Tesla Business Strategy Analysis

Tesla’s business model and business strategy move along three key pillars:

Internalized design and development.
Owned manufacturing.
Direct distribution.

These three pillars together enable Tesla to be vertically integrated and therefore reach important economies of scale, which makes it possible for it to become more profitable as it scales.

Strategy	Description	Example	Implications	Integration
Electric Vehicles (EVs)	Tesla is primarily known for its electric vehicle (EV) business. The company designs, manufactures, and sells high-performance electric cars, including sedans, SUVs, and sports cars. Tesla’s EVs are known for their range, performance, and cutting-edge technology.	– Tesla Model 3, Model S, Model X, and Model Y are popular electric vehicle models. – The company continuously updates and improves its EVs through over-the-air software updates, enhancing features and performance.	– Pioneers the adoption of electric vehicles worldwide. – Reduces greenhouse gas emissions by replacing internal combustion engine vehicles. – Drives innovation in battery technology and autonomous driving systems.	Tesla’s EV business is tightly integrated into its overall strategy, serving as the foundation for the company’s mission to transition the world to sustainable energy. The company continually invests in research and development to improve EV technology and expand its vehicle lineup.
Energy Storage Solutions	Tesla offers energy storage solutions for residential, commercial, and utility-scale applications. Its Powerwall, Powerpack, and Megapack products store electricity from renewable sources, making it available when needed and supporting a more sustainable energy grid.	– Tesla’s Powerwall provides energy storage for homes, allowing users to store excess solar energy for use during peak demand or grid outages. – The Megapack is a utility-scale battery system that stores renewable energy for large-scale projects.	– Promotes the adoption of renewable energy by addressing intermittency issues. – Enhances energy resilience for homes and businesses. – Supports the growth of renewable energy projects and reduces dependence on fossil fuels.	Energy storage solutions complement Tesla’s broader mission by enabling the efficient use of renewable energy, reducing reliance on fossil fuels, and providing backup power during grid disruptions. These products align with the company’s sustainability goals.
Solar Energy Products	Tesla offers solar energy solutions, including solar panels and solar roof tiles. These products allow homeowners and businesses to generate clean electricity from sunlight. Tesla’s acquisition of SolarCity in 2016 expanded its presence in the solar energy market.	– Tesla’s solar panels and solar roof tiles integrate seamlessly with residential and commercial rooftops, converting sunlight into electricity. – The company offers solar installation services, making it easier for customers to adopt solar energy.	– Encourages the adoption of solar energy for electricity generation. – Reduces dependence on grid-supplied electricity and lowers energy costs. – Complements Tesla’s energy storage solutions by providing renewable energy sources for storage.	Tesla’s solar energy products and services are integrated into its broader energy ecosystem. They align with the company’s mission to transition to sustainable energy by providing renewable electricity generation options and supporting energy storage solutions.
Autonomous Driving Technology	Tesla is a leader in autonomous driving technology, equipping its vehicles with advanced driver-assistance features, such as Autopilot and Full Self-Driving (FSD) capabilities. The company collects real-world driving data from its fleet to improve its autonomous systems.	– Tesla vehicles feature Autopilot, which provides advanced driver-assistance features like adaptive cruise control and lane-keeping assist. – Full Self-Driving (FSD) offers more advanced autonomous capabilities, such as automated lane changes and navigation on highways.	– Advances road safety by reducing accidents and driver fatigue. – Positions Tesla as a leader in autonomous vehicle technology. – Provides valuable data for training and improving autonomous systems.	Autonomous driving technology is a significant part of Tesla’s vehicle strategy, enhancing safety, convenience, and differentiation. The company continually updates its software to improve autonomous features and expand its capabilities, aiming for eventual full self-driving capabilities.
Vertical Integration	Tesla emphasizes vertical integration by manufacturing many of its components in-house, including electric drivetrains, batteries, and chips for self-driving. This approach allows Tesla to have greater control over quality, costs, and innovation.	– Tesla’s Gigafactories produce batteries and electric drivetrains at scale. – The company manufactures its proprietary Full Self-Driving (FSD) computer chips. – Tesla is building Gigafactories for vehicle production in various regions, such as Giga Shanghai and Giga Berlin.	– Reduces dependence on external suppliers and potential bottlenecks. – Enables cost efficiencies and innovation in product development. – Supports the scale-up of production to meet increasing demand.	Vertical integration is a core part of Tesla’s strategy, enabling the company to maintain control over key technologies and reduce production costs. This approach is integrated into the entire product lifecycle, from battery production to vehicle manufacturing.
Global Expansion	Tesla aims for global expansion by establishing manufacturing plants and sales presence in key markets worldwide. The company builds Gigafactories and Supercharger networks in regions to support its growing customer base.	– Giga Shanghai in China manufactures vehicles for the Asian market. – Giga Berlin in Germany supports European production. – Expanding Supercharger networks across North America, Europe, and Asia to provide convenient charging infrastructure.	– Increases accessibility to Tesla vehicles and services worldwide. – Reduces shipping costs and delivery times. – Addresses local demand and regulatory requirements.	Global expansion is a crucial part of Tesla’s strategy, allowing the company to tap into new markets, increase production capacity, and enhance customer service. Tesla integrates its global footprint into its distribution, sales, and service networks.

Table of Contents

In-house manufacturing

history-of-tesla — Founded in 2003, by Eberhard and Tarpenning, eventually, the initial co-founders left the company, and by 2004, Musk first became the main investor, and thereafter, by 2008, he took over as CEO of the company. Tesla would go through many near-death experiences, until 2018. And yet, by 2021, Tesla became a trillion-dollar company.

