Strategy and Organization (01QYQPH)- Prof.

Neirotti
Written exam July 1st, 2016
FAMILY NAME, FIRST NAME,

STUDENT NUMBER (block letters)

EXAM INSTRUCTIONS:

Write your FIRST NAME, LAST NAME, and STUDENT NUMBER on each paper.
Your desk should be completely clear, a part from these papers, student IDs, a pen.
The use of smartphones even disconnected is not permitted. Students found using a smartphone will have to
immediately leave the room.
If you want to withdraw from the exam, please write WITHDREW
Results will be published on the website in about 7 days from now. An appointment will be scheduled for those
wishing to do the oral exam or to see the paper.
You have 2 hours and 15 minutes to answer your questions.

Question n. 1 (14 points)

Based on the article reported in the Appendix, discuss the following points about Tesla, an
American firm producing electric cars.
1. Identify the critical success factors in producing electric cars (3 points)
a.
b.
c.
d.
e.
f.
g.

Acceleration time of the vehicle

Price and mile autonomy of the battery
Cars aerodynamic capability (drag coefficient)
Time for recharging the battery
Number of charging stations
Brand and reputation
Cash availability. Needed to sustain economic losses. Due also to the Teslas high level of
vertical integration, which requires more investments in plants, etc.
h. Product development (no long delays in product launch)
i. Manufacturing capability/excellence
j. A Steep learning curve in battery production (i.e., rapidly achieve cost savings)
2. Apply a SWOT analysis for Tesla, referring to theoretical frameworks such as the Resource
Based View. In conducting the analysis describe Teslas strengths and weaknesses in
comparison to the position of incumbent car-makers in the electric vehicle market (e.g.
Toyota, Volkswagen, Nissan-Renault). (5 points)
Strenghts
a. Scale and innovation leader in battery production
b. Strong brand and Elon Musks reputation as a visionary entrepreneur
c. More focus and higher commitment on EV compared to incumbents, especially the ones
with a high market presence in the segment of compact cars (not munificent)
Weakness
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d. No scale economies compared to the incumbents (MES is 6 million car per year)
e. Low manufacturing competencies compared to incumbents
f. No cash cows coming from other car segments
Note Strengths and Weaknesses refers to Tesla. Opportunities and Threats refer to the industry
environment in general and to how Tesla based on their resources and capabilities - can seize
opportunities or can face competitive threats. Thus, for example, the paucity of charging stations
cannot be considered a weakeness for Tesla, since all the car makers involved in EV deal with
the same problem.
Opportunities
g. Increased and diffusion attention in the demand on green products
h. Support from related industries: i.e. clean-tech such as solar and wind energy; software and
tlc:
Threats:
i. Public subsidies for EV may decrease/expire in some years
j. Possible increased investments of incumbents in substitute technologies (e.g. natural gas?)
with a more compelling value proposition for the customer
k. EV not so compelling for the customer (whats the value proposition? Is it compelling?
What is the actual willingness to pay for green engines?). In general, in many countries the
WTP for cars is quite low (cars have a long life, in average 11 years), but this is particularly
true for mass market segments and not for the luxury/premium segment.
3. Why do you think Tesla has decided to compete in the segment of luxury cars? Why could
this segment be more attractive than the other segments of the car making industry (e.g.
compact cars, sedans, SUVs, etc.)? (3 points)
a. Customers are less price sensitive, more tolerant to delay in product launch, more
willing to indirectly finance the firm with a deposit.
b. Economies of scale are not a KSF in that market segment
c. Being the product price higher, the weight of battery cost on the product price is
lower
4. How successful could be Tesla in entering a market like Italy? Motivate your answer based
on the Porters Diamond Model. (2 points)
a. Supply conditions: manufacturing competencies (Fiat heritage). It could be easy to
find a partner for manufacturing
b. Demand Conditions:
a. small country, it cannot be served with local manufacturing
b. very high cost for energy (the cost of owning and using an EV would not be
that convenient to the customer)
c. small country with low distances compared to the US. E.g. A round trip Turin
Milan may not require a stop for charging the battery.
c. Related and supporting industries:
a. look at the rate of development of the clean-tech industry there
b. good local availability of suppliers for automotive components given the
country specialization in this sector
c. no charging stations (but this is commonplace in all the world)
d. Structure and rivalry in the local industry
a. The main local competitor is FCA, which has a very limited supply of EV
and hybrid cars. Good market penetration for other incumbents such as
Toyota and Nissan-Renault
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5. Finally, based on the elements you have discussed, what do you think are the elements that
drove Barclays to predict no profitability for Tesla in the next five years? Do you agree with
this prediction? (1 point)
a. Barclays prediction is plausible due to Teslas limited scale of production, its
capability to launch new products in the expected time, the degree of competition in
the market segment is positioned, the doubt of its capability to scale production in
other market segments.
b. However, we may argue that this prediction may not take into account the industry
life cycle and the fact that the EV industry is still in a fluid phase, where
technologies are rough and production processes are still inefficient
FAMILY NAME, FIRST NAME,

