MA616 Strategic Management

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MA616 Strategic Management

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MA616 Strategic Management

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Course Code: MA616
University: Melbourne Institute Of Technology

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Country: Australia

Question:
You are required to analyse the business situation of a well-known California-based company Testa’s entry into Australia’s renewable energy sector. 
Answer:

Introduction 
Tesla Motors, Inc. is a firm based in America that designs, produces and trades in electric cars and electric vehicles and powertrain machinery. The name of the company signifies the founder Elon Musk, a scientist who is also known for creating the alternating current power and induction motor. It was founded in 2003. In 2015, the company made innovations in the energy sector by introducing the Powerwall home battery and the Powerpack industrial –scale battery. Later in 2016, Tesla bought Solar City, the top provider of solar power systems in the United States. Such massive developments indicate the seriousness of Tesla in the sector of renewable energy (Tesla Motors, n.d.).
Strategy Challenges Affecting the Tesla Renewable Battery Company
Projected High Prices of Lithium
According to Aulicino (n.d) Tesla Company is expected to incur billions of dollars to establish a massive battery factory which means the company has to double the number of lithium batteries they produce and further increase the lithium mined from the ground. Lithium is rare in the current market, and a high demand for it implies extra high prices because it is the key component of the Tesla battery. Furthermore, the world’s supplier of lithium is Bolivia, which also has plans of creating an OPEC from the supply of lithium.
Compatibility
Rodrigues et a. (2015) asserts that based on the design of the Power wall battery, only two inverters in the market can be compatible with it. This means that all houses with other existing solar panels have to acquire a new inverter which is costly and renders the previous ones redundant. Such a consequence has made most consumers not to adopt the Power wall battery.  For those that do not possess solar panels will have to buy the complete system that includes solar panels and an inverter. The number of solar panels needed is higher to power both the home and the Powerwall. Another problem associated with the one of compatibility is the integration of the batteries into the market. Batteries operate on a direct current while the current market is used to and dependent on the alternating current which necessitates the need for an inverter.
Affordability 
According to Truong (2016), the current cost of the complete system that includes solar panels and an inverter is inclusive of the costs of connection to the grid and installation. Furthermore, the energy consumption rate of many homes in Australia is high seeing they are dependent on electricity supply. A small scale Power wall battery of 7kWh is not likely to make up for this and thus to completely rid of the dependence on electricity ( Motors, 2015).  This implies that a home will have to install more than one battery units to increase the storage capacity, thus raising the costs even much higher.
Strategic Direction 
Product Strategy: Powerwall Home Battery
One distinguishing feature of the Powerwall home battery package is that it is made up of high-quality solar PV modules, comes with an inverter and the Tesla Powerwall, hence the reason for its high sales volume (Randall, 2015). The entire system also comprises of all needful connection materials, fixing and roof mounting. The wide range of the of options for the solar system allows The Powerwall home battery components to be installed separately, for instance, a customer can decide to install the solar system alone and the battery system at later times. Furthermore, the system is upgraded on the move for automatic switch on at home and for charging the Electric car. As impressive as the Powerwall Battery is, it still gives the customer the option of adding the Powerwall battery to the installed solar system. Tesla in collaboration with the assigned technical team offers free advice on the best decision to take based on the circumstance. This gives enough time for the customer to save and install batteries later after observing on the usage of the Solar PV System.
Apart from the flexibility features, the Powerwall provides 13.2kWh of disposable energy; the battery is charged on a daily basis which allows it to satisfy the electricity demands in the evening for most of the average to large families. In addition to this, Tesla is in the process of creating options for multiple connections of batteries to increase the capacity.
Powerpack Industrial Scale Battery
Shahan  (2015) highlights that The Tesla Powerpack 2 is an advanced a flexible commercial power storage whose technology is founded on a lithium-ion battery and is used in industrial applications. The Energy Powerpack can be adjusted to fit various installations ranging from 100kWh to 100MWh with options of increasing it by 250kWh. Each Powerpack comprises of sixteen pods linked to one DC output in parallel connection
