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How it works
Tesla is the first American car company to go public in 2010 since Ford Motor Company in 1956 (Tesla, 2018). Since then, Tesla’s stock has gone up as the company keeps rolling out new features and models while simultaneously capturing the imagination of a curious public (Tesla, 2018). There are specific ways that Tesla has become such an outstanding company soaring as they keep coming up with new products. With many supply and demand, price elasticity and many other aspects to become such a great company Tesla has grown to be the future of our society.
Tesla was founded by Elon Musk and Martin Eberhard in 2003 and went public in July 2010. An electric-car maker headquartered in Palo Alto, California, Tesla has been on top of the trend towards alternative powertrains in the passenger vehicle industry (Eisenstein, 2018). Tesla has delivered around 40,740 vehicles globally during the second quarter of 2018, after fiscal year 2017 deliveries amounted to around 103,000 units. As of 2018, Tesla’s model range includes the Tesla Model S, Tesla Model X, Tesla Model 3, as well as future planned Tesla Semi and Roadster models (Eisenstein, 2018).
How it works
Including Powerwall and Powerpack batteries, solar panels, solar roof tiles, and some related products to enhance the ability of performance of the company and gain cliental. The company’s products were originally aimed at customers in the high-end sphere of the market, but with the release of the Model 3, are now targeting broader customer segments. Tesla Motors has developed a way to look forward to our future as a society, and to see what more is still to come.
Tesla Motors was name after Nikola Tesla and formed to develop an electric sports car. “Tesla’s goal is to accelerate the world’s transition to sustainable energy” (Tesla, 2018). For instance, not just building cars Tesla is democratizing green energy by creating a self-dependent ecosystem of products with using green energy for homes, cars, and appliances. Tesla’s mission is ‘To accelerate the world’s transition to sustainable energy’ (Tesla, 2018). Having good quality, reliability, earth safe, and self-dependent ecosystem the future with Tesla will soar and be able to be the future of energy products in our society. With ambitious goals, Tesla is the future of solar energy used for cars, homes, and appliances; where building the “machine that builds the machine” is going to change our world of the future.
Tesla builds not only all-electric vehicles but also infinitely scalable clean energy generation and storage products. Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better. “Launched in 2008, the Roadster unveiled Tesla’s cutting-edge battery technology and electric powertrain” (Tesla, 2018). From there, Tesla designed the world’s first ever premium all-electric sedan the Model S from the ground up, becoming the best car in its class in every category (Tesla, 2018). The model S used lithium-ion battery cells and the first production with a range greater than 200 mi (320 km) per charge (Tesla, 2018).
All Tesla vehicles including the IPO, Model S, Model X, and Model 3 rollout are all produced at it’s factory in Fremont, California, where most of the vehicle’s components are made. To achieve Tesla’s goal of having the safest factories in the world, Tesla is taking a proactive approach to safety, requiring production employees to participate in a multi-day training program before ever setting foot on the factory floor (Tesla, 2018). Tesla continues to provide on-the-job training and track performance daily so that improvements can be made quickly. Also manufacturing a unique set of energy solutions including Solarcity acquisition with the Powerwall, Powerpack and Solar Roof. This enables homeowners, businesses, and utilities to manage renewable energy generation, storage, and consumption.
Supporting Tesla’s automotive and energy products are a facility designed to significantly reduce battery cell costs called Gigafactory 1. With having cell production in-house, Tesla manufactures batteries at the volumes required to meet production goals, which creates many jobs. Building its most affordable car yet, Tesla continues to make products accessible and affordable to more and more people, with accelerating the advent of clean transportation and clean energy products. For example, electric cars, batteries, and renewable energy generation and storage already exist independently, but when combined, they become even more powerful and “that’s the future we want” (Tesla, 2018).
The demand for Model S and X has effected in a substantial customer order backup list whereas, Tesla is following through with its plans to optimize the options mix for the two vehicles. This could mean the involvement of more features in the base models for the Model S and X, along with higher starting prices. Although, it could also mean that the introduction of more high-end features or simply a higher prioritization of delivery windows of highly optioned Model S and X units (Sparks, 2018).
