Tesla Motors, Inc.’s Five Forces Analysis & Recommendations (Porter’s Model)

Tesla Motors, Inc. Five Forces Analysis, Porter’s, competition, buyers, suppliers, substitution, new entrants, automotive case study
A Tesla car in Germany. A Five Forces analysis (Porter’s model) of Tesla Motors, Inc. points to competition as the biggest force in the automotive industry environment. (Photo: Public Domain)

Tesla Motors, Inc. maintains its profitability through strategic measures that address the challenges outlined in this Five Forces analysis of the automotive business. Michael Porter developed the Five Forces Analysis model as a tool to understand the impact of external factors on firms and the conditions of their industry environment. This Five Forces analysis of Tesla looks into the external factors significant in the automotive industry, and how such factors affect the company. As one of the biggest players in the electric vehicle market, Tesla must effectively address such external factors to ensure its long-term competence and resilience in the face of competitive rivalry in domestic and international markets.

Tesla’s success as an innovative manufacturer of electric vehicles is partly based on its strategies that tackle the external factors in the automotive industry environment. This Five Forces analysis (Porter’s model) shows that Tesla must prioritize competitive rivalry as the most significant of the forces in its business environment.

Overview: Tesla Motors, Inc.’s Five Forces Analysis

Firms in the automotive industry environment are subject to a variety of external factors, including technology-based firm competitiveness. Tesla’s profitability is a reflection of the organization’s strategic effectiveness. However, Tesla must ensure that it addresses such external factors according to the intensity of the forces impacting the business, as shown in this Five Forces analysis:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (moderate force)
  3. Bargaining power of suppliers (moderate force)
  4. Threat of substitutes or substitution (moderate force)
  5. Threat of new entrants or new entry (weak force)

Recommendations. The results of this Five Forces analysis of Tesla Motors, Inc. show that competition is the most significant force impacting the business. Thus, the company must prioritize this force in its strategic formulation. A recommendation is for Tesla to continue strengthening its competitiveness. Stronger competitive advantage is achievable through innovation and increased market presence. For example, in terms of innovation, Tesla can boost its research and development (R&D) investment to outpace competitors’ rate of innovation. On the other hand, increasing market presence through marketing campaign aggressiveness supports Tesla’s mission and vision statements.

Competitive Rivalry or Competition with Tesla Motors, Inc. (Strong Force)

Tesla Motors, Inc. operates in a highly competitive market. This aspect of the Five Forces Analysis outlines the influence of competition on the automotive industry environment. In the case of Tesla, the intensities of the external factors responsible for the strong force of competitive rivalry are as follows:

  • Small number of firms (weak force)
  • High aggressiveness of firms (strong force)
  • Low switching costs (strong force)

There are only a small number of significant firms operating in the automotive market. This external factor limits the effect of competition on companies like Tesla Motors, Inc. However, these firms are generally aggressive in innovating and promoting their products. Such condition strengthens the effects of competitors against Tesla. Also, the low impediments for customers to buy cars from other manufacturers (low switching costs) further strengthen competition. This aspect of the Five Forces analysis of Tesla points to competitive rivalry as a high-priority strategic consideration in the automotive industry environment.

Bargaining Power of Tesla’s Customers/Buyers (Moderate Force)

The influence of customers on firms and the automotive industry environment is accounted for in this aspect of the Five Forces Analysis. Tesla’s customers are a direct factor that determines the company’s sales revenues. The following external factors and their intensities maintain the moderate force of the bargaining power of customers on Tesla Motors, Inc.:

  • Low switching costs (strong force)
  • Moderate substitute availability (moderate force)
  • Low volume of purchases (weak force)

The low switching costs reduce barriers in Tesla customers’ tendency to purchase cars from other providers. This external factor imposes a strong force against the company and other players in the automotive industry environment. However, the availability of substitutes is only moderate in many cases, thereby limiting customers’ bargaining power against Tesla. For example, many customers in suburban areas have limited access to public transportation, making it more practical for them to drive their own car. In addition, the low volume of purchases (each customer buys and keeps only one or a few cars) reduces the influence of customers on Tesla. Thus, Tesla considers the bargaining power of customers a second-level strategic priority, based on the intensities of the corresponding external factors shown in this aspect of the Five Forces analysis.

Bargaining Power of Tesla’s Suppliers (Moderate Force)

Tesla’s business partly depends on the reliability of its suppliers. This aspect of the Five Forces Analysis shows how suppliers shape the industry environment by influencing the availability of materials that firms need. The intensities of the external factors that create the moderate force of the bargaining power of Tesla’s suppliers are as follows:

  • Moderate forward integration (moderate force)
  • Moderate size of suppliers (moderate force)
  • Moderate supply (moderate force)

Tesla’s suppliers have a low level of forward integration. This external factor refers to suppliers’ limited control in the distribution and sale of their products. For example, some suppliers use third parties to sell their materials to Tesla, while others directly transact with the company. In addition, most of these suppliers are moderately sized, thereby having limited influence on the automotive industry environment. Another external factor is the moderate level of supply, which empowers suppliers to affect Tesla, but only to a limited degree. This aspect of the Five Forces analysis of Tesla indicates the bargaining power of suppliers as a secondary strategic priority.

Threat of Substitutes or Substitution (Moderate Force)

Tesla Motors, Inc. experiences the impact of substitutes on the automotive industry environment. In this aspect of the Five Forces Analysis, the intensities of the external factors that lead to the moderate force of the threat of substitution against Tesla are considered, as follows:

  • Low switching costs (strong force)
  • Moderate substitute availability (moderate force)
  • Moderate performance of substitutes (moderate force)

The low switching costs enable substitutes, such as public transportation, to easily attract customers. This external factor imposes a strong force against Tesla’s industry environment. However, the moderate availability of substitutes limits such influence of suppliers. In relation, many substitutes have only a moderate level of performance in satisfying customers’ practical needs, thereby further limiting such force against Tesla. In this aspect of the Five Forces analysis of Tesla Motors, Inc., the external factors point to the threat of substitution as secondary consideration in the company’s strategies.

Threat of New Entrants or New Entry (Weak Force)

New entrants or firms impact the automotive industry environment, thereby determining the performance of companies like Tesla. This aspect of the Five Forces analysis identifies the intensities of the external factors that create the weak force of the threat of new entry, as follows:

  • High cost of brand development (weak force)
  • High cost of doing business (weak force)
  • High economies of scale (weak force)

Tesla Motors, Inc.’s business is difficult to compete with, especially because of the high cost of brand development. For example, the company already has a strong brand that new entrants find difficult to match. In addition, automobile manufacturing has high costs, which impose a barrier to new firms. Also, large players like Tesla benefit from increasing economies of scale, which new entrants can only achieve upon exceeding a production threshold. Based on the external factors in this aspect of the Five Forces Analysis, the threat of new entry is only a minor strategic concern in Tesla’s industry environment.

References