The Powerpack is a modular system which can be scaled up to multi-megawatt hour solutions for large commercial projects. The architectural design enables a multi-installation of the system to suit a variety of industries. Because the system is fully integrated, the time taken for installation is much shorter than other systems which have different vendors for various components. Furthermore, the Powerpack comprises of an efficient inbuilt thermal management system which allows the system to be installed anywhere without the necessity for a power consuming HVAC system. Additionally, the internal thermal control system regulates the temperature levels of the cell all the time, thus increasing the battery life and the general efficiency of the system 
External Environmental Analysis and Its Strategic Implications 
For an extended period of time, the Lithium Battery Manufacturing industry emphasized more on the production of lithium batteries for select markets that comprised of the electronic producers and defense suppliers. Because of substantial investment in research and innovations in new applications supported by the US Government, the industry has changed a lot for the better. The intervention of the government through its incentives had reduced production costs and improved the sustainability of the innovation in a variety of applications. The increase in demand for the lithium batteries in the automobile industry led to the growing production of the cells and, this demand is expected to reach 16.4% of revenue increase annually (Carter, 2015, para. 1, p.1). Tesla battery has ventured into the industry and is indeed expanding its territories by the introduction of the Powerwall House Battery and the Powerpack Industrial Scale Battery. However, this industry is facing stiff competition from China that has also invested heavily in the production of lithium battery which is likely to infiltrate the market (Carter, 2015, para. 2).
Industry Structure
The key players in this industry are Nissan Leaf, Tesla Motors, Ford Motor Company and General Motors. All these companies are both buyers and manufacturers of lithium batteries. The key suppliers are wholesalers of Metals, companies that mine Lithium Carbonate and Hydroxide which substitutes the producers of Gasoline and Natural Gas. The fresh entrants into this industry are organizations that are establishing manufacturing plants for the lithium batteries. Additionally, industry rivalry exists among the firms with developed manufacturing plants that compete globally. The industry analysis is done using Porter’s Five Forces of competition namely Potential Entrants, Substitutes, Buyers, Suppliers, and Industry Competitors.
Potential Entrants 
The threat of entry is the main force that affects any industry that is thriving well with excess returns on its cost of capital which to the new firms is a major attraction thus leading to the decline of profits to the competitive level.  Many factors determine the level of competition, but the main one is the barrier to entry, which is further analyzed by considering the large needed capital Investment, the advantages of Economic of Scale, Barrier laws, and Industry Incentives.
Capital Requirements
Because the industry is already initiated but still developing, and it’s based on intensive technology innovation, the kind of money needed to purchase and setup the necessary high-tech machinery and equipment is of medium level. According to Carter (2015), the investment requires $0.18 for each dollar spent. Furthermore, the professional workforce is mandatory for the initiation of the operations which makes the capital requirements very costly. This is of advantage to Tesla Battery Company because of its many years of progression and success in the industry in addition to the fact that the company has acquired the leading producers of solar products, e.g., Solar City.
Economies of Scale and Total Cost Advantage
The new companies venturing into the market may benefit from its possession of patented technology and manufacture lest expensive lithium batteries. However, due to the in-depth research by the already established firms on how to lower the cost per Kilowatt hour (kWh), competition is always high. For example, 24M created and patented a new process that would reduce the cost of production (Grießer, 2017). According to Nelson et al. (2012), the cost per Kilowatt-hour is from $300 to $500. But large capital is required to establish a large plant sufficient to manufacture new batteries.
Legal Barriers
The industry must be subject to the laws and regulations both from the federal government, the state and environmental groups because of the dangerous effect of lithium batteries. The rules govern all the processes in the manufacture of lithium battery from its storage, treatment, discarding, transportation, and discharge of any dangerous materials associated with the production to the environment. Because of this, the firms are forced to meet all the costs related to federal industry standards which are very costly to sustain. Gaines  & Cuenca (2000) asserts that the necessary cost to acquire the authorization of a battery pack for commercial purposes and air transport costs from $10,000 to $20,000.
Industry Incentives
The two primary initiatives of the government to advance technology with the aim of searching for the alternative source of fuels are the ATVM (The Advanced Technology Vehicles Manufacturing Program) and the ARRA (the American Recovery and Reinvestment Act). A total of $25 billion loans has been authorized under the ATVM program to manufacture fuel efficient cars but only $8.4 billion loans to the ARRA for the production of electric vehicles that are using lithium batteries. Furthermore, $1.25 billion was offered to Tesla Motors by Nevada from the states’ tax incentives to help in the building of the Giga-factory (Trop & Cardwell, 2014). Such incentives may excite new entrants, but the qualifications are very high.
