Tesla Motors is so effective at aligning its business and operating model, that it took me quite some time to decouple the two for individual assessment. Tesla has gone through painstaking but innovative means to establish their entire value chain internally. From design, to manufacturing and supply chain management, to sales, Tesla tightly controls every aspect of operation so that it can consistently deliver on its value proposition of providing “high quality, environmentally friendly, premium vehicles that perform well and are safe”. Despite being one of the most popular cars in the news, Tesla is one of the smallest car manufacturers in the market and cannot take advantage of the economies of scale that most major auto companies do. To combat this, Tesla was innovative with its supply chain management, partnerships, and sales and distribution model.
Tesla has been very selective in choosing between conventional manufacturing methods for car parts versus alternative means based on how suppliers’ prices and timing capabilities fit into Tesla’s design and production timelines. When traditional suppliers could not meet their demands, Tesla deployed their talented designers to create the exact part they would need from scratch and began searching for new suppliers, who might not necessarily be in the auto industry, to fabricate these parts. These custom supply chains make Telsa’s design and fabrication timelines much faster than their competitors. Tesla also strategically partnered with Toyota and Diamler on the purchase of standard parts to benefit from the price reductions in larger economies of scale that it could not receive at its current volumes.
Tesla has diverged from the traditional dealership model in how it sells its cars. Tesla owns and operates its own showrooms, which serve as places for potential customers to learn more about the company and vehicles. Because of laws requiring cars to be sold in dealerships, Tesla cannot physically sell cars in these locations. Customers are required to purchase their cars online, but Tesla has streamlined the customer experience to make the process and selection of customizable car features intuitive. The direct to customer sales allows for consistent prices no matter the customer’s location and conveys a sense of fairness and transparency that is a normal gripe at an auto dealership. Like Dell, Tesla builds cars to order thus keeping its inventory very low and freeing up capital to be spent in other areas that can grow the business such as new product development and new showrooms.
When it comes to the product, everything Tesla does embodies its customer-centric focus. The company’s goal is to create strong relationships with its customers through an extremely positive customer experience through its purchasing and servicing processes. Very similar to how it runs its supply chains, Tesla does this by controlling every aspect of the customer experience ensuring each step exactly how it was envisioned. During the purchasing process, Tesla provides extensive education both in their showrooms and online through forums so that the customer feels comfortable with the purchase. Tesla owns its servicing centers, ensuring the best experience during this process also. Also, Tesla pushes out software and hardware updates to cars in order to address complaints as they arise, bypassing the need to visit a service center. This entire cycle makes customers stickier as once they have bought a Tesla and had the exemplary customer service, it is hard for them to exit.
As can be seen in the adjacent figure, Tesla has two positive feedback loops in its business model for greater profit generation that depend on perfect delivery on its value proposition and operating model. By consistently ensuring a positive customer experience, Tesla can convert more customers to sales and continue to grow its showrooms that will attract more customers to purchase their cars. By continuing to build a strong Tesla brand known for innovation and high quality while maintaining a lean, robust supply chain, Tesla can continue to fund research and development to stay at the cutting edge of the technology. Tesla can also use economies of scope to leverage its current operations and distribution processes in the development and delivery of future car models.
Tesla has already begun leveraging its economies of scope by broadening its product portfolio to include the Tesla Roadster, Model S, and now the Model X. The Model 3 has just been announced but will not be ready until sometime in 2017. Revenues have continued to grow from $413M in 2012 to $2B in 2013 and $3.2B in 2015. Research and Development has also continued to increase at a huge rate, up from $285M in 2013 to $603M in 2014. Unfortunately, the company has yet to turn a profit. We will have to see how turbo-charged Tesla’s battery is as it grows into a mature company.
Supply Chain Case Study: https://www.tradegecko.com/blog/tesla-custom-built-supply-chain
Tesla Financials: http://www.marketwatch.com/investing/stock/tsla/financials