Question n. 2
Car manufacturers make cars doors but not tyres, which are then bought in a competitive market from
specialized suppliers (e.g., Pirelli, Michelin, Bridgestone). Explain car makers choice referring to the
following elements discussed during the course:
1. Specialization and learning economies
2. Transaction Cost Economics
Specialization and learning economies.
- Tyres require different core competencies (in chemicals) and production processes than the ones
required for manufacturing engines, powertrain technologies, and for forming/stamping the body
of the car.
- the degree of technological innovation in tires is very high and this requires high level of R&D
investments. As in any R&D intensive industry, specialization matters!
3. TCE. Tires are not specific to a particular car model. Thus, manufacturing tires does not require high
asset specificity. Therefore, the market transaction cost is low. Conversely, stamping doors require
dedicated molds, that must be designed and produced according to the specific requirements of each
car model. The level of asset specificity is very high. Outsourcing door manufacturing would require
high transaction costs, due to the risk of opportunistic behaviours in one of the two parts.

Note:
1- Claiming that ZARa is in an uncontested market through a Blue Ocean strategy is WRONG.
The market is not uncontested, since there is direct competition from GAP, Benetton, H&M..
Question n. 3 (4 points)
For years a common wisdom in management has been that firms can hardly be successful in combining cost
leadership with the delivery of a superior benefit to the customer. In this regard, Michael Porter in the 1980s
claimed that firms trying to pursue this challenge are bound for being stuck in the middle. Nowadays cases
like IKEA and the Zara seem to have reverted this wisdom. Based on the discussion of these cases conducted
during the course, identify the commonalities that these two firms have in their capability to combine cost
leadership with product differentiation. Based on that, what should firms try to replicate from IKEA and Zara
to combine cost leadership and product differentiation?

The focus of the question was on addressing commonalities and generalizing the lessons learned! Long and
detailed description of Zara and IKEA strategies as separate entities were not appreciated and were object of
a low evaluation.

a. In a nutshell, the product per se and the related manufacturing processes (i.e., upstream part of the value
chain) are standardized, based and inspired on a cost leadership logic (based on a low product durability,
usage of cheap materials), whereas the customer relationship management (i.e., downstream part of the
value chain) is inspired on a logic of benefit differentiation. This logic is based on: i) great product
variety, ii) the crucial importance of the store, iii) the role of customer experience at the store.
Furthermore, the product is cheap, but thanks to an attractive design, it is something about the customer
has not to feel ashamed of having purchased a Zara or an Ikea product.
b. Each of the two strategies exhibits a high level of internal consistency and strategic fit and - As such
they form a whole entity which is more difficult to imitate than each individual element of this whole
entity.

