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

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

Tesla Inc. (formerly Tesla Motors, Inc.) maintains its profitability through strategic measures that address the competitive challenges outlined in this Five Forces analysis of the global automotive business. Michael Porter developed the Five Forces Analysis model as a strategic management tool to understand the impact of external factors on firms and the competitive landscape of their industry environment. This Five Forces analysis of Tesla looks into the external factors significant in the automotive industry and the energy solutions 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 involving automakers like Honda Motor Company, General Motors Company, Volkswagen, Toyota Motor Corporation, Nissan Motor Company, and BMW (Bavarian Motor Works). The company must account for the nature and characteristics of such competition in the domestic and international markets for electric automobiles, batteries, and solar panels, as considered in this external analysis.

Tesla Inc.’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 and the energy storage and solutions market. This Five Forces analysis (Porter’s model) shows that Tesla must prioritize competitive rivalry as the most significant of the forces in its multinational business environment. Pressures from substitutes, suppliers and buyers are also considered in this business analysis.

Overview: Porter’s Five Forces Analysis of Tesla, Inc.

Firms in the international automotive industry environment experience a variety of external factors, including raw material availability and technology-based firm competitiveness. Tesla’s resilience is a reflection of strategic effectiveness. This company analysis shows that the business manages to grow in spite of competitive challenges. However, Tesla must ensure that it addresses 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 Porter’s Five Forces analysis of Tesla, Inc. show that competition is the most significant force that impacts the business. Thus, the company must prioritize this force in its strategic formulation. A recommendation is to continue strengthening Tesla’s competitiveness: Stronger competitive advantage is achievable through innovation and increased market presence. For example, in terms of innovation, the company can boost its research and development (R&D) investment to outpace competitors’ rate of energy storage innovation. In terms of increasing market presence, aggressive marketing campaigns support Tesla’s vision and mission statements. The other forces outlined in this Porter’s Five Forces analysis also have significant intensities, but to a lower degree compared to competitive rivalry. Managerial initiatives must address these forces according to their intensities.

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

Tesla, Inc. operates in a highly competitive market. This aspect of the Five Forces Analysis outlines the influence of competition on the automotive and energy solutions industry environment. In this case of Tesla, the external factors and their intensities 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 firms operating in the automotive market. In Porter’s Five Forces analysis framework, this external factor limits the effect of competition on companies like Tesla, Inc. However, these firms are generally aggressive in innovating and promoting their products. For example, large automotive companies have aggressive marketing campaigns. Tesla’s marketing mix or 4Ps partly meets such aggressiveness, which strengthens the effects of competitors against the business. Also, the low impediments for customers to buy cars from other manufacturers (low switching costs) further strengthen the force of competition. This aspect of the Five Forces analysis of Tesla Inc. points to competitive rivalry as a high-priority strategic management consideration in the automotive and energy solutions industry environment.

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

The influence of customers on firms and the automotive, battery, and solar panel 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 the company:

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

Low switching costs reduce barriers for Tesla customers to purchase cars from other providers. In the context of this Porter’s Five Forces analysis, 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 Inc. For example, many customers in suburban areas have limited access to public transportation, making it more practical 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, the intensities of the external factors in this aspect of the Five Forces analysis reflect the bargaining power of customers as a moderate force and a secondary management priority. This prioritization is reflected in Tesla Inc.’s generic strategy and intensive strategies.

Bargaining Power of Tesla’s Suppliers (Moderate Force)

Tesla Inc.’s business depends on the reliability of 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 level (moderate force)

Tesla Inc.’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 the framework of Porter’s Five Forces analysis, this external factor imposes a moderate force on the corporation. 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 this Porter’s Five Forces analysis of Tesla Inc. indicates the bargaining power of suppliers as a secondary strategic management priority.

Threat of Substitutes or Substitution (Moderate Force)

Tesla, Inc. experiences the impact of substitutes on the automotive and energy solutions 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 the company are considered, as follows:

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

As pointed out in the other aspects of this Porter’s Five Forces analysis of Tesla Inc., low switching costs enable competition. In this external analysis case, 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. For example, customers have only a moderate and limited number of substitute options in the market. In relation, many substitutes have only a moderate level of performance in satisfying customers’ practical needs. For instance, public transportation is not as versatile as a private car. This condition further limits substitutes’ force against Tesla. In this aspect of the Five Forces analysis of Tesla, Inc., the external factors point to the threat of substitution as a secondary management consideration in the company’s strategies.

Threat of New Entrants or New Entry (Weak Force)

New entrants are new firms, which impact the industry environment and determine the performance of companies like Tesla Inc. 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’s business is difficult to compete with, especially because of the high cost of brand development, along with the popularity of Elon Musk. For example, it is difficult for new entrants to match the company’s strong brand, which is one of the strengths enumerated in the SWOT analysis of Tesla Inc. This external factor is an entry barrier in the context of Porter’s Five Forces analysis. In addition, automobile manufacturing has high costs, which impose a barrier to new firms. Also, established 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 management concern in Tesla Inc.’s industry environment.

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