In mid-2018, the U.S. auto industry was in the early stages of what many believed would be a significant evolution in how people thought about and used cars. The future would be dominated by electric and autonomous vehicles. Car ownership in which people paid for a hard asset with all its bells and whistles would give way to people buying miles on shared vehicles. Tesla co-Founder and CEO Elon Musk had envisioned his company’s electric vehicles leading the charge in the industry’s evolution. However, the company was burning through cash at an unsustainable rate as it prepared to launch the industry’s first mass-market electric vehicle, the Model 3. Many industry observers doubted whether Tesla would have enough money to stay afloat and if Musk was the right leader.
Answers to each of the three questions below should be approximately 1-2 pages (double-spaced), for a total response of approximately 4-6 pages of text (double-spaced, 12-pt font, 1-inch margins). Supporting items such as spreadsheets, figures, and graphs are encouraged, but not mandatory. (Note that answers which are significantly shorter or longer than the page limit are unlikely to receive full credit; supporting items do not count toward the page limit.)
- [60 points] Quantitative Exercise: Take a close look at the “Competitors” tab of the Excel Exhibits above. Tesla is significantly smaller than any of its competitors, and is also the fastest-growing firm in the auto industry. Other than measures of size and growth rate, can you identify at least four additional key performance indicators (KPIs) where Tesla is an outlier compared to its competitors? For each KPI, calculate the impact on Tesla’s annual profits (either positive or negative, compared to the industry average), and explain how the KPI fits into Tesla’s overall strategy. (Hint: be sure to use KPIs that do not depend on size; for example, look at operating margin instead of operating profit.)
- [60 points] From the perspective of 2018, how attractive is the auto industry, in terms of the five forces of industry analysis? What is the industry’s current stage of evolution, and what is the likely impact of the most significant of the potential disruptions discussed in the case (electrification, autonomous driving, alternatives to private ownership, etc.)? Are the established firms that have dominated the auto industry in recent decades likely to perform well in the future, or will new entrants like Tesla likely to take over?
- [60 points] The case describes Tesla as “more vertically integrated than any [other] car company” in the modern auto industry, and highlights a number of areas where Tesla has chosen to integrate activities that other companies outsource. How well do Tesla’s vertical integration decisions match textbook theories like the Efficient Boundaries Model and/or the Strategic Sourcing Framework? What are the costs and benefits of this vertically-integrated approach for Tesla? What should Elon Musk prioritize going forward in order to give Tesla the best chance for success?