Therefore, as Tesla has more of a demand in their products they need to be able to keep up with supply to keep the customers happy especially if they are paying high prices for the product. As orders grew for Model S and Model X in 2017 Tesla began to worry about the new Model 3 coming out. When Model 3 was on display customer traffic increased considerably and orders for Model S and Model X have increased (Sparks, 2018). Because there is more customer traffic, there has been an even bigger increase in solar and Powerwall sales. As the demand for the new Model 3 rollout has increased, the company has also been ramping up Model S production, but it has struggled with the launch of the new Model X SUV, which has been plagued by quality glitches and supply chain issues.
Overall, “Tesla produced a quarterly record of 15,510 vehicles in the first three months of 2016, up 10 percent from the prior quarter, including 12,851 Model S cars and just 2,659 of the Model X”. (Eisenstein, P. A, 2018). In the second quarter, Tesla expects to produce about 20,000 vehicles, but said they might not reach customers in Europe and Asia until the third quarter. For the year, Tesla said it remains confident that it will deliver 80,000 to 90,000 Model S and Model X vehicles, due to growing of demand and its planned production increases for later in the year ( Eisenstein, 2018). This planned growth means Tesla will need more capital as it plans to increase capital expenditures by about 50 percent above the $1.5 billion it had planned for in 2016.
This will impact Tesla’s ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla. Tesla saw a rapid burst of reservations when the new Model 3 was announced with $1,000 in deposits (Eisenstein, 2018). Although, having many potential buyers still uncertain about when they might be able to actually take delivery, investment bank Needham & Company on Thursday issued a report claiming that 24% of those reservations have been canceled.
There is substantial evidence that the demand for model S, Tesla’s flagship product, has been largely unchanged over the period 2014- 2016, despite a large growth in the quantity demanded and revenue. There are two reasons for this seemingly contradictory statement. First, the demand for model S decreases as prices decline, and the quantity demanded increases. Next, the demand for model S is highly elastic. Meaning a reduction in the price would produce a disproportionately large increase in the quantity demanded. Because the percentage of reduction in price causes a much larger percentage increase in deliveries, the revenue will increase.
The data suggests that most of the observed increase in model S deliveries and revenue can be attributed to price reductions without a noticeable increase in demand. Tesla has positioned them as a luxury car manufacturer with the rare benefit of being completely electric. The electric car consumer is most likely with an Urban/suburban lifestyle with a home and garage, 84% men, 51% aged 45-64 and 33% aged 18-44, Educated 43% of users have post graduate degree vs. 25% of general market, a high income, concerned about environment and effects of fossil fuels, drive short distances, and 5% were previous Toyota owners (Team, 2018). The Model X is a great product that cannot be compared to other vehicles.
As fast as a sports car, spacious as a SUV and has as energy efficient as a motorbike. Customer benefits are not sacrificed in this vehicle and for such a high price is appropriate to them and the quality they are getting. Their target consumer is the high-income individual with a lot of money to spend. These individuals in general are prepared to pay more to get the best quality product. Telsa’s most expensive model of the X with all insensitive is far costlier than any of its competitors. This gives the customer the image that Tesla is a vehicle that is far more superior to all other vehicles and positions them as a more luxurious vehicle than its competitors. Tesla also has a fixed price on their vehicles, so there is no negotiation, which helps build a loyal customer base.
The price elasticity of demand impacts the way consumers and Tesla Motors makes the pricing decisions and revenue for the company. Because Tesla vehicles tend to have customers with a higher income, and a fixed price Tesla has a benefit of always having to increasing or keeping a higher price. Although, they are more expensive Tesla Motors has to keep up with their consumers making sure they always have some improving on technology and their luxurious aspects of a vehicles. This will keep the customers happy and the company making revenue from the consumers.
Indicating that Tesla will be decreasing their global workforce about 9%, impacting about 3,500 salaried staff to increase their profit. With making around 10,000 cars per week as the production scales up, the cost absorption should improve, helping the gross margins. “Tesla is targeting gross margins of 25% on the Model 3 by next year, which would be roughly in line with its premium vehicles” (Team, 2018). As a manufacturing company Tesla motors has fixed and variable costs in its operations. Fixed costs are costs that are independent of output. These costs remain constant throughout the relevant range, and include rent, buildings, machinery, and more. Variable costs are costs that vary with output.
