufacturers are large, bureaucratic, slow to respond to customers, dependent on customer financing for unit sales growth, and culturally different from a software company. The speed of the innovation process in the electric vehicle market makes Tesla more like Google or Amazon than an automaker, and its growing market valuation is a clear signal to all car manufacturers that they will have to develop more innovative business models like Tesla, to survive (Shipley, 2020). Tesla provides its customers free charging stations known as “superchargers” in the United States and Europe. The company's strategy of building colossal factories, called gigafactories, has allowed them to increase production of batteries and vehicles. Its first gigafactory began operating in Reno, Nevada, in 2016, opening others in Buffalo, New York, and Shanghai, China, with additional expansion plans. Tesla's success is attributed to its data-driven approach, as it has accumulated vast amounts of information from its consumers. Its vehicles' self-learning systems enable remote software updates over Wi-Fi, enabling continuous self-improvement without the need for a visit to a repair center. Tesla has collected data from more than 100 million miles driven by its cars, allowing it to create high-resolution maps that show precise details such as speed changes and danger zones. Tesla uses this information to improve its autonomous vehicle technology, proving it is a data-focused, software-based company, not just a vehicle manufacturer. This approach has allowed them to stand out among their competitors and maintain their dominance in the electric vehicle market.

Tesla competes with a “focused differentiation” strategy. The two strongest pillars of the brand's strategy are sustainability and innovation. Its target market for over a decade has been people who want to spend $100,000 or more on a new vehicle. 2021, they launched the Model 3, priced at around $47,000. Tesla offers the best energy storage systems for electric cars, positioning it as an innovative leader in its market. In addition to focusing on sustainability, Tesla aims to offer the most advanced innovation and performance in vehicles. Tesla has overcome some supply chain planning challenges through vertical integration, for example, by acquiring a solar systems company. Tesla uses the triple bottom line (Economic-Environmental-Social) approach to sustain its supply chain (Milliken, 2023).

OBJECTIVE

This article aims to investigate the application of Porter's five forces by Tesla Inc. in its corporate strategy, evaluating the company's ability to implement each of the forces individually in a highly innovative market, facing new competitors and already established competitors, as well as evaluating how the company uses its innovation capacity to differentiate itself from its competitors.

METHOD

The nature of the research approach will be qualitative, using data from articles that address the use of Porter's five forces by Tesla Inc. The qualitative research approach is justified because qualitative data represents actions, human acts, and expressions. Qualitative methods emerge from phenomenological and interpretive paradigms, are often interactive, intensive, and involve a long-term commitment. In qualitative research, the delimitation and the formulation of the problem have their characteristics. Both require the researcher to immerse themselves in the context that will be analyzed. To prepare the study, three articles were used between 2006 and 2020. The criteria for using these articles were the relevance of the subjects covered by the authors and the relationship of the themes with the use of Porter's five forces in terms of Tesla's corporate strategy. Inc.

DEVELOPMENT

Rivalry between Tesla's competitors.

The threat of new entrants into the electric vehicle market is moderate. Several factors make it difficult for new companies to enter the market, including:

High capital requirements: The development and production of electric vehicles require significant capital investment. New entrants must build factories, develop new technologies, and establish a supply chain.

Brand recognition: Tesla has a strong brand and is well-known to consumers in producing electric vehicles. New and established entrants must invest in marketing and advertising to develop their brand awareness in the electric and autonomous vehicle market.

Technology: Tesla is a leader in technology applied to electric and autonomous vehicles. New entrants must invest in research and development to compensate for their delay.

Government Regulations: Governments worldwide are implementing a series of regulations to promote the adoption of electric vehicles. These regulations can be complex and costly for new entrants to comply with.

With fewer parts, the total cost of ownership for Tesla vehicles is significantly lower than an internal combustion vehicle. There is no need for expensive oil changes, tune-ups, replacement of mufflers, and so on (Shipley, 2020), which constitutes a relevant advantage for Tesla.

However, some factors make the threat of new entrants into the electric vehicle market more significant, including:

Reduced battery costs: Lithium batteries, the main component of electric vehicles, have been falling rapidly. This will make electric cars cheaper and more accessible to consumers, attracting new market participants.

Changing consumer preferences: Consumer preferences are shifting towards electric vehicles. This is due to several factors, such as rising fuel prices, concerns about climate change, and the increasing availability of charging infrastructure.

Government support: Governments worldwide are providing subsidies and other incentives to promote the adoption of electric vehicles. This is making it more attractive for new companies to enter the market.

There are also new entrants into the electric vehicle market, such as BYD, NIO, and XPEV in China and Mercedes-Benz, BMW, and Audi internationally. Mercedes-Benz has announced that from 2025, all its new models will be built on purely electric platforms.

Figure 2: Best-selling electric cars in the United States in 2022, based on new registrations (in units).

Bargaining power of buyers of Tesla products.

With the growing number of electric vehicles from other brands and the gradual improvement in performance and reduction in usage costs, consumers have more and more options. The bargaining power of electric vehicle buyers is gradually increasing (Grundy, 2006.). However, Tesla vehicles are still relatively new products, and a limited number of options are available to consumers, which keeps buyers' bargaining power still moderate.

