Apart from the technological and performance superiority displayed by its products, Tesla’s business strategy has contributed to making the company stand-out among American car companies. Tesla made vertical integration a central part of its strategy; a move that strengthened its market position. A broad definition of vertical integration is acquiring or controlling certain production steps such as distributors or suppliers that were previously outsourced. This paper will identify the value chain segments chosen by Tesla. The paper will also discuss if vertical integration strengthened the company’s market position and how the move helped the company build a competitive advantage. Tesla’s use of vertical integration allowed the organization to have more control over the production quality which in turn led to technologically impressive vehicles resulting in a competitive advantage.
The value chain segments that Tesla chose to enter and perform internally are battery and electric motor productions as well as powerful central control systems and self-driving algorithms (Movsesyan & Anokhina, 2020). These segments are included in the organization's operations. Most automotive companies normally outsource these production responsibilities to suppliers. This is the main difference between Tesla and its competitors. Since the move to perform the above-mentioned operations internally, Tesla decided to divide its production activities into two main parts. The first is the automotive segment. This category involves the design, development, production, and sales of its electric vehicle models (Movsesyan & Anokhina, 2020). The next segment which is energy generation and storage deals with the design, manufacture, installation, and sale of their batteries and solar energy systems. Value creation is achieved through the use of robots and AI systems in the manufacturing process.
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Some of the advantages of using vertical integration include increased profit margins as a result of more control over the products, ensuring supply chain due to desired product quality, and the ability to utilize emerging technologies. Tesla has greatly benefited from all the three advantages of vertical integration listed above. Before the potential automotive revolution by Tesla, automakers focused more on the chain management strategy and opted to reduce production costs by outsourcing engine manufacture to suppliers. The long term impact of this strategy was the inability of technological advancement for car production companies. Another important point to consider is the fact that electric cars have fewer components compared to traditional combustion engines; this is another reason why Tesla’s vertical integration strategy proved to be beneficial.
With all these advantages and the genius to identify the opportunity in the complex supply chain, the move to internalize the value chain segments saw the company produce a more efficient, better performing, and technologically advance vehicle that was more appealing to the automotive market (Movsesyan & Anokhina, 2020). This helped the organization to build a competitive advantage and strengthen its market position. Vertical integration was the key to success for Tesla and many other automakers are expected to focus on the strategy as the industry advances towards the production of electric vehicles.
In conclusion, Tesla’s use of vertical integration allowed the organization to have more control over the production quality which in turn led to technologically impressive vehicles resulting in a competitive advantage. The organization decided to internalize the production of batteries, powerful central control systems, self-driving algorithms, and electric motors. This is unlike the traditional chain management strategy that outsourced most of the manufacturing responsibilities to the suppliers. Advantages from the move include increased profit margins as a result of more control over the products, ensuring supply chain due to desired product quality, and the ability to utilize emerging technologies.
Reference
Movsesyan, E., & Anokhina, M. (2020). Tesla Vertical Integration Strategies: Theory, Practice, Results. Business Strategies , 8 (7), 184-188. https://doi.org/10.17747/2311-7184-2020-7-184-188
