FAMILY NAME: LEON
FIRST NAME: ALEXEI
REG NO: 1102810
ESSEX BUSINESS SCHOOL
COVER SHEET
BE431 BUSINESS STRATEGY

Based on your own research, analyse the current strategic position of Tesla Motors both in terms of their competitive environment and their capabilities. You must draw on relevant frameworks discussed on the module. Your comments in this section should include a discussion of the extent to which the frameworks you used were helpful for your analysis. Critically evaluate the concept of ‘disruption’ in the context of business strategy. Your analysis in this section should make specific reference to Sillince (2006).

Lecturers: Dr. Christina Volkmann, Dr. Marina Michalski and Dr. Danielle Tucker
Date: 2nd March 2015
Word Count: 2553

Introduction

The literature in the field of business and technology has covered the analysis of the term disruptive innovation in respect to the concept of competitive advantage. Scholars such as Christensen (1997) and Johnson (2008) have developed the theory of disruptive innovation and focused on stressing the difference between the disruptive innovations which are sustainable and the ones which are not. Furthermore, the research conducted by Sillince (2006) as well as Penrose (1959), Balogun (2014) has been essential to critically evaluate the methods used by the companies to construct their competitive advantage. The persuasion often used by the companies to differentiate themselves from the competitors and gain competitive advantage has been one of the key arguments made by Sillince. The discussion from this paper includes in its first part the VRIO framework used to analyse the internal aspects of Tesla Motors, in comparison with Sillince`s (2006) arguments which stress the importance of the rhetoric in the process of evaluating the knowledge (resources) of Tesla. Furthermore, the second part of this essay will analyse the external environment of Tesla by using the PESTEL framework.

Tesla Motors is an American company established in 2003 which produces, designs and markets vehicles and components powered exclusively by electricity (Mangram, 2012). At the moment, Tesla has no competitors which manufacture zero-emission sports cars in serial production (Mangram, 2012). Furthermore, Tesla has recently entered the luxury vehicle sedan market with its Model S and it seeks to sell sleek, eco-friendly designs at high margins (Sun, 2011). According to Sun (2011), Tesla has a completely different business model in comparison with General Motors, Ford and Chrysler in Detroit. The previously mentioned author asserts that Tesla`s strategy reflects Apple Computer`s business model which attempts to address the increasing demands for electric vehicles (Sun, 2011).

Christensen (1997) has initially defined the disrupting innovation as `a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors` (Čiutienė and Thattakath, 2014, p. 16). Christensen argues that the disruptive innovations are not necessarily advanced technologies and depicts the fact that the evolution of business at industry or market level has caused a shift from the technological focus to a business modelling focus (Christensen and Raynor, 2003; Johnson, Christensen and Kagermann, 2008). Several contemporary examples of disruptive innovators consist of Google advertising, Cisco routers as well as Fidelity mutual funds and Southwest Airlines business model (Christensen et al., 2009). The previously mentioned companies have changed the entire market over time because they introduced an innovation which `disrupted` the market in unexpected ways (Cortez, 2014).

Tellis (2006) has challenged some of Christensen’s conclusions, arguing that the assumption stated by the latter scholar who supports the fact that disruptive technologies disturb incumbent technologies can only be verified after the market has been changed. Accordingly, it can be argued that in the case of Tesla Motors the strategic orientation which the company is adopting is important because it includes its philosophy of how to conduct business in order to acquire greater performance (Gatignon and Xuereb, 1997). According to Day (1994), the beliefs and the values of Tesla Motors, in this particular case, define the resources to be used and consolidate the capabilities and the resources into a `cohesive whole` (Zhou, Yim and Tse, 2005, p. 45). Hence, the previously mentioned capacities represent the origin of the competitive advantage which and are hard to trade, duplicate or imitate (Day, 1994; Hunt and Morgan, 1995).

The resource-based view (RBV) framework can be used to assess the organisational strategy of Tesla Motors and identify the value, rarity, imitability and nonsitutability (VRIN) of its resources (Sillince, 2006). The previously mentioned attributes can determine the competitive advantage of Tesla and are seen by Sillince (2006) as rhetorical constructions. In addition, it can be noted that Sillince (2006) is criticising the fact that the rhetoric has a significant influence on an organisation`s actions because of its practice to link resources, rhetoric and RBV. Similarly, Bitzer (1968) asserts that only the rhetorical situation made up of the constraints that bear on the audiences, resources and a critical firm issue, determine the occurrence of such a discussion about the organisational resources (RBV). A conclusive example of a constraint which relates to the particularities of the organisation and industry`s use of rhetoric is the public announcement made by an organisation with more market power to attract more attention (Sillince, 2006).

