Porter’s 5 Forces Analysis of Tesla

Porter’s 5 Forces Analysis of Tesla

Tesla did not invent electric vehicles but it has succeeded in developing relevant technologies further to bring these vehicles to the mass market. Its venture into clean energy technologies has also advanced developments in power storage and end-use photovoltaic solar power systems. These accomplishments have made it one of the most valuable automakers and companies in the world. Part of its success comes from its notable strengths and its competitive advantage which include cost-efficiency through vertical integration and a dynamic pricing strategy.

Analyzing Its Industry Position and How It Compares to the Competition: Porter’s 5 Forces Analysis of Tesla

1. Industry or Competitive Rivalry

Note that Tesla competes in three industries and markets. These are the automotive, battery or energy storage, and photovoltaic solar panel industries and markets. Furthermore, it also serves the more specific vehicle niche and lithium-ion battery market. Its multi-industry business exposes it to rivalries from different fronts.

There are different competitors in the automotive industry. These include automakers in the United States, Europe, and East Asia. There are also different producers and suppliers providing solar power solutions to commercial and residential consumers both in the U.S. and across the world. The intensity of the competitive rivalry in these industries and markets is high.

However, when it comes to the energy storage market, Tesla has a competitive advantage. Its advanced technologies and vertical integration strategy have made its batteries affordable and accessible. Note that it is one of the largest suppliers of energy storage devices in the world. The intensity of competition is moderate due to the presence of other players.

2. Threat of Substitutes

Understanding the threat of substitutes for Tesla, especially its electric vehicle business, requires taking into consideration two key points: primary substitutes to electric vehicles and primary substitutes to private vehicle ownership.

Of course, the primary substitutes for electric vehicles are engine-based vehicles that run on gasoline. There is a wide range of vehicles and vehicle models to choose from. Smaller cars and even mid-range ones are more affordable than Tesla vehicles. The threat from these products is high due to their price and in consideration of access to fuel versus charging stations.

Another substitute for electric vehicles represents a substitute for private vehicle ownership. These include different modes or forms of sustainable transport such as mass transportation, smaller electric vehicles such as scooters, and bicycles.

Nevertheless, when it comes to its energy storage and solar power businesses, the threat of substitutes is moderate to low. There are still no feasible substitutes for lithium-ion battery technology because it remains a standard for energy storage. There is also no clean energy substitute for solar panels for end-use consumption.

3. Threat of New Entrants

Advances in technologies relevant to the design and production of electric vehicles have lowered the entry barriers to the entire electric vehicle market and thus, heightening the threat of new entrants for Tesla. There are now several startup electric automakers in the market that take advantage of production capabilities in countries such as China.

Established automakers have also entered the market. Honda and Toyota have their respective electric cars in their respective product portfolios. Chevrolet and Mercedes-Benz have also electric vehicles targeted toward mid-range to high-end consumers. Other automakers can enter the market given their access to capital and economies of scale.

Its energy storage and solar panel businesses also face a higher threat from new entrants. Several startups can outsource manufacturing capabilities from established producers to minimize capital requirements. There are established and growing manufacturers of batteries and photovoltaic technologies in countries such as India and China.

4. Bargaining Power of Buyers

There are different factors influencing the bargaining power of buyers of Tesla vehicles, as well as its battery and solar panel products. For example, as explained above, the threat of substitutes for electric vehicles is high, thus compelling automakers to lower their prices.

Furthermore, buyers can also be price sensitive. They might refuse to purchase an electric vehicle or install solar panels in their homes if the costs of doing so are not aligned with their socioeconomic status or purchasing power. Demand for these products is dependent on the income and employment levels in a particular geographic market

Tesla has still managed to create a high level of differentiation in its electric vehicles to lower or manage the high bargaining power of its potential buyers. Its closed-loop product ecosystem makes owning and driving a Tesla vehicle convenient for vehicle owners.

For its energy storage devices and photovoltaic system solutions, its vertical integration strategy, economies of scale, and relationship with relevant suppliers have enabled it to bring down the prices of its products. One of the goals and central to the mission of the company is to make clean energy solutions accessible and affordable to the mass market.

5. Bargaining Power of Suppliers

Remember that vertical integration is one of the notable strengths of Tesla. Its vertical integration strategy has been demonstrated in the fact that it produces more than 80 percent of the components needed for its electric vehicles. This lowers its dependence on suppliers and exposure to risks associated with supply chain disruptions.

Of course, the bargaining power of suppliers in its electric vehicle business range from moderate to low. The company still outsources several components from suppliers. However, because of its status in the industry, it has a commanding power over these suppliers. These suppliers would want to work with Tesla because of the size of the business doing so will bring.

The specific solar panel business is somewhat exposed to moderate to a higher level of supplier bargaining power. The company does not manufacture photovoltaic components. It still depends on third-party manufacturers. The rise of other competitors in the solar panel market and the high threat of entrants lowers the supplier-to-firm concentration ratio.

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