Michael Porter five-force analysis

Michael Porter five-force analysis

The automotive industry continues to achieve major technological disruptions that facilitate the development of the sector. Additionally, the industry witnesses shifting customer needs and new regulations on vehicle emissions. Much of the technological disruption of the automobile sector can be traced to Tesla Motors and the charismatic CEO Elon Musk. Tesla integrates a unique business model that entails the aspects of being a tech firm, hardware supplier, and automaker. The company’s mission intends to accelerate the world’s transition to sustainable energy. Tesla hopes to achieve these objectives by manufacturing electric vehicles that surpass both performance and style.

Michael Porter established a five-force analysis framework as a strategic management tool seeking to understand the impact of the external environment of an organization’s competitiveness. The model’s assessment of Tesla embarks on the factors significant in the car-making industry and related solutions in energy consumption. As one of the notable players in the electric automobile segment, Tesla seeks to address the external factors effectively to achieve the company’s long-term resilience, competence, competitiveness, and sustainability. The company faces stiff competition from automakers such as Bayerische Motoren Werke (BMW) group, Ford, General Motors, and Toyota Motor Corporation. Tesla Motors must incorporate the nature and features of such rivalry in both domestic and global markets for electric cars, solar panels, and batteries, among others.

The threat of new entry

          The car-making industry has high financial barriers, which limits the occasionalism on new entrants. The traditional automobile companies such as General Motors, Honda, Ford, and Toyota entered the electric car market as early as 2017. However, these corporations embody a low long-term threat to the market segment operated by Tesla Motors. In addition, the risk of new automobile entrants is low due to the size of the competitors already working in the industry. Nelson and Goon (2019) note the sector has a high cost of research, brand management, marketing, and economies of scale. Therefore, new companies would compete with established brands, thus requiring high initial capital.

Threat of substitution

there is a medium potential of the risk of substitutes considering the electric automobile market. Standard modes of transport that conserve energy include low-cost car subscription programs, motorcycles, and bicycle trends, which feature in a widely sustainable lifestyle market. The small and insignificant amount of available substitutes provides Tesla with the opportunity to provide intelligent energy management products and services to clients. This threat is moderate since alternatives offered by other rivals are low. Additionally, the presence of public transportation provides less competition for Tesla’s automobiles. Notably, there is a slow witching cost of customers from one vehicle brand to another or choosing public transport. Other manufacturers also offer electric and hybrid models that have varying prices. However, the threat of substitutes in the automobile industry limits the influence of suppliers leading to competitive prices of the manufacturing resources. Even though public transportation does not have the versatility of Tesla, the condition limits substitute threats.

Buyer power

          The automobile industry has a low probability of the occurrence of collective actions aimed at reducing the prices of vehicles. However, current and potential customers can gather their discontent and dissatisfaction to force Tesla Motors to decrease the prices. Nelson and Goon (2019) contend that companies in the automobile industry need to have an aggressive strategy to ensure arguments and consumer debates to push prices down are rare. Notably, the sector experiences long delivery processes that often delayed making the consumers claim for discounts. The buyer’s power in the automobile sector continues to increase with carmakers, vehicle designs and makes to choose. In this scenario, many car dealers are expected to negotiate the prices of the automobiles. However, the bargaining power of Tesla Motors customers is moderate since other competitors offer electric and hybrid alternatives. Additionally, the company does not negotiate prices of the automobiles, thus limiting the customer’s bargaining power.

Supplier power

          The bargaining power of Tesla Motor’s suppliers is moderate since the company’s production is limited compared to other automakers. According to Nelson and Goon (2019), Tesla highly depends on its battery supplier, Panasonic Corporation, with whom the company has a supply agreement until the end of 2020. Notably, there are potential suppliers in which the company hopes to make a significant impact on production activities. The move may increase the company’s bargaining power in the industry. However,  Elon Musk leveraged the agreement with Panasonic Corporation to create a Giga-factory that produces more lithium-ion batteries. Tesla hopes the partnership will decrease the final battery cost by 35 percent at the end of 2020. Tesla forecasts a production growth of up to 500,000 units by collaborating with solar roof suppliers. Since the existent suppliers have a low level of forward integration, the supplier power poses as a secondary strategic management tool.

Competitive rivalry

          Tesla Motors operates in a highly competitive industry that is easily disputed by technology. This element of the porter’s framework outlines the competition for energy-saving solutions and automotive innovations in the sector. A small number of companies, high aggressiveness, and low switching costs are some of the external factors that create issues for the growth and development of Tesla Motors. According to Nelson and Goon (2019), the major players in the automobile industry are General Motors, Ford, Volkswagen, Renault-Nissan, Toyota, and Hyundai. Additionally, the US automobile sector is a multi-billion dollar oligopoly where large brands control the market share. In the fight for an equal share of the industry, carmakers innovate new vehicle designs, redesign existing models, and provide incentives to charm potential consumers. Tesla Motors’ marketing mix meets the aggressiveness of the sector hence strengthening the effects of rivals against the business. The existence of low switching costs continues to enhance the competitiveness of the industry. Therefore, industry rivalry is a high priority for Tesla’s strategic management.

Doing business with Tesla Motors provides several benefits and challenges to potential collaborators. One of the significant advantages is the reduction of money spent on promotion and marketing. While other companies spend billions in an advertisement through mainstream media and digital adverts, Tesla receives a lot of free media attention since it has a direct line to customers. In addition, Elon Musk is among the valuable CEOs and can market any of the company’s products without spending any money. Additionally, Tesla is a giant technology disruptor, especially against other companies with decades of experience in the business. Musk has enabled Tesla to continue innovating and creating new solutions that allow the company to grow faster and subsequently receive higher margins than rivals. However, some of these benefits could diminish with time. One of Tesla’s challenges is profitability and valuation. The automaker has a significant debt load and requires a steady cash flow to fund Musk’s sustainability initiatives. Additionally, Tesla anticipates a rapid drop in the vehicle demands from Europe and Asia. The sustainability of the demand drop is a crucial question for investors and companies seeking to do business with the automaker.