Most of the time variable costs increase at a constant rate relative to labor and capital. Variable costs can include wages, utilities, and materials used in production. As model S brought in revenue of $3.20 billion in the Annual statement in 2015, with both fixed and variable costs having the effect of increasing sales. The general and administrative sales all include $603.7 million because of global expansion of the customer support of infrastructure and the business (Kimyes, 2016). The engineering work on model X included $464.7 million in 2015, where every Tesla car that sells they loose $3,200 rather that in 2014 (Kimyes, 2016). The sales and marketing costs are not all fixed, but as the production levels or sales change there will be fixed costs that will eighther improve or decrease their revenue.
Some of the Income statements for 2012 and 2013 were analyzed, whereas research and development costs are considered as fixed costs from the statement. The selling and administrative cost is treated as variable cost, as further detailed data was not available. The selling and administrative cost, when detailed, should result in an additional fixed cost in the long run and variable cost is expected to come down. In 2014 the revenues for Tesla motors were 2.31 billion, including parts, material, labor, shipping and logistics costs. Also fixed cost such as depreciation, insurance, rent, motorized tool costs, and warranty expenses. For example, in 2014 7 million dollars was for research and development expenses to develop the Model X. Tesla has also been focusing on higher variants of the Model 3 sedan.
For instance, most of the Model 3 vehicles that are being delivered currently start around an average cost of $50,000. Therefore, the higher mix of all luxury vehicles is more likely to help Tesla increase its profits. As you can see, from 2012 to 2015 this company has grown and has made a profit and revenue worth continuing to make more products that are environmentally friendly even though there has been a fluctuation between years they still continue to earn revenue. Being a company starting to get established, and continually expanding, it is interesting to look at their data, as the results are mixed, as the variable cost appears to go higher in this case.
This Graph explains the revenues earned and profits made with both fixed and variable cost together to show that Tesla has been successful throughout many years. Although there may have been some fluctuation and stand still points, Tesla has made sure that they make a plan to figure out how to get to their revenue and make a great impant and profit in the end as shown.
Many players in the auto industry including Ford, GM, Chrysler, and Toyota control over 60% of the market, traditional combustion engines with 97%, 3% utilize hybrid technology, 34% of autos are plug in EV, and .01% of Tesla commands of the entire auto industry (Hawkins, 2017). The growth in hybrid and EV market will depend largely on future oil prices, consumer sentiment, costs and R&D. The recent reductions in oil and gas prices put less strain on manufacturers and consumers. As Tesla has reported, their revenue shall increase and in the 3rd quarter 2018 by 128.65 % year on year, with an average competitors revenue growth of 17.22% ( CSImarket.com, 2018).
Their customer service should also increase due to more assurance of EV’s and the market booming of energy saving and economic products. The society is becoming more economically advanced, so Tesla has an advantage over other competitors and vehicle that are not electric.
Tesla Motors entered the market as the only electric high-performance vehicle. Their strategy is to enter into cheaper and broader markets.
The Barriers to entry is the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing firms because they protect their revenues and profits (Kenton, 2018). Including some barriers to entry of different tax benefits, customer loyalty, good brand image, and other aspects to keep customers and gain customers.
Tesla starting from nothing and now one of the top places in rankings for best cars and among some of the most popular companies within a little more than ten years. Up until now, companies like Toyota, Volkswagen, Ford and GM dominated the US market and led many to believe that the power these companies had could keep potential new entrants off the market (Kenton, 2018). Elon Musk the CEO of Tesla Motors claimed that his work is driven by the vision of how things could be rather than how they are. This is why Tesla did not see the numerous barriers to get into the automobile industry as threats. The current market and society was the only thing holding them back.
Moreover, Elon Musk decided not to create analogies with current companies, but to create his own enterprise and make it serve as a reference to others. The Roadster set the start and allowed Tesla to prove their initial success and raise the money required for the establishment of their Gigafactory and the future vehicle models that can now lead to the mass appeal and larger distribution. This will help customer loyalty with making sure to keep customers happy having to ensure better quality of EV’s. The success from doing something that required low capital that helped Tesla realize bigger projects taking the company closer to accomplishing its mission.
In the beginning of production, back in the early 2000s Musk valued the acceptance of failure and the feedback. One crucial part of the experience is the charging stations, which Tesla has been developing continuously for the past years. Tesla provided its customers with 120-V charging stations, but then realized that the time it takes for a car to charge becomes a burden and decreases the value of their product. This, bringing more customer to be satisfied and bringing more customers to know that there will be more ways to fill up their tank and not have to travel as far. Although, the company increased the network of its 240-V charging stations and believing this would help customer service reputation where it takes a shorter time to charge up a car battery. As of March 2016, Tesla has built 611 stations that charge at zero marginal cost to the customers.