Buying a Tesla is relatively simple: you go online, choose a model, add accessories, make a bank deposit, and schedule pickup. Done! (Shipley, 2020).

Some factors that contribute to the moderate bargaining power of Tesla buyers are:

Tesla Brand Reputation: Tesla has a strong brand reputation for innovation and quality. This gives Tesla an advantage in charging higher prices for its vehicles.

The limited number of electric vehicles on the market: There is still a limited number of electric cars, allowing Tesla to face less competition by reducing buyers' bargaining power.

High switching costs for buyers: Switching to an electric vehicle can be expensive for buyers due to the cost of the car and the need to install a charging station at home. This reduces buyers' bargaining power and limits the return to combustion vehicles.

However, some factors facilitate the negotiating power of Tesla vehicle buyers, including:

The falling cost of electric vehicles: Electric car prices are decreasing, making them more affordable for buyers. This will increase the bargaining power of buyers.

The increasing availability of government subsidies: Governments worldwide offer subsidies and other incentives to promote the adoption of electric vehicles. This will make electric cars more accessible to buyers and increase their bargaining power.

Tesla will have to continue to innovate, especially in terms of the performance of its batteries and autonomous driving, to maintain its leadership position in its market.

Bargaining power of Tesla suppliers.

Tesla operates gigafactories in several locations, with a large scale of automation, allowing them to produce in large quantities with less labor, reducing production costs (Grundy, 2006). In this way, the bargaining power of Tesla's suppliers is moderate. Tesla has several suppliers for its batteries and other essential components but has also invested in its production capabilities in a continuous verticalization process.

Tesla's battery-powered vehicles are significantly more straightforward to produce than their internal combustion competitors. By some estimates, they have considerably fewer moving parts per vehicle – around 20 – versus the 2,000 in internal combustion engines (Shipley, 2020).

Some factors that contribute to the moderate bargaining power of Tesla's suppliers are:

Tesla production volume: Tesla is the world's leading manufacturer of electric vehicles and purchases large volumes of components from its suppliers. This allows the company to have price advantages in the component negotiation process.

Tesla Vertical Integration: Tesla has vertically integrated its supply chain for critical components, such as batteries. This reduces Tesla's dependence on suppliers by providing greater control over its costs and quality.

The availability of alternative suppliers: There are several suppliers for Tesla's components. Tesla has been developing several alternative suppliers in different locations, which gives it an advantage in its purchasing processes.

However, some factors limit Tesla's negotiating power with its suppliers, including:

The complexity of critical components: Some key components, such as batteries and processors (chips), are complex and require specialized knowledge to be produced. This gives suppliers some advantage in negotiating prices and delivery flow.

The long-term nature of supplier contracts: Tesla typically signs long-term contracts with its suppliers. This limits Tesla's flexibility to change suppliers if necessary.

Tesla is well-positioned to manage the bargaining power of its suppliers. Still, it must continue to invest in its production capabilities and develop relationships with new suppliers to maintain that advantage.

The semiconductor shortage has affected the entire automotive industry. Tesla faced the shortage better than most automakers but was not immune to its effects. Tesla has taken several steps to mitigate the impact of the semiconductor shortage, including:

Redesign its vehicles to use fewer chips: Tesla redesigned its vehicles to use fewer chips, sometimes eliminating several product features, which helped reduce its need for semiconductors.

Multi-Vendor Semiconductor Supply: Despite the global difficulty in reducing dependence on semiconductor purchases from industries based in Asia, especially Taiwan, Tesla has been developing several new suppliers for this component, thus mitigating the risk of lack of it in global crisis events.

Invest in its semiconductor production: Tesla is investing in its production capacity, giving it more control over its supply chain.

The threat of new entrants to Tesla.

Although Tesla is one of the first companies to enter the new electric vehicle market, it cannot only focus on existing competitors if it intends to achieve long-term development (Grundy, 2006).

The rivalry between competitors in the electric vehicle market is beginning to intensify. Established car manufacturers like Volkswagen, Toyota, and Ford are developing and selling electric vehicles. Several new companies are also competing in the market, such as Rivian and Lucid. Some factors that contribute to the increase in rivalry between Tesla and its competitors are:

The growing demand for electric vehicles: The demand for electric cars is increasing worldwide, attracting more and more competitors to this market. The growing number of electric vehicle offerings has been increasing, giving consumers more options and making it more difficult for any company to dominate the market.

The rapid pace of innovation in the electric vehicle industry: The electric vehicle industry innovates rapidly, constantly introducing new technologies and features. This increases the difficulty for any company to maintain a competitive advantage for a long time.

Some actions that Tesla has been taking to compete in the electric vehicle market are:

Research and Development: Tesla invests in research and development, promoting the adoption of new technologies and features to give its vehicles a competitive advantage.

Production capacity: Tesla has been expanding its production capacity by opening new gigafactories; this will help it meet the growing demand for its vehicles and reduce costs.

