Porters Five Forces of Competition Model - Case Study Example

Explain How the Porter’s Five Forces of Competition Model can be applied to Tesco and explain the nature of the competition facing Tesco plc. In light of this discuss Tesco’s strategy and its success. 1. Introduction The demise of the local high street store to the dominance of supermarkets in the past 20 years has radically transformed the grocery market (Henry, 2008, p.77). For example, the DEFRA Economic Note on UK Grocery Retailing (2006) indicates that in addition to continued growth in the UK Grocery Retail sector; approximately “3/4 sales are made in supermarkets and superstores… with traditional small retailers now accounting for only 7% of sales” (DEFRA, 2006). The UK supermarket industry is currently dominated by four major players, namely Tesco, Sainsbury’s, Asda and Waitrose; and Tesco is estimate to have a 30.5% market share of the UK supermarket industry (TNS World, 2009). It is submitted that a key element of this is effective interrelationship between corporate strategy management and exploitation of macroeconomic factors. For example, Tesco’s strategy mission statement clearly asserts its objective to broaden the scope of its services in order to address continuous fluctuations in consumer demand in order to “deliver strong sustainable long-term growth” (Tescoplc.com). Indeed, the underlying basis of macroeconomic theory is the interrelationship between performance and behaviour in decision making regarding national economies along with a consideration of the various determinants of economic activity (Michl 2002, p.20). This is further reiterated by the arguments of Johnson et al, who opine that it is the environment which ultimately shapes organisational survival in the marketplace (Johnson et al, 2008, p.54). In turn, this proposition is further supported by reports highlighting gains in Tesco market share as a result of its ability to accommodate changes in consumer behaviour and trends due to the growth of multi-channel retailing (Wood, 2010). In further considering marketing strategy within the competitive environment it is also necessary to apply Porter’s five forces analysis (Hill & Jones, 2007, p.46). The Porter’s five forces analysis is a business tool for undertaking industry analysis for the purposes of developing business strategy and uses five central forces as a yardstick against which to analyse competiveness in a particular industry (Porter, 1980). For example, if we apply this to the UK supermarket model, a key factor in competitiveness has been the ability of supermarkets to be aware of their brand being inherently dependent on the public perception of branding (Burch and Lawrence, 2007, p.109). 2. Tesco & Industry Analysis: Porter’s Five Forces Model 2.1. Threat of Entry If we consider the Porter’s five forces model in the context of UK supermarkets, it is evident that the macro factors shaping the UK grocery market have significantly contributed to a retail market model dominated by the superstores under the “market development” aegis (Capon, 2009, p.258). As a result, the market development has enabled market penetration by the major players in the UK such as Sainsburys, Tesco and Waitrose. As highlighted above, the UK grocery market is dominated by the UK supermarket and superstore retail model, which accounts for seventy five percent of UK grocery sales (DEFRA, 2006). Moreover, it is submitted that the central rationale for this market dominance is the interrelationship between macroeconomic factors and increasing consumer power (Baumol & Blinder, 2008, p.162). In particular, the digital era fuelled novel business opportunities and the continuous evolution of online business channels has made multi-channel retailing a reality, with the customer now placed at the forefront of business strategy. In turn this has reshaped business distribution and marketing models. Furthermore, the combination of Tesco’s ability to diversify the services offered, the correct marketing-mix strategy and the ability to provide busy consumers with a one-stop shop solution has significantly impacted local shops. For example, the findings of DEFRA in the 2006 report, highlights that transformational shift of the UK grocery sector from high street store to superstore is directly correlated to macro factors (2006). In particular the influence of technological changes on the macroeconomic framework within which Tesco operates has resulted in the “inexorable rise of multiple supermarkets at the expense of independent stores” (DEFRA, 2006). Moreover, the desire for economies of scale perpetuated the one stop shop retail model for grocery retailing (DEFRA, 2006). Therefore, it is clearly difficult for new entrants to enter the market particularly due to the requirement for huge investment and significant capital to compete with the large fixed operational costs involved in ensuring cohesion between brand strategy, customer relationship management (CRM) and effective supply chains. For example, Tesco has been able ability to sustain growth in the competitive grocery sector has been the continuous innovation in service offering to adapt to the contemporary consumer (Burch & Lawrence, 2007). Prime examples of this include the development of Tesco’s in house brand and the use of customer loyalty schemes; which boost profits in the long term (Capon, 2009, p.135). Moreover, Tesco’s strategy management and effective implementation of CRM has expanded the brand beyond the UK grocery market (Capon, 2009). Another barrier to entry for new entrants includes the economies of scale in providing diverse services and products. For example, this applies to the choice of products stocked in store (Burch and Lawrence, 2007, p.109). For example, Burch and Lawrence argue that a significant factor in increasing the attraction of the supermarket and superstore in the UK grocery market is the strategy of co-branding (2007, p.109). Indeed, it has been argued that a central factor in attracting consumers to the superstore model has been the role of food and “the importance of quality in food purchasing” (Seth & Randall, 2000, p.177). As such, the economic power of Tesco to address consumer preferences in purchasing decisions enables dominance in the market. 