Porter's Five Forces Analysis: Force 1: The Degree of Rivalry
Porter's Five Forces Analysis: Force 1: The Degree of Rivalry
Porter's Five Forces Analysis: Force 1: The Degree of Rivalry
The Porters Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firms current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its application inspired numerous companies as well as business schools to adopt its use (Wheelmen and Hunger, 1998). The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organizations behaviour in a competitive market. These include the following: The rivalry between existing sellers in the market. The power exerted by the customers in the market. The impact of the suppliers on the sellers. The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thorsby, 1998).
Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places). The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the StructureConduct-Performance (SCP) model.
The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda, Sainsbury's and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Bud gens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. This powerful force had a great impact on the small traditional shops, such as butchers, bakers and etc. Hence, nowadays it possesses a strong barrier for new companies who desire to enter the grocery market. For instance, it becomes rather difficult for new entrants to raise sufficient capital because of large fixed costs and highly developed supply chains. This is also evident in huge investments done by large chains, such as Tesco, in advanced technology for checkouts and stock control systems that impact new entrants and the existing ones. Other barriers include economies of scale and differentiation (in the provision of products or services with a higher perceived value than the competition) achieved by Tesco and Asda seen in their aggressive operational tactics in product development, promotional activity and better distribution.
Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco's famous loyalty card - Club card remains the most successful customer retention strategy that significantly increases the profitability of Tesco's business. In meeting customer needs, customizing service ensure low prices, better choices, constant flow of in-store promotions enables brands like Tesco to control and retain their customer base. In recent years a crucial change in food retailing has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that shows a greater need for supermarkets to sell non-food items. It has also provided supermarkets with a new strategic expansion into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World producers. Ecologically benign and ethically sound production of consumer produce such as tea, coffee and cocoa is viable, and such products are now widely available at the majority of large chains.
Threat of Substitutes
General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. In this case Tesco, Asda and Sainsbury's are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres Ritz (2005).
CONCLUSION
Branding and Reputation
There are companies that have always understood that they were selling brands before the product. Tesco is a brand and also serves as the core strategic advantage. The company was spreading like wildfire transforming the generic into the brandspecific, largely through carefully branded packaging and the promotion of an every penny counts environment. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value. The product and service development processes of the company have been substantially re-engineered, to facilitate better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product activity has focused on enhancing core ranges and introducing quality products. Tesco's innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on strong brand reputation. The company is also very successful in terms of customer loyalty due to its loyalty cards system and its general approach to customizing services to the needs of every customer. This is truly evident in terms of tremendous growth of on-line sales where the company has a strong platform to further develop this revenue stream. After considering the fact the nowadays majority of people have less time for shopping, Tesco employed this on-line systems and now became the biggest online supermarket.
IT Integration
Today companies act in an increasingly dynamic and complex environment, giving more difficulties making forecasts and adapting themselves to the continuous changes. In order to be able to compete in this kind of world, it is necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For Tesco operations have become necessities rather than luxuries. Systems that control stock, keep all the stock and deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has risen beyond its traditional support role and taken up a central role in business strategy formulation. Extranet system employed by the company, enables Tesco to use the Internet to create proprietary and customised information flows between the company and its business partners. The system connects business partners online behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution channels. Extranet also helps to extend the key information on business partners throughout the supply chain and facilitate collaborative relationships with partners. Market exchanges hold the promise of extending Tesco's reach, delivering buyers to their virtual doorstep from around the world. Other examples of the most efficient technological advances that support daily business operations of Tesco are wireless devices, intelligent scale, and electronic shelf
labelling, self check-out machine and radio frequency identification (RFID) systems. This technology is an effort to maintain Tesco's ability to handle an increase in product/service volume while controlling costs; it also enables to be innovative and market oriented.
Supplier Management
Tesco, like many other grocery chains companies, sources its goods from overseas manufacturers who are more competitive on price and volumes. For many years Tesco has been supporting British jobs and expertise by encouraging large branded suppliers to develop exclusive production facilities. But in recent years the company has realised the need to look abroad for products no longer available in UK, bud tried to do it through long-established UK partners. The foods continued to be heavily UK-based due to the very successful range of prepared foods. As a major retailer selling diverse product range, they work with many different suppliers around the world, with employees from many different cultures and ethnic groups. Therefore, it is the company policy and company's main approach to have unique relationships with suppliers. Applying advanced technology in its communications and cooperation with the suppliers, the company aims to control the work of its suppliers and heavily relies on their efficiency. The direct suppliers use a number of sub-contracted suppliers, selected to be best in class in their country. Tesco has established close relationships with the contractors believing that regular and long term orders promote the investment necessary to improve conditions in the supply chain. Being an international company, Tesco develops various supplier management programmes to survey key suppliers and franchisee satisfaction. The company also takes part in the Ethnical Trading Initiative.
CONCLUSION
The success of the Tesco shows how far the branding and effective service delivery can come in moving beyond splashing one's logo on a billboard. It had fostered powerful identities by making their retailing concept into a virus and spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, and consumer experience and brand extensions. In a rapidly changing business environment with a high competitors' pressure Tesco have to adopt new expansion strategies or diversified the existing in order to sustain its leading market position in an already established retailing market. The company must constantly adapt to the fast changing circumstances. Strategy formulation should therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The quality of a formulated strategy and the speed of its implementation will therefore directly depend on the quality of Tesco's cognitive and behavioural learning processes. In large organizations as Tesco strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Tesco's strategy at a corporate level defines the businesses in which Tesco will compete, in a way that focuses resources to convert distinctive competence into competitive advantage