Porter`s Five Forces Analysis

Porter`s Five Forces Analysis

In the following Porter`s Five Forces Analysis, existing threats of entry, bargaining power of suppliers and buyers and potential threats caused by substitute products and market competition will be outlined which aims at assessing the attractiveness of an industry and discovering a desirable strategic innovation that improve the industry and company profitability.

Threat of Entry

Setting its focus on electric vehicles, has given Tesla a crucial competitive advantage over other automobile manufactures. In addition, over the time the company built up a great reputation, and is considered as one of the most important precursors in that industry, which in turn, makes Tesla highly successful for example in poaching top engineering talents from universities.

As a consequence, Tesla employs the best engineers and therefore can continuously pressing ahead with technological developments and keeping a lead over competitors.

However, it is important not to rest on its success and thereby to neglect the fact that the continuously increasing demand for environmental friendly vehicles and the widespread knowledge about the necessary technology, makes it more and more attractive for other firms to enter the market and in addition more easy for companies to replicate existing products in that branch, which might present an external threat for Tesla.

Bargaining Power of Suppliers

In the case of Tesla the power of the suppliers highly differs in the product purchased.

Tesla uses approximately 2000 components, purchased from over 300 different suppliers world wide.

I terms of purchasing battery components, the most important component of an EV, the bargaining power of the suppliers is extremely high because Tesla buys most of its battery components from single sources. Subsequently, any problems in delivery will result in production disruption that might have a negative impact on the image of the company.

Hence, being reliant on a timely and correct delivery results in a high bargaining power of the battery cell component suppliers.

In addition to battery cells, Tesla also purchases large volumes of cooper, steel, aluminium, and nickel, for the internal wiring and external shell of its vehicles. These components are traded in highly liquid global markets and it is unlikely that there will be major fluctuations in their supply. Prices for such metals are set in competitive markets, so it is difficult for individual suppliers to set unfavourable prices without losing market share. Nevertheless, to ensure flexibility, Tesla generally do not have long-term contracts with its suppliers, in order to maintain the ability to switch suppliers and take advantage of better prices.

Bargaining Power of Buyers

The bargaining power of buyers in the case of Tesla is modest, due to several factors:

On the one hand side Tesla has an important partnership with Daimler Toyota and Lotus. Supplying these companies contributes a great share to the partners overall profit, what puts Tesla in a strong bargaining position.

Regarding the private sector, Tesla placed itself in a unique niche market by producing very exclusive, advanced and environmentally friendly automobiles with low competition and focuses with its high-priced flagship Model S ($ 70,000), on high-income individuals with price inelastic demand, though the market price will not affected much by market demand.

But as other car companies continue to invest in electric vehicles and make the market more competitive, its obvious that this is only a temporary advantage because first there is only a limited amount of wealthy people who are in the position to purchase luxury goods, secondary the competitive market forces will no longer allow Tesla to enjoy such a beneficial mismatch between supply and demand.

In order to prevent a loss in market share, and attract middle class consumers, Tesla wants to widen its product range by including an electric vehicle that will be available at $35,000.

Due to the fact that Tesla has built up a strong reputation regarding excellent performance and safety ratings of its Model S, it is likely that Tesla’s middle class car will meet higher demand than comparable alternatives. Hence, while competitive forces will strengthen bargaining power of buyers in the coming years, the author expects that, as whole, the bargaining power of buyers will still remain low.

A further important point to consider is that government programs in the form of tax deductions stimulate the demand of electric cars in the private sector as well, what constitutes a further incentive to purchase that kind of products Tesla produces.