By applying to Tesla the VRIO framework which is the improved version of Barney`s (1991) VRIN model, it can be determined to what extent the company`s resources are a source of sustainable competitive advantage. According to the latter framework, an organisation can achieve and maintain a competitive advantage only when it has resources that meet all of the VRIO principles: value, rarity, imitability and organisation exploitation (Rothaermel, 2015). Firstly, Tesla can be considered valuable because it is the only electrical car manufacturer which provides its own `Supercharger Network` and focuses on developing the rapid-charging technology while trying to reduce the battery pricing costs by 30 percent (Financial Times, 2014). Furthermore, by referring to the propriety showroom sales of Tesla, it can be noted that they use a franchise system and keep sales and service centres in-house (Financial Times, 2014). This business model gives to Tesla the capacity to manage their image throughout the entire value chain (Fleming, 2014).

The second principle of the VRIO framework refers to control of the resources (Rothaermel, 2013). In the case of Tesla, it can be argued that the decision made by their CEO, Elon Musk, to disclose the patent book to the competitors has a significant effect on the company`s level of rarity and might represent a vulnerability as the Model S has over 250 registered patents (Fleming, 2014 ). However, Tesla differentiate itself from the rest of all their competitors because of their original sales model as well their supercharge infrastructure available for their customers in USA, Canada, Europe, China, Japan and Australia. Thirdly, taking into account the inimitable principle, Tesla has been successful in maintaining the brand control due to its `Silicon Valley` approach to the business model reflected by their dealerships as well as their focus on solving complex problems (Fleming, 2014).

Finally, the last principle of the VRIO model analyses to what extent is an organisation able to exploit its resources (Rothaermel, 2013). In this regard, Tesla has been successful in exploiting its organisational capability in order to generate a supplementary source of income from selling to other firms their extensive research. Furthermore, all the models produced by Tesla are based intensely on the research and development conducted by their department which it will be continually exploited in order to produce more affordable models on a larger scale. Similarly, the excellent opportunity represented by Tesla`s supercharger network it is expected to expand and further develop in order to deliver a better customer satisfaction (Fleming, 2014).

A major criticism of the RBV framework is pointed out by Sillince (2006) who asserts that RBV is founded on subjective or socially constructed beliefs. He claims that `there is no account in the theory of how actors come and hold those belief about resources` (Sillince, 2006, p. 188). Similarly, Priem and Butler (2001) argue that RBV model is ineffective at clarifying how companies create value, rarity, inimitability, and nonsubstitutability. Furthermore, Sillince (2006) argues that the RBV framework does not indicate how a company can maintain its competitive advantage on the long term. The key problem highlighted by Sillince (2006) is related to the methods used by firms to rhetorically present their competitive advantage to their external and internal audiences. It can be noted that the competitive advantage is based on intangible resources (e.g. culture of the organisation) which can be socially constructed with the influence of media, company`s websites, annual reports as well as newspapers and journals.

In order to critically analyse the business strategies used by companies to gain the competitive advantage, it can be argued that Penrose`s (1959) influential theory about how firms grow is useful to determine to what extent is a firm`s fast growth sustainable. The central argument stated by Penrose refers to the fact that the administrative restraints have a significant influence on the speed of the firm`s growth, therefore the growth process is dynamically constrained. In the case of Tesla, the growth happened gradually as it took five years to release the first model, Tesla Roadster. However, the fact that the CEO of Tesla, Elon Musk has expressed its interest to collaborate with companies such as Toyota and Lotus and even reveal Tesla`s patterns, shows that the company`s interested to establish themselves on the market before the competitors with hybrid and hydrogen-cell cars. In this case, it can be argued that the disruptive innovation at Tesla can also said to be socially constructed by the influential newspapers such as The Financial Times (2015) and Forbes (2015) who assert that `Elon Musk is revolutionizing two industries at once, disrupting traditional automakers with his electric car maker Tesla and shaking up spacecraft with SpaceX`.