When Tesla started to execute its business model, back in the early 2000s, it thought it could mostly outsource parts of the car, and create an electric vehicle, out of those.

Yet, they soon realized this assumption was completely off.

Not only they didn’t manage to secure proper parts for the vehicles, but none wanted to risk having electric vehicles that could have caught fire.

Instead, if Tesla wanted to make its business plan viable, it had to build its own manufacturing centers. It took years for the company to do that, and it’s starting to pay off today.

Now Tesla has various manufacturing facilities called Gigafactories.

Over the years, Tesla managed to open various Gigafactories: in Texas, Shangai, and Berlin.

The Gigafactory is a key ingredient to enable Tesla to mass scale the supply side. Meaning that the company will be able to manufacture potentially millions of cars, to distribute across the world.

Energy storage and generation

Another key element to making the Tesla business model scalable is the ability of drivers to find electric stations around the country and to quickly charge their cars.

That is why, over the years, Tesla has been ramping up its electric generation and storage arm.

The energy part is critical because it will enable Tesla to build the underlying infrastructure to power up its whole business model.

Just like AWS was developed initially by Amazon to power up its infrastructure. Over time, AWS grew into an enterprise platform, powering up a good chunk of the web.

And for the same token, when the Tesla energy storage and distribution infrastructure grows to the point of enabling third-party to get energy, this part will become a key ingredient of Tesla’s business model success.

Direct distribution

Another key element of the Tesla business model which the company started to build early on, is the direct distribution or the ability to sell Tesla vehicles either through its online stores or via its Tesla stores.

Tesla started to open its direct stores, very soon, as the company borrowed Apple’s direct sales playbook.

This wasn’t easy to set up and actually pretty controversial for the auto industry, as most car sales went through dealerships, yet Tesla set to do just that.

And financing models

As explained in real-time insurance, a combination of lower insurance premiums and better leasing rates has the potential to ramp up Tesla’s demand side, making it possible for many millions of Americans to own a Tesla.

This is critical because Tesla, on the one hand, can use its cars to gather driving data.

This will enable the company to build its own database of drivers, which can be dynamically scored, to assess their insurance premiums.

If drivers can adjust their driving behaviors by improving their scores, they can also see their insurance premiums reduced.

In addition, this might also make the whole lease less expensive, thus enabling more people to afford to buy a Tesla.

And by enabling Tesla to build another valuable business unit, which can be used to further scale its operations in the long run!

Key takeaways

Manufacturing, together with energy storage and generation and direct distribution, are some of the key ingredients of Tesla’s business model.
Tesla produces its cars in-house, controlling the supply side of the business.
Tesla also produces the parts for energy storage and generation, which is part of the energy infrastructure, is critical to powering up Tesla vehicles, and makes the whole network of electric cars more valuable. While on the other hand, it will also work as an infrastructure for third-party electric players in the future.
Tesla also directly distributes its cars through its e-commerce or physical stores, thus cutting middlemen and dealerships.
Lastly, Tesla leverages real-time driving data from its customers to build a database and dynamically adjust insurance premiums, which also makes Tesla more affordable. Thus, giving them a chance to get more people to buy a Tesla in the future. If the manufacturing helps Tesla push its supply side to mass scale, real-time insurance rates combined with in-house leases enable the company to scale the demand side of the business!

Key Highlights

Key Pillars: Tesla’s business model and strategy are built upon three key pillars: internalized design and development, owned manufacturing, and direct distribution.
In-House Manufacturing: Tesla recognized the need to build its own manufacturing centers due to challenges in sourcing parts for electric vehicles and concerns about safety. This led to the establishment of Gigafactories in various locations, enabling mass production of cars and batteries.
Energy Storage and Generation: Tesla’s focus on energy generation and storage complements its electric vehicles. The company aims to create an infrastructure of charging stations and energy storage solutions, similar to how Amazon Web Services (AWS) grew from supporting Amazon’s infrastructure to a broader enterprise platform.
Direct Distribution: Tesla adopted a direct distribution model, bypassing traditional dealerships. It established online and physical stores, allowing customers to purchase vehicles directly from Tesla. This approach was inspired by Apple’s direct sales strategy.
Real-Time Insurance: Tesla’s real-time insurance model utilizes driving data from its vehicles to offer dynamic insurance premiums based on individual driving behavior. This approach reduces insurance costs and makes leasing more affordable, ultimately driving demand for Tesla vehicles.
Vertical Integration: By vertically integrating design, manufacturing, distribution, and even insurance, Tesla achieves economies of scale, making it more profitable as it scales.
Database and Leasing: The real-time insurance model helps Tesla build a database of driver behavior, which contributes to assessing insurance premiums. Additionally, reduced insurance costs combined with leasing options make owning a Tesla more accessible to a broader range of consumers.
Scalable Supply and Demand: Tesla’s manufacturing facilities and vertical integration enable mass production, while real-time insurance and leasing options enhance affordability, allowing the company to scale both its supply and demand sides.
Business Transformation: Despite initial challenges and near-death experiences, Tesla’s business model transformation over the years has driven it to become a trillion-dollar company by 2021.
Economic and Environmental Impact: Tesla’s focus on electric vehicles, energy storage, and sustainability contributes to reshaping the automotive and energy industries, with a long-term goal of reducing carbon emissions.