The success of a business hinges on its ability to establish a competitive edge, which may be challenging to maintain in the face of new entrants, shifting consumer preferences, and innovative technology. Michael Porter, a professor at Harvard Business School and the founder of the consulting business I worked for, has written about two sources of competitive advantage.
Offering a superior product for which buyers are willing to pay more, and delivering a good product at a lower price than competitors (known as “cost leadership“) are two ways to achieve success in business. Differentiation might come from a firm that provides the most desirable item in a novel market segment. Customers may no longer be willing to pay a premium for the trendy pioneer’s goods if imitators quickly enter the market.
This is worth remembering when thinking about Tesla, whose stock has risen by around 20% from its recent low of $102, but is now lowering prices because customers have become disdainful of the company’s products. How so? Disgruntled Tesla buyers are being driven away by Elon Musk‘s toxic tweets.
In addition, Tesla is losing market share and profit margins in the United States and China because it is not renewing its product range or adjusting to the changing demands of its customers. To put it plainly, Tesla does not have a competitive edge that can last. There is little incentive to buy its shares without one.
Tesla’s Price Cuts
The decline in Tesla vehicle sales in 2022 caused the company to fall short of its 50% growth goal for shipping volume. According to the New York Times, Tesla is slashing the prices of most of its vehicles by 20% in the United States and Europe in an effort to increase sales.
Not all Tesla buyers can take advantage of these discounts. They are applicable to its more affordable variants, with the exception that certain features may be unavailable at certain trim levels. The Inflation Reduction Act would grant federal tax credits for electric vehicles with a price tag of less than $55,000 to qualifying buyers in 2023.
One analyst views the price cuts favorably. Wedbush’s Dan Ives told the Times, “I think Tesla recognizes they are not the only game in town and the Detroit companies are jumping into the deep end with E.V.s. I think the price cuts mean Tesla is going to rip the Band-Aid off and try to go on the offensive.”
Price cuts would hurt Tesla’s already slim profit margins, but would they be worth it if it meant regaining ground in the market from its competitors? Maybe, but I highly doubt it. The reason for this is that despite Tesla’s steep discounts, consumers still choose other EVs because they believe they provide better value.
Tesla’s growth rate is lower than the average in the sector. The Times said that in the United States, vehicle sales dropped by 8 percent to less than 14 million automobiles and trucks, the lowest level since 2011. However, sales of electric vehicles increased by 66% to more than 808,619 in 2018, as reported by Kelley Blue Book.
In recent years, Kia has made strides in expanding its market share. As opposed to “a few hundred in 2021,” it sold 43,000 EVs in the United States last year. Ford, Volkswagen, and others “posted sizable increases in E.V. sales last year and offer many models that were significantly more affordable than Tesla’s,” noted the Times.
Despite having a goal of 50% growth, Tesla only increased its sales by 40% in 2022, to 1.3 million vehicles. For Tesla to appeal to the masses of people who can’t afford to pay more than $100,000 for a car, the company’s current approach of differentiating itself from the competition has to shift.
Particularly, it has to develop into a cost leader, which means producing EVs at lower prices than its competitors. One Bernstein analyst, Toni Sacconaghi, stated in a study, “We see demand problems remaining until Tesla is able to introduce a lower-priced offering in volume, which may only be in 2025.”
With its price drops, Tesla may find itself strategically caught between its earlier differentiation approach and a prospective cost leadership plan, in which it produces a high-quality car at a price lower than that given by rivals like Kia, Hyundai, and others. Tesla may have manufactured 34,000 more vehicles than it delivered in the fourth quarter because its competitive edge is diminishing.
Establishing and maintaining a competitive advantage is crucial to the survival and growth of any firm in today’s dynamic marketplace, where consumers’ tastes and expectations are always evolving and new technologies are constantly being introduced.
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