Tesla Superior Electric Vehicle

As of the first half of 2013, Tesla has a superior electric vehicle product, the Model S, and commands a higher price point than the BMW 5 Series. It also, however, has higher costs per vehicle and operates at a loss per car. As a result Tesla is not creating value, which prevents it from successfully pursuing a differentiation strategy and achieving a competitive advantage over BMW. To build a competitive advantage, the firm must achieve minimum efficient scale, which will help reduce its costs per car, so that it can create value by maximizing the difference between customers’ willingness to pay and the total cost of the vehicle.

Tesla does not currently have a competitive advantage because it is unsuccessfully pursuing a differentiation strategy. The company is attempting to create value by increasing customers’ willingness to pay (WTP) by manufacturing the Model S with superior qualities. The vehicle is priced at $61,070 after tax credits in California, whereas the BMW 5 is priced at $48,725. Assuming that price is a proxy for willingness to pay, Tesla’s higher price reflects a higher amount that Tesla can extract from its customers than BMW can. Customers are most likely willing to pay more for the Model S because it is superior than the BMW 5 in terms of acceleration, horsepower, cargo capacity, consumer reports ratings, and annual fuel cost. For example, the Model S has a quarter of the fuel costs of the BMW 5 at $468 per 1500 miles, whereas the BMW 5 is $2112 per 1500 miles (Exhibit 1).