Five Forces The concept of the five forces is rooted in the idea that these are the five forces that influence whether an industry or company can be profitable. A company, when formulating its strategy, will seek to find ways to shift these forces and manipulate them in ways that allow the company to be profitable, preferably sustainably profitable. As Porter (2008) elaborates, the five forces that shape competitive strategy are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes and the intensity of rivalry within the industry.

About the Company

The company to which the five forces will be applied is Tesla Motors, the electric car maker. Tesla is a relatively new player in the industry, has a tremendous reputation with respect to product quality, but has yet to turn a profit, has a tremendous bleed rate, but it also cannot produce to demand. It would be a reasonable question as to whether a company in this situation should continue, or whether somebody should buy them out. How viable in the automobile industry, the electric car niche and Tesla's position within that niche?

Bargaining Power of Buyers

The degree to which the company can set prices in the marketplace is related to the relative bargaining power of buyers. Buyers gain power in a number of different ways. One is when the buyer is a volume buyer. This is not the case in the automobile market, where buyers typically only buy the one car. The buyers derive no power from volume purchases here. The buyers may, however, be able to bargain with the companies in the industry. There are several firms in the electric car business, and there is a reasonable amount of differentiation among them. This differentiation, however, enhances the bargaining power over buyers, because the buyers have less opportunity to play sellers off of one another. In conventional automobiles, there are usually three or four strong competitors in most categories, and these are not always very well differentiated. The degree of differentiation in some segments of electric cars is similarly not great, but Tesla has increased its relative bargaining power over buyers by having a superior level of differentiation. Consumers are not in a position to drive down the price of a Tesla by opting for another electric vehicle. Indeed, consumers with a propensity to do this are not going to sit on a multi-year waiting list for a Tesla.

Right now, the company has positioned itself in the luxury category, as a differentiated option within that category. The company has actively sought this positioning to attract that particular target market, and its products are just as differentiated from the typical luxury vehicle as they are from the typical electric vehicle, so to that extent it has successfully used differentiation to claim a leadership position in the luxury vehicle market (Winton, 2016 ). The use of differentiation and product positioning to reduce the bargaining power of buyers essentially has allowed to Tesla to set its own prices. It still prices roughly within the range of its competitors, but generally higher, and the wait list for vehicles indicates that even at the highest prices in the category Tesla is able to sell more vehicles that it can make. The company can be said to have strong bargaining power over its buyers, who are price takers.

Bargaining Power of Suppliers

As noted, Tesla has a very high burn rate, and for the most part this is due to the need of the company to grow its business very quickly. However, the burn rate can also be influenced by the bargaining power that Tesla has over its suppliers, or vice versa. Suppliers with high power levels can set prices. Their ability to do this will depend on how badly Tesla needs the product, but also on how badly the supplier needs Tesla's business. As an automaker, Tesla's volumes are quite low, so companies that supply larger firms in the industry, such as tire manufacturers, are in a fairly good position to dictate prices to Tesla.

But to minimize the bargaining power of suppliers going forward, Tesla has done some unorthodox things with its supply chain. First, the company has a much higher than average degree of vertical integration. While it has partners on key inputs like batteries, Tesla has taken responsibility for the development of its own batteries and other key inputs. This not only allows Tesla to focus on buying raw materials, for which it has better bargaining power, but it also allows for a higher degree of customization in the vehicles, which enhances its bargaining power...

What has helped Tesla as well is that many of its suppliers are not in the auto industry, but rather in other industries relating to the technology that underpins a Tesla. Where Tesla would not have much bargaining power over traditional industry suppliers, it does over technology suppliers and non-traditional suppliers, for whom Tesla's volumes are actually relevant (Tao, 2014). While the bargaining power over suppliers is not yet favorable, it is more neutral for Tesla.
Threat of New Entrants

New entrants can drive down the prices in the industry, in particular when they arrive with technological or other market advantages. Right now, Tesla has technological superiority that helps to support its positioning and its price points, but that could change with new entrants. Most major automakers are in the electric car business, so they remain viable competitors, especially should be acquire the technology to displace Tesla as industry leader in that regard. There are other competitors, however, including Apple, which has tens of billions of dollars to spend getting into the business, and possibly Google as well. These companies come from the same technology sphere as Tesla, and are more likely to leapfrog the company than the more traditional automakers (Hard, 2016).

Furthermore, as evidence of climate change becomes increasingly apparent even to the relatively clueless, demand for fossil fuel usage is going to fall. The shift could potentially be rapid, and the thought that this might be the case is going to result in hundreds of billions being pumped into batteries and renewable energy transportation solutions. The reality is that this will bring many new competitors into the market. Tesla needs to leverage its first mover advantage and establish a strong position before this happens, because the threat of new entrants is high and potentially devastating to Tesla's business.

Threat of Substitutes

In the short run, there is still threat of substitutes for Tesla. First, regardless of what business positioning you look at, Tesla still competes as personal transportation, against conventional automobiles. This is particularly the case in the luxury segment, where a) there are no other electric competitors and b) when there are waiting lists for Tesla cars that basically force buyers to seek out alternatives. Furthermore, overall car sales are down, because many millennials are rejecting the car-based lifestyle in favor of scaled-back urban living, though some evidence has come about recently that millennials are starting to buy cars, in particular should they start a family and move to suburbs (Bershidsky, 2016). Still, there is reason to believe that the short-term bump in car-buying relates to the rock bottom fuel prices as much as anything else, and that the threat of substitution remains real, both from hydrocarbon vehicles and from people opting out of vehicle ownership altogether.

Intensity of Rivalry

There are several companies making electric cars, and most of these are large automakers for whom electric cars are a niche market. Furthermore, to this point their products are not competing against the Tesla vehicles that are on the market. They will be soon, but not right now. What this means is that for the rivals, electric cars may have interesting potential, but they are not the focal point of the business. These companies do not depend on their electric vehicles. Tesla does, so the stakes for it are higher, but again at this point it cannot produce anywhere near enough vehicles to meet demand. As a result of this, Tesla is in a situation where it does not have much intensity of rivalry. It famously opened up its patents, which a company locked in a life-or-death rivalry would never do.

Analysis

Overall, the bargaining power of buyers is weak, the bargaining power of suppliers is neutral, the threat of substitution is neutral, the intensity of rivalry weak and the threat of new entrants is high. The industry therefore is moderately profitable. This analysis highlights some keys to success for Tesla going forward.

First, the company will want to increase its bargaining power over suppliers. In 2015, its gross margin was 22.8%, not enough to cover the marketing and R&D expenses, resulting the company losing money. If it could get more out of its suppliers, that would help. It is already exercising what it can with respect to bargaining power over buyers, and any more would risk pricing many buyers out. With respect to suppliers, however, that will come with scale. The biggest issue for Tesla…