Sales and distribution: Tesla is building its global sales and distribution network to reach a more extensive customer base worldwide.

Threats of substitute products at Tesla.

As a new type of “clean” automobile, electric vehicles are preferred by consumers; however, hydrogen cell-powered vehicle technology is a threat with the potential to replace them. As Tesla is the leader in the electric car industry, it tends to be the most threatened. From the perspective of technical requirements, hydrogen fuel cell technology is gradually falling behind as it still faces development problems (Grundy, 2006). In this sense, the threat of substitutes at Tesla is moderate. The main substitute for electric vehicles is traditional gasoline-powered vehicles. However, electric vehicles stand out for having lower operating costs and emissions. Some of the factors contributing to the moderate threat of substitute products at Tesla are:

The rising cost of gasoline: The cost of gas has been rising steadily, which makes electric vehicles more attractive to consumers.

The increasing availability of charging infrastructure makes it easier for people to own and drive electric vehicles. Tesla offers free charging stations to its vehicle owners in several locations in the United States and Europe.

The environmental benefits of electric vehicles: Electric vehicles produce zero emissions, which makes them more attractive to consumers concerned about environmental issues.

However, some factors may increase the threat of substitutes for Tesla products, including:

The initial cost of electric vehicles: Electric vehicles are still more expensive than gasoline-powered vehicles, making it a barrier for some consumers considering switching to an electric vehicle.

The limited range of electric cars: Electric vehicles have a limited range, which can be a barrier for consumers who need to travel long distances repeatedly.

The inconvenience of charging electric vehicles: Charging an electric vehicle takes longer than refueling a gasoline-powered vehicle. This can be a barrier for some consumers considering the switch to an electric vehicle.

Figure 3: Tesla charging stations available in the United States.

DISCUSSION

Tesla is beginning to face growing rivalry with companies like General Motors, Ford, and Volkswagen, looking to gain a share in the electric vehicle market. In addition to facing the emergence of new Chinese companies with BYD and Rivian. Tesla addresses this rivalry by investing in research and development to maintain its technology leadership and expand its global presence by increasing its market share. The threat of new entrants to Tesla is possible but not easy. Tesla has a significant advantage in technology, scale, and brand. Furthermore, the electric car market is still relatively small, making it difficult for new entrants to emerge. The bargaining power of Tesla's suppliers is relatively low. The company relies on suppliers for critical components such as batteries and motors. However, Tesla has a long-term relationship with these suppliers, which may limit their eventual replacement. The bargaining power of Tesla buyers is moderate. The company sells its cars directly to consumers, which gives it some control over prices. However, buyers are beginning to have other options for electric cars, which can increase their bargaining power. The threat of substitute products is also relatively low for Tesla. Electric cars are a cleaner and more efficient alternative than internal combustion vehicles. Growing concerns about climate change and pollution will increase demand for electric cars, which would reduce the threat of substitute products.

CONCLUSION

Tesla's sales volume still ranks it first in the electric vehicle market. Based on Porter's five forces model, Tesla still has many strong, established competitors and faces the threat of new companies entering the market. As a high-tech industry, Tesla remains at the forefront by developing vehicles with embedded autonomous driving and artificial intelligence features. Elon Musk wants Tesla to be seen as more than an electric car company, having developed technology for the “Full Self-Driving” (FSD) system, which is an advanced driver assistance system that the company hopes to expand to be universal and even sell it to other automakers and technology companies. Tesla's strategy of making public chargers “superchargers” available is also critical to the company's success. This charging network makes it easier for Tesla vehicle owners to travel long distances and makes electric vehicle ownership more convenient and affordable. In this sense, Tesla intends to quickly expand its charger network to make it the largest and most reliable network. Tesla's vertical integration is one of its corporate strategies that differentiates it from other automakers. Tesla's vertical integration strategy has reduced the cost of its batteries, making its electric vehicles more affordable. Additionally, Tesla's production verticalization process speeds up innovation and keeps the quality control process under the company's control. As a significant global market, China is a strategic market for Tesla. The challenge for Tesla in China lies in the rise of new local brands and potential competitors. Tesla's main strategic focus is the replacement of fossil fuel-powered vehicles with electric vehicles by consumers. To this end, the company may eventually join the mass vehicle market with low production costs. However, such a move could obscure the sophisticated perception of Tesla products, opening up the possibility of the rise of already established traditional luxury vehicle brands such as Mercedes Bens and BMW in the electric vehicle market. Tesla is more than an electric car company; it is an integrated technology company. Elon Musk's strong leadership, visionary, the cutting-edge technology used in his products, and the construction of new gigafactories are factors that can contribute to the company's growth in the future. Furthermore, the increased demand for electric cars and advances in autonomous driving will guarantee Tesla a promising market for the coming years. Unlike traditional vehicle manufacturers, Tesla was born with a culture of innovation in its DNA, which has kept the company ahead of its competitors, guaranteeing it a competitive advantage that is difficult to lose.

REFERENCES

8. Porter, M.E (1996). What is strategy? Harvard Business Review.