2.2. Bargaining Power of Suppliers Tesco’s power in the marketplace means that product placement is vital for suppliers and Ritz (2005) highlights that Tesco’s leading position in being able to negotiate product placement and promotional deals has placed Tesco in a strong position in contrast to small individual chains (Ritz, 2005). Additionally, Tesco’s ability to source products cheaply from abroad has placed it in a stronger negotiating position vis-a-vis UK suppliers (Wood, 2010). On the other side of the spectrum, the growing competition in the supermarket industry and ability of Tesco’s rivals to also negotiate deals with suppliers has had implications for profit margins for both supermarkets and suppliers (Ritz, 2005). 2.3. Bargaining Power of Customers According to Porter’s five forces paradigm, Porter argued that increased hegemony in products resulted in lower switching costs, which in turn increased buyer power (Porter, 1980). This is increasingly evident in the contemporary multi-channel retail environment particularly as a result of the ecommerce business model. For example, The DEFRA 2006 report highlights that Tesco has been one of the most successful supermarket chains in exploiting the multi retailing format, which is reiterated by the continuation in market share growth (DEFRA, 2006; Wood 2010). Moreover, the DEFRA report highlights that whilst Tesco’s market share is inherently dependent on location, it ultimately is “commanding, and steadily increasing, 30% share of the non-convenience UK grocery market” (DEFRA, 2006). Therefore, Tesco has acknowledged the increasing power of customers and continued to adapt its strategy to meet consumer demand and gaps in the market. For example, in addressing the constraints of the “mature market” and planning restrictions in the UK, Tesco has made significant inroads into the convenience retailing sector with the increase of high street and local “Tesco Express” in prime locations for passing trade (DEFRA, 2006). It is submitted that a significant element of Tesco’s success is the ability to spot gaps in the pre-existing saturated “mature market” for profitable gain (Sadler & Craig, 2003, p.231). Additionally, Tesco has been able to continue growing by continuing its core aggressive discounting policy from the 1970s, whilst implementing new marketing initiatives to increase the perceived value presented to customers in persuading them to continue shopping at Tesco (Sadler & Craig, 2003, p.231). To this end, Tesco has been able to sustain growth and profitability in a saturated sector through continued innovation in service offerings (Sadler & Craig, 2003, p.231). Moreover, a significant element has been the ability of Tesco to adapt to consumer habits in the multi-channel retail marketplace. Indeed, Tesco’s strategy statement highlights that its ability to diversify has been “the foundation of Tesco’s success in recent years” (tescoplc.com). This is further highlighted by Tesco’s diversification into non-food services and a commitment to the increasing public consciousness regarding fair trade and the environment with its corporate social responsibility strategy objectives being committed to environmental concerns in ensuring ethical product supply (tescoplc.com). 2.4. Threat of Substitutes Under the Porter model, the argument is that the higher the possibility of product substitutability, the higher the threat of consumers switching to cheaper alternatives (Porter, 1980). In the grocery market, there is increased product substitutability and market saturation. Additionally, the reality of busy modern life, rising incomes and increase in the female workforce has further influenced consumer decision making, in turn increasing the likelihood of consumer switching due to availability of product substitutes. Tesco has addressed this by acquiring sites for small scale operations such as the Express stores, along with customer preference targeted discount coupons from monitoring purchase patterns. Another example of addressing substitutability is the successful online store and home delivery service. 2.5. Competitive Rivalry Overall the UK grocery market is dominated by the large players and Tesco has approximately 30% of the UK market with a growing share in global markets as a result of continued diversification. This market power continues to grow as Tesco is able to match its strategy development goals with continuous changes in consumer trends as highlighted through numerous loyalty schemes and diversification into non-food markets such as finance. As a result, Tesco’s purchasing power is high with regard to suppliers. Nevertheless, the increasing power of the consumer is increasingly important in shaping retail strategy objectives in the grocery market, and Tesco’s ability to maintain market share is to continue to innovate and build market share through entering emerging markets and spotting gaps in the market where consumer demand is not being met. This will enable Tesco to maintain its position and the competitive edge over the other main retailers in the UK grocery market. BIBLIOGRAPHY Baumal, W. & A. Blinder (2008). Macroeconomics: Principles and Policy. Cengage Learning. Burch, D. & G. Lawrence (2007). Supermarkets and agri-food supply chains: transformations in the production. Edward Elgar Publishing. Capon, C. (2009). Understanding the Business Environment. Pearson Department for Environment, Food and Rural Affairs (DEFRA) (2006). Economic Note on UK Grocery Retailing. Available at www.defra.gov.uk accessed December 2010. Henry, A (2008) Understanding Strategic Management. Oxford University Press. Hill, C., & Jones, G. (2007). Strategic Management: an integrated approach. South Western College Publishing Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring Corporate Strategy. Pearson. Michl, T. (2002) Macroeconomic Theory: A Short Course. M. E. Sharpe Porter, M (1980) How competitive forces shape strategy. The McKinsey Quarterly, Spring 19800. Ritz (2005). Store Wars, Business Review, Volume 11, April, pp.22-23 Sadler, P. & Craig, J. (2003). Strategic Management. Kogan Page. Seth, A., & . Randall (2000). The Grocers: The Rise and Rise of the Supermarket Chains. Kogan Page. Tesco Strategy statement available at www.tescoplc.com/plc/about_us/strategy/ accessed December 2010. Wood, Z. (2010). Tesco regains market share as Morrison Slips, The Guardian, 7 December 2010, available at www.guardian.co.uk accessed December 2010. Read More