FAMILY NAME, FIRST NAME,

STUDENT NUMBER (block letters)

Question n. 4 (8 points)
Discuss whether the following statements are TRUE or FALSE. Motivate your answer.
1. Referring to the case study Apple 2008, answer and briefly discuss the following question:
At the end of the 1990s could Apple truly change the rules of the competition game in
the Personal Computer industry? (2 points) (2 points)
NO. A dominant design had already emerged in the industry in the second half of the 1990s, i.e. the
so-called WINTEL platform.
2. Referring to the case study Kodak, answer and briefly discuss the following question:
Considering the competition for the leadership in the US market between Kodak and Fuji
Film, Was Kodak decision not to sponsor film supplies for the 1984 Olympic Game in Los
Angeles the right choice? (Fujifilm was one of the official sponsors) (2 points)
NO, it was not the right choice. By sponsoring the LA Olympic Games, Fujifilm could gain a
stronger reputation in the American market and could attack Kodaks market share and leadership in
the American Market. This choice exhibited a low degree of external consistency, since it was not in
line with the Kodaks need to defend its market share in a period in which the market approached a
maturity phase and thus more importance for a cost leadership.
APPENDIX
Ten Charts That Will Make You Rethink Tesla's Model 3 - Tom Randall
April 21, 2016 12:00 PM EEST
It was the night of the unveiling. Nineteen minutes into his big talk, Elon Musk finally revealed
what everyone had come to see. Three of Tesla Motor Inc.s Model 3 prototypes rolled onto stage.
But it was the next revelation that brought the house down: Tesla had already taken in more than
115,000 reservations that day, each with a $1,000 depositsight unseen. The crowd swooned. The
media roared.
In the weeks that followed, reservations jumped to about 400,000almost four times the total
number of cars Tesla has produced over the last eight years. As the dust settles on this achievement
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an affordable, practical, desirable electric carweve been pulling together data to put it in
historical context. The charts below show how much Tesla's new metal box with wheels may
change our world, but they also show how everything else needs to go exactly right if that's going to
happen.
The Model 3 represents the first time an affordable electric car doesnt have to apologize for
running on batteries. Conventional wisdom once held that electric cars would always run slow and
would never be objects of automotive lust. Tesla flipped that on its head by clocking some of the
fastest times from 0 to 60 miles per hour in the world with its Model S.

But how far can you go before having to charge the battery again? That's always been a
foundational question. Could this upstart really make a long-range car with the grace of the Model S
and deliver it at a reasonable price? Apparently, yes. The Model 3 offers the cheapest range
available for any electric car, even though it retains some of the richest features. In the long run, this
may be one of the most important contributions of the car, if it is to bring the electric automobile
fully into the mass market.

Battery cost makes up a third of the price of an electric vehiclea fact that hasn't been lost on
Tesla. The company has been throwing a lot of its sweat and money at cutting this expense
including building the biggest battery factory on the planet and launching a standalone batterystorage business. The strategy seems to be working: Tesla is now making finished battery packs at
or below $220 per kilowatt hour, considerably less than the industry average, according to analysts
at Bloomberg New Energy Finance (BNEF). If Tesla can shave an additional 30 percent off its
battery cost, it should be able to sell the Model 3 with a healthy 20 percent gross profit margin.
Tesla is also expanding range by eking more miles out of the same electricity. Musk said on Twitter
that he thinks the final Model 3 will have a drag coefficient of 0.21. That would make it one of the
sleekest cars ever sold:
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But even a long-range battery dies, and what happens then? As it turns out, charging isn't as big a
hurdle as many drivers imagine. Sure, there are still roughly 13 gas stations for every public
charging location. But that's ignoring the most common type of charging station of all: your garage.
About two-thirds of U.S. homes have them. With an at-home charger and 215 miles of range, most
customers rarely need to stop at a charging station. Looking at it that way, charging
locations already outnumber gas stations by about 400 to 1.
Public charging stations are primarily needed for drivers who spend long stretches on the road at a
timebe it for road trips or business travel. For most of these drivers, it's the speed of the chargers
not the absolute numberthat matters most, so Tesla is focusing on building a charging network
with the fastest chargers in the world. Tesla Superchargers can provide 170 miles of driving range in
30 minutes, and owners of the Model X and S can use them all without charge. The number of
Superchargers will double this year alone, according to Tesla.