Substitutes 
Fossil Fuels and Hydrogen Fuel Cells are the primary substitutes in this industry with electricity being the major threat substitute and affect the demand for the Tesla lithium Battery. An increase in the price of Fuel causes a corresponding increase in the cost of electricity usage, thus a high demand for lithium batteries. But since the cost of electricity usage is averagely lower, and then the demand for it is higher but to a certain extent because the popularity of Tesla Batteries drives its demand. The general awareness of climate change has also continued to weaken the demand for electricity due to its dependence on fossil fuels to run its turbines.
Suppliers 
The presence of fourteen ASX listed companies with lithium deposits and four ASX companies that meet the requirements of JORC in Australia makes it the world’s number one producer according to U.S Geology Survey (2016).  For instance, the Neometals Ltd found in Western Australia chiefly mines lithium among other metals.; the Pilbara Minerals Ltd also found in the western Australia mines for lithium and tantalum and covers about 800Km2. (Australian Shares, 2014). This implies that the competition for Lithium metal in Australia is not that stiff for an already established firm like Telsa. However, with the increasing interest in natural energy, more entrants are expected to venture into the market which may lead to the drop in the supply of lithium in the market and a further increase in competition among lithium battery manufacturing firms.
Buyer’s power
Approximately 34% of the leading companies that manufacture lithium batteries are also players in the production of electric vehicles. These companies include Tesla Motors with 8.4% market share, GM with 8.5% market share, Ford with 8.9% market share, and Nissan with 12.6% market share the lithium battery production. All these companies were serviced with loans for the manufacturing of lithium battery except Tesla Motors that entered into a contract with Panasonic for the supply of lithium packs while it builds the Giga-factory in Nevada which is expected to provide large lithium batteries that all the other companies combined. Such investments which tend to increase the demand for lithium whose supply is limited shifts the bargaining power of the suppliers. For instance, Tesla will require an amount of approximately 24,000 tons of lithium hydroxide to its Giga-factory for it to attain its goal thus forcing it to source for more from different suppliers (Martin et al., 2017). Therefore, it is not expected for the buyer power to rise until the production of lithium rises to levels higher than the demand.
Industry Competitors 
The profitability of the sector is dependent on the competition between firms. Furthermore, leading firms are determined by comparing companies of different sizes and their corresponding market share. For example, Tesla Motors leads the market in the manufacture of luxury electric vehicles as well as lithium batteries and thus enjoys the freedom in determining its prices, whereas, Nissan is dominant in the production of electric vehicles and thus sets the price of its car (the leaf)  and lithium batteries. Therefore, the industry doesn’t have diversity in competition because only a few companies are involved in the production of lithium batteries. As a result, those customers that can afford Tesla batteries will adopt them, but those that cannot continue with their respective sources of energy.
SWOT Analysis
Internal Strength
Tesla has incorporated a culture of innovation to its processes which enable the company to own various patents for the Powerwall and Powerpack batteries (Witt, 2013). The company is also lead by Mr. Elon Musk who is an award winner in many awards. He also serves as the product architect and chief executive which has made Tesla to be listed on the NASDAQ exchange (Boyke, Cheng, Clevers, Schroeder, & Strupp, 2010). The design skills used to make its quality products is one of its internal strength. It’s Battery Technology which is its core technology is superior to other companies in the market (MacKensie, 2013).
Internal Weakness
Tesla is a new business competing against established companies a weakness that offers other firms a competitive advantage. The company also faces the possibilities of supplier issues in case of an increase in the demand for its products since it fully depends on lithium which is limited in supply. Also, their numbers of employees are fewer compared with the already established companies (Tesla Motors, Inc. Profile,n.d.)
External Opportunities 
Its success in the European markets is a great opportunity in other international markets such as Australia. Also, its partnership with other major producers to acquire synergy in the distribution of its products improves its marketing strategy (Aulicino, Waratuke, Williams, & Elliott, n.d). Since its innovations are geared towards sustainability by use of natural resources, the various government regulations do not hinder the company’s progress.
External Threats
Regardless of the massive investment in the battery technology and vehicles, the consumers are undecided regarding the future of battery cars and absolute independence on the lithium battery (Shirouzu, Kubota, & Lienert, 2013). The strict progressive regulations on global-efficiency as from 2020 are coercing automakers to critically examine their options, even the application of innovative technology (Shirouzu, Kubota, & Lienert, 2013).
