Question

What type of diversification strategy does the launch of Tesla Energy represent: related or unrelated? Explain why. Does Tesla Energy’s new business meet the three tests of corporate advantage?

Answer 1

Tesla’s diversification strategy was related. The company in the process of diversification acquired SolarCity and constructed the Gigafactory to warehouse it’s battery and automobile production. Tesla’s diversification to Tesla’s Energy is the an unrelated diversification as it is diversifying into a completely new field for sustainable energy sources. The objective of Tesla’s Engergy is to help the world to move away from their reliance on fossil fuels and move towards a sustainable energy source. It is useful for homeowners, businesses and other utilities to use Tesla’s renewable energy and cultivate a culture of a clean energy ecosystem. Tesla achieved economies of scale through shared activities. For example, there was shared manufacturing center and the same sharing concept for its R&D activities for its lithium ion batteries. Also, the company reused the same distribution channels for its related diversified products. Even the marketing outlets were reused. Thus, Tesla’s Energy is a new concept apart from automobile manufacturing which clearly demonstrates its unrelated diversification.

Porter’s three tests of corporate advantage are attractive test, cost of entry test and better off test. Yes, Tesla’s diversification strategy as Tesla Energy did meet these three tests to gain the competitive advantage in the industry.

1. Attractive test- The diversification is aimed at solar energy which is highly useful in today’s globalized economy. This is ofcourse an attractive industry.
2. Cost of entry test- The cost of entry was a boon for the automobile manufacturing section of Tesla and it did not capitalize all the profits of the company.
3. Better off test- The new business helped Tesla to earn high revenues and gain the competitive test than its competitors.