Supporting the future business growth, Tesla’s organizational structure has helped Tesla Motors in many ways. Defining different patterns of interactions among the company’s components. As Tesla doesn’t have much competition, because of being the top EV company they have more of a near-monopolistic structure (Wadhwa, 2017). Although for years to come, competition with Tesla is said to gain structure of a monopoly competition. As years go by, the future of cars and products with is more and more environmentally friendly. The organizational structure also takes a traditional form, considering the company’s managerial focus and control, along with limited operational expansion in the global market. For instance, as a manufacturer of electric automobiles, batteries, solar panels, and related transportation and energy solutions, Tesla Inc. uses its corporate structure to facilitate extensive control of the organization (Team, 2018).
Tesla Inc. has a functional organizational structure that has a function-based hierarchy, is centralization, and with divisions. Most importantly, the functional hierarchy involves functional teams or offices that oversee domestic and international operations. Making sure to observe in traditional corporate structures, whereas companies aim to maintain strict managerial control of their operations including a few as technology, engineering, and finances. Uses centralization in its corporate structure. Centralization is managerial control on the entire organization through decisions that a central group or team generates. Whereas, the head of the offices of the global hierarchy form the corporation’s central headquarters control all of the operations. This organizational structure of Tesla minimally supports the autonomy of its regional or overseas offices.
Lastly, the divisions are used to implement different strategies, marketing campaigns, and organizing financial records and reports. The most important corporate structures are Automotive Energy Generation and Storage (Team, 2018). These organizational structures will impact the future effects of Tesla’s market and cause an increase or decrease of revenue.
Within the future recommendations for Tesla Motors, in order for Tesla to be successful and ensure that there will be an increase in revenue in the future there needs to be options for change. Including one important aspect of adding more EV Supercharging stations so customers have more options of where to charge their cars. This will ensure customer service for the future and for the present. Another future recommendation would be having to advertise the company more so more people will know about the company and products the company makes. This will also help customers be more aware of the company and will gain cliental because more people will know about what they produce and why they should choose to purchase a Tesla.
Also, making sure that have more locations and expand the company to more local and more Tesla gains customers due to an increase in changes and issues resolved. These aspects of change will increase revenue/profit, ensure that consumers will be happier and will continue to be customers. Customer expectations shall be met as the future of Tesla vehicles improve and gain more competition. The Model 3 will face somewhat tougher competition in 2019, as the likes of Volvo and Volkswagen launch new electric cars (Eisenstein, 2018). The EV version of the new Volvo’s XC40 is a SUV rather than a premium sedan.
Also available in both crossover and hatchback unlike the Tesla availability in EV. Although, Volkswagen doesn’t plan to start building electric I.D. cars until November 2019. Therefore, now only shipping the Long Range, Dual Motor All-Wheel Drive and Performance versions of the Model 3, makes good on its promise to ship the $35,000 Standard version of the car by early 2019 (Eisenstein, 2018). Suggesting that Tesla speed up the engineering and performance aspects to ensure that the new and improved Tesla vehicle will have what it takes to be more competitive to the new Volvo. To sustain Tesla’s success the price elasticity of demand must impact the firm’s pricing decisions and revenue growth. With applying the concepts of variable and fixed costs to you’re firm for informing its output decisions.
For instance, analyzing how different kinds of costs like labor, research and development, raw materials affect the firm’s level of output. Creating business strategies, including price and non-price strategies, based on the market structure to ensure the market share and potential market expansions (Eisenstein, 2018). The focus on research and development in the company’s growth strategy involves the modification of the assembly line to handle the production of the Model S and Model X. The company’s growth strategy was to increase production of the model S and to unveil its Model X in 2015 and Model 3 in 2017. This was in line with its production strategy and initiatives for the future.
With future success, by 2020 the Gigafactory is expected to achieve an output of battery packs that can be used not only for cars but also in stationary storage, helping to improve the reliability of the electrical grid, reduce energy costs for businesses and residences, and provide a backup supply of power (Hawkins, 2017). Tesla estimates that the factory will reduce the costs of its batteries by possibly 30% in 2020. CEO Musk claims that by 2020 Tesla will most likely be producing cars that go as far as 745 miles per charge (Hawkins, 2017).
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