TESLA’S VERTICAL INTEGRATION STRATEGY Unlike many vehicle manufacturers, Tesla embraces vertical integration from component manufacturing all the way through vehicle sales and servicing. The majority of the company’s $53.8 billion in 2021 revenue came from electric vehicle sales and leasing, with the remainder coming from servicing those vehicles and selling residential battery packs and solar energy systems. At its core an electric vehicle manufacturer, Tesla uses both backward and forward vertical integration to achieve multiple strategic goals. In order to drive innovation in a critical part of its supply chain, Tesla has invested in a “gigafactory” that manufactures the batteries that are essential for a long-lasting electric vehicle. According to Tesla’s former VP of Production, in-house manufacturing of key components and new parts that require frequent updates has enabled the company to learn quickly and launch new versions faster. Moreover, having closer relationships between engineering and manufacturing gives Tesla greater control over product design. Tesla uses forward vertical integration to improve the customer experience by owning the distribution and servicing of the vehicles it builds. Their network of 655 retail locations allows Tesla to sell directly to consumers and its 1,200 mobile service units are able to provide convenient vehicle maintenance to customers without relying on third parties that sometimes have competing priorities. Beyond vertically integrating the manufacture and distribution of their electric vehicles, Tesla uses the strategy to build the ecosystem that is necessary to support further adoption of their vehicles. As many consumers perceive electric cars to have limited range and long charging times that prevent long-distance travel, Tesla has installed nearly 3,500 Supercharger stations to overcome this pain point. By investing in this development themselves, Tesla does not need to wait for another company to deliver the critical infrastructure that drivers demand before they switch from traditional gasoline-powered cars. Similarly, Tesla sells solar power generation and storage products that make it easier for customers to make the switch to transportation powered by sustainable energy. Tesla’s vertical integration strategy adds to the complexity of its business operations, but has enabled the company’s 87 percent year-over-year growth in vehicle sales between 2020 and 2021 and allowed the company to achieve profitability in 2020 and record net income of more than $5.5 billion in 2021. Tesla, Inc., has rapidly become a stand-out among American car companies. Concepts & Connections 6.3 describes how Tesla has made vertical integration a central part of its strategy. What value chain segments has Tesla chosen to enter and perform internally? How has vertical integration of its ecosystem aided the organization in building competitive advantage? Has vertical integration strengthened its market position? Explain why or why not.
TESLA’S VERTICAL INTEGRATION STRATEGY
Unlike many vehicle manufacturers, Tesla embraces vertical integration from component manufacturing all the way through vehicle sales and servicing. The majority of the company’s $53.8 billion in 2021 revenue came from electric vehicle sales and leasing, with the remainder coming from servicing those vehicles and selling residential battery packs and solar energy systems.
At its core an electric vehicle manufacturer, Tesla uses both backward and forward vertical integration to achieve multiple strategic goals. In order to drive innovation in a critical part of its supply chain, Tesla has invested in a “gigafactory” that manufactures the batteries that are essential for a long-lasting electric vehicle. According to Tesla’s former VP of Production, in-house manufacturing of key components and new parts that require frequent updates has enabled the company to learn quickly and launch new versions faster. Moreover, having closer relationships between engineering and manufacturing gives Tesla greater control over product design. Tesla uses forward vertical integration to improve the customer experience by owning the distribution and servicing of the vehicles it builds. Their network of 655 retail locations allows Tesla to sell directly to consumers and its 1,200 mobile service units are able to provide convenient vehicle maintenance to customers without relying on third parties that sometimes have competing priorities.
Beyond vertically integrating the manufacture and distribution of their electric vehicles, Tesla uses the strategy to build the ecosystem that is necessary to support further adoption of their vehicles. As many consumers perceive electric cars to have limited range and long charging times that prevent long-distance travel, Tesla has installed nearly 3,500 Supercharger stations to overcome this pain point. By investing in this development themselves, Tesla does not need to wait for another company to deliver the critical infrastructure that drivers demand before they switch from traditional gasoline-powered cars. Similarly, Tesla sells solar power generation and storage products that make it easier for customers to make the switch to transportation powered by sustainable energy.
Tesla’s vertical integration strategy adds to the complexity of its business operations, but has enabled the company’s 87 percent year-over-year growth in vehicle sales between 2020 and 2021 and allowed the company to achieve profitability in 2020 and record net income of more than $5.5 billion in 2021.
Tesla, Inc., has rapidly become a stand-out among American car companies. Concepts & Connections 6.3 describes how Tesla has made vertical integration a central part of its strategy. What value chain segments has Tesla chosen to enter and perform internally? How has vertical integration of its ecosystem aided the organization in building competitive advantage? Has vertical integration strengthened its market position? Explain why or why not.
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