According to Zhou, Yim and Tse (2005), there are two different perspectives (e.g. `inside-out` and `outside-in`) which can be used to achieve the competitive advantage. In order to further analyse Tesla Motors, the `outside-in` perspective has to be taken into account. In this case, the PESTEL (Political, Economic, Socio-Cultural, Technological, Environment and Legal) framework represents a relevant tool to evaluate the demand uncertainty, competitive intensity as well as the external market forces and technological turbulence of Tesla Motors (Porter, 1980, 1985). PESTEL framework has two essential roles for a firm. On one hand, it identifies the environment within which the firm performs. On the other hand, it identifies the relevant information that will enable the firm to anticipate circumstances and situations that it might confront in the future (Rothaermel, 2015). By taking into account the political factors which affect Tesla, it can be noted that at the international level, several countries have encouraged the adoption of alternative-fuelled automobiles (Lane, 2014). For example, the American citizens who use hydrogen fuel cell vehicles could get tax incentives ranging from $20 to $40,000 (Lane, 2014). Furthermore, due to the fact that Tesla operates in 17 countries from Asia, North America and Western Europe, it has to take into consideration different political patterns which influence their business operations (Tesla, 2014). In this case, the most significant problem which Tesla has is in New Jersey, USA due to the fact that in this state the new cars can be only sold through a franchised dealer rather than the manufacturer itself (George, 2014).

The economic factors which can be taken into account when analysing Tesla Motors are related to the fact that in the recent years the alternative energy industries have registered significant growth (BBC News, 2014). However, the cost of using the traditional oil powered cars has been decreasing once the oil price began to shrink. In addition, the increasing purchase power of the customers after the recession as well as the recovery of GDP can be reflected in a higher demand for more efficient cars (World Bank, 2014). The next aspect taken under consideration by the PESTEL framework refers to the social factors. In this case, Tesla has been considered a great alternative because customers have rated fuel efficiency as one of the most important aspects when it comes to deciding which new car to buy (KPMG, 2013). However, a major drawback for Tesla is represented by their expensive batteries and limited range as well as their high purchase prices (KPMG, 2013).

The automotive industry has been influenced significantly by the technology advancement and it started to shift towards a better energy efficiency approach (KPMG, 2013). According to Kachaner et al. (2011), market places as well as B2B platforms have given increased opportunities to the car industry which led to reducing the costs of the vehicles which use alternative power. In the case of Tesla, the technological problems raised by the customers determined the company to recall almost all of the cars in 2013 in order to fix a problem with the software which was causing an overheating (Bunkley, 2014). In addition, McKinsey and Company (2013) assert that once disruptive technology reaches the maturity, it has the potential to change the entire industry. This relates to the fact that Tesla is the only manufacturer which is able to offer to its customers a car`s autonomy between 260 and 300 miles, which is significantly superior in comparison with what any other competitor can offer (Tesla, 2014). The last two factors of the PESTEL model refer to the environmental and legal aspects. Firstly, the growing awareness to the climate change has a significant effect on how the companies operate as well as on the customers who take into account more carefully the environmental effect implied by the production process of products (Snyder, 2014). In the case of Tesla, it can be noted that the company has been incorporated the environmentally friendly approach, being one of the single manufacturers of luxury sports car with zero CO2 emissions (Tesla, 2014). Finally, the legal aspects affecting Tesla are related to the fact that several states from the United States do not allow the auto manufacturers to sell directly the new cars. Despite of the efforts made by Tesla to enter the car market, the company is still restricted to sell in Virginia, Maryland, New Jersey, Texas and Arizona (Snyder, 2014).

Conclusion

The present paper was designed to determine the efficiency of the frameworks used to analyse the internal (RBV) and external environment (PESTEL) of Tesla Motors and to determine the effect of rhetoric marketing used to create the symbolic value of the brand. The first part of the essay attempted to relate the concept of disruption with the competitive advantage which the RBV model is creating with the help of the social construction. In the case of Tesla Motors, the internal environment analysed with the VRIO model has established the fact that Tesla is valuable, rare, inimitable and a strongly organised. However, the rhetoric of Tesla is constructed especially by publications such as Financial Times and Forbes, as well as by the interviews of its founder Elon Musk. Tesla has been considered as a disrupter innovator and the image which the company has established on the automotive industry in the recent years is stronger than before. The disruption can be assessed only after the market has changed completely, therefore it is necessary to indicate that this process takes a long period of time and it is possible only if the content of the knowledge can be sustained by its performance statistics. Both of the frameworks used to analyse Tesla present several limitations as they cannot evaluate precisely the internal and external environment as scholars such as Sillince and Balogun indicate in their analysis. The innovation which Tesla has used to differentiate them from the competition has to be sustained by the more established competitors from the automotive industry in order to generate the shift towards the production of the electrical cars instead of hybrid or hydrogen-cell powered ones. Therefore, the strategy adopted by Tesla`s CEO to share the patents is suitable when taking into account the potential of the company for further development in the future.

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