Criteria of Sustainable Competitive Advantages
Engineering Excellence
Sharma (2016) notes that the engineering excellence behind the Powerwall Home Battery and the Powerpack Industrial Scale is beyond comparison. The Powerwall home battery package is made up of high-quality solar PV modules, comes with an inverter and the Tesla Powerwall. The entire system also comprises of all needful connection materials, fixing and roof mounting. The Powerpack is a modular system which can be scaled up to multi-megawatt hour solutions for large commercial projects. The architectural design enables a multi-installation of the system to suit a variety of industries. Because the system is fully integrated, the time taken for installation is much shorter than other systems which have different vendors for various components.
Synergy as a result of Cooperation with other Firms
Karamitsios (2013, p.16) illustrates that the partnership of the R&D department with Panasonic is a step towards the development of efficient lithium batteries.
Suppliers 
According to Hall (2013), the company has made a move to modify its purchase process from the approach of a decentralized entity to the strategic global commodity. Additionally, the same author retaliates that Tesla’s speed and flexibility by urging its suppliers to be proactive and willing to support and collaborate with engineering teams.
Competence
The superiority of the battery technology has place Tesla, a head of other companies in the market. This competency can be attributed to its many years of investment in research and development to realize its objective of full dependence on the lithium battery power source and a fully electric
Conclusion 
Based on the preceding analysis, Tesla Motors is well placed in the industry but the important question how its current capabilities and opportunities in Australia will sustain their competitive advantage in the sector of Renewable Energy Sector. Major manufacturers such as Nissan, GM and Toyota are also venturing into the development of technology that is competitive with that of Tesla. It is evident that Tesla has flaws in supply and components in case demand increases and therefore it must marshal its resources and improve on its weaknesses while continuing to strengthen its secure areas.
References
Aulicino, S., Waratuke, J., Williams, S., & Elliott, C. (n.d.). Tesla Motors case study Australian Shares (2014). The Complete Online Database for Australian Shares. Retrieved from:  https://www.australian-shares.com/ Bellis, M. (2014). Introduction to Green Technology. Retrieved from: https://www.greeninventions.com
Boyke, D., Cheng, J., Clevers, J., Schroeder, M., & Strupp, K. (2010, December 14). Teslatomorrow: The future of Tesla motors. University of Wisconsin-Madison
Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc.
Gaines, L., & Cuenca, R. (2000). Costs of lithium-ion batteries for vehicles(No. ANL/ESD-42). Argonne National Lab., IL (US). Retrieved from:https://ntl.bts.gov/lib/14000/14700/14729/DE00761281.pdf
Grießer, M. (2017). Cost Optimization of an Integrated Bypass Device for Lithium-Ion Battery Cells Used in Electrified Vehicles. Nuremberg : University Erlangen-Nuremberg.
Retrieved from:https://www.lee.tf.fau.de/files/2017/05/2017-03-17_MA-Griesser.pdfGupta, S. (2015). From gadgets to the smart grid. Nature, 526(7575), S90-S91.
Hall, J. (2013, June 20)./electronics/articles/tesla-builds-supply-chain-own-image/ .Retrievedfrom: https://www.mypurchasingcenter.com
Karamitsios, A. (2013). Open Innovation in EVs: A Case Study of Tesla Motors.Master ofScience Thesis INDEK KTH Industrial Engineering and Management Industrial Management  . Stockholm: KTH Industrial Engineering and Management, IndustrtialEngineering MacKensie, A. (2013, January)
oftheyear/car/1301_2013_motor_trend_car_of_the_year_tesa_model_s.Retrieved from https://www.motortrend.comMartin, G., Rentsch, L., Hoeck, M., & Bertau, M. (2017). Lithium market research–global
supply, future demand and price development. Energy Storage Materials, 6, 171-179.Motors, T. (2015). Powerwall; Tesla Home Battery’. Tesla Motors.
Nelson, P. A., Gallagher, K. G., Bloom, I. D., & Dees, D. W. (2012). Modeling the performance and cost of lithium-ion batteries for electric-drive vehicles(No. ANL–12/55). Argonne National Laboratory (ANL).
Randall, T. (2015). Tesla’s Battery Grabbed $800 Million in Its First Week. Bloomberg Business, 8.
Rodrigues, S., Faria, F., Ivaki, A., Cafôfo, N., Chen, X., & Morgado-Dias, F. (2015). New opportunities for using Tesla Powerwall Battery in the United States of America and Portugal. Proc. of CIIEM15.
Shahan, Z. (2015). Tesla Powerwall Price vs Battery Storage Competitor Prices (Residential& Utility Scale. Clean Technica.
Sharma, S. (2016). The Tesla Phenomena A Business Strategy Report.
Shirouzu, N., Kubota, Y., & Lienert, P. (2013, February 04). Electric cars head toward anotherdead end Tesla Motors, Inc. Profile (n.d.).Tesla Profile. Retrieved from https://www.teslamotors.com
Trop, J., & Cardwell, D. (2014). Tesla plans 5 billion battery factory for mass-market electric car. NY Times.
Truong, C. N., Naumann, M., Karl, R. C., Müller, M., Jossen, A., & Hesse, H. C. (2016).
Economics of residential photovoltaic battery systems in Germany: The case of Tesla’s Powerwall. Batteries, 2(2), 14.
U.S Geological Survey (2016). Mineral Commodity Summaries 2017. Reston: Virginia.
Retrieved from:https://minerals.usgs.gov/minerals/pubs/mcs/2017/mcs2017.pdf Witt, D. (2013). Tesla motors presentation.

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