So Tesla has the right chargers and it has the right car. The sky is the limit, right? Well, here is the
biggest hurdle the company faces between now and the electric-car filled horizon: follow-through.
First Tesla has to make all those Model 3s on order, and this is a company that's known for delays.
The chart below shows each of Tesla's unveilings and the forecast for delivery Musk
provided when he began taking reservations. Every car missed its deadline, most recently with the
Model X overshooting by more than 18 months. Did we mention that those $1,000 deposits on the
Model 3 are fully refundable?

Tesla can no longer afford such delays, for several reasons:

1.

Previously Tesla relied on wealthy early adopters who weren't in a rush. Many Model 3
buyers don't have that luxury.

2.

The backlog of 400,000 reservations will probably grow before the launch slated for late
next year. Even if it doesn't, this is a considerable number of cars to move. Delays for some in the
queue are inevitable, but how long will buyers wait?

3.

The competition is arriving soon. General Motors Co.'s Chevy Bolt is already going to beat
Tesla to market with an electric car that can drive 200 miles on a charge for less than $40,000.
While the Bolt doesn't share the panache of a Model 3, it's a practical option for electric-car buyers,
and the luxury brands aren't far behind.

4.

Perhaps most pressing for Tesla is that the $7,500 U.S. subsidy for electric cars, which
brings the base Model 3 price to $27,500, is going to expire.
Everything must go right for the Moel 3 to succeed: The battery factory must flourish, costs must
come down, car-manufacturing capacity must scale at an astonishing rate, and all of it needs to
arrive on time. Musk says he can sell 500,000 cars a year by 2020 worldwide. Here's what the U.S.
Tesla market would need to look like in order for that to happen:
The high price of the Model S and Model X will put a cap on their total potential market. In order
for Tesla to meet its 2020 forecast, it will need to make up the difference with the rapid deployment
of the Model 3. In fact, Tesla may need to sell more units than the class-leading BMW 3 Series.

Launching the Model 3 put Teslas business model under far more strain. Other carmakers look on
its extreme vertical integration with bemusement. If Mr Musk fancies himself as the next Henry
Ford, his factory certainly resembles the Model Ts production line, where iron ore and rubber went
in one end and a car chugged out the other. Other carmakers are now largely brand managers,
assemblers and systems integrators, ensuring that all the parts they buy from suppliers work in
harmony when bolted and welded together. This serves to spread risk and push costs to suppliers.
Tesla makes most of its parts in-house. Mr Musk regards this as a competitive advantage. Firms
build value by doing hard things, he reckons. But tooling, forging and design suck up capital.
The same holds true for sales and distribution. Whereas other carmakers sell their vehicles through
networks of independent dealers, Tesla sells directly to the public, through its website and in
showrooms located in shopping centres. This means it keeps the retail markup, but it is unclear how
much, if at all, this offsets the cost of maintaining the showrooms. And dealer networks are useful in
other ways: they assume a lot of risk by paying for cars when they take delivery of them, rather than
when they sell them.
In all, Teslas way of working requires lots of cash. Barclays, a bank, thinks the firm will burn
through $11 billion over the next five years, and will not generate significant profits until then.
Investors have willingly stumped up so far but many analysts question whether Tesla is worth its
current market capitalisation of $29 billion, more than half the value of GM, which makes nearly
10m cars a year. The worry is that entering the mass market will change the way Tesla makes cars,
the sort of customers it chases and the competitors it faces.