Tesco Porter Five Forces Analysis

Porter’s Five Forces Analysis

A model was put forward by Michael. E. Porter in an article in the Harvard Business Review in 1979. This model, known as Porter's Five Forces Model is a strategic management tool that helps determine the competitive landscape of an industry. Each of the five forces mentioned in the model and their strengths help strategic planners understand the inherent profit potential within an industry. The strengths of these forces vary across the industry to industry, which means that every industry is different regarding the profitability and attractiveness. The structure of an industry, even though it is stable, can change over time. These Porter’s five forces are as follows:

• Threat of New Entrants
• Bargaining Power of Suppliers
• Bargaining Power of Buyers
• Threat of Substitute Products or Services
• Rivalry Among Existing Firms

The Porter’s Five Forces model can be used to analyse the industry in which Tesco operates, in terms of attractiveness through inherent profit potential. The information analysed using the model can be used by strategic planners for Tesco to make strategic decisions.

Tesco Porter’s Five Forces Analysis

This section analyses Tesco using each of the five forces of Porter’s model.

Threat of New Entrants

• The economies of scale is fairly difficult to achieve in the industry in which Tesco operates. This makes it easier for those producing large capacitates to have a cost advantage. It also makes production costlier for new entrants. This makes the threats of new entrants a weaker force.
• The product differentiation is strong within the industry, where firms in the industry sell differentiated products rather a standardised product. Customers also look for differentiated products. There is a strong emphasis on advertising and customer services as well. All of these factors make the threat of new entrants a weak force within this industry.
• The capital requirements within the industry are high, therefore, making it difficult for new entrants to set up businesses as high expenditures need to be incurred. Capital expenditure is also high because of high Research and Development costs. All of these factors make the threat of new entrants a weaker force within this industry.
• The access to distribution networks is easy for new entrants, which can easily set up their distribution channels and come into the business. With only a few retail outlets selling the product type, it is easy for any new entrant to get its product on the shelves. All of these factors make the threat of new entrants a strong force within this industry.
• The government policies within the industry require strict licensing and legal requirements to be fulfilled before a company can start selling. This makes it difficult for new entrants to join the industry, therefore, making the threat of new entrants a weak force.

How Tesco can tackle the Threat of New Entrants?

• Tesco can take advantage of the economies of scale it has within the industry, fighting off new entrants through its cost advantage.
• Tesco can focus on innovation to differentiate its products from that of new entrants. It can spend on marketing to build strong brand identification. This will help it retain its customers rather than losing them to new entrants.

Bargaining Power of Suppliers

• The number of suppliers in the industry in which Tesco operates is a lot compared to the buyers. This means that the suppliers have less control over prices and this makes the bargaining power of suppliers a weak force.
• The product that these suppliers provide are fairly standardised, less differentiated and have low switching costs. This makes it easier for buyers like Tesco to switch suppliers. This makes the bargaining power of suppliers a weaker force.
• The suppliers do not contend with other products within this industry. This means that there are no other substitutes for the product other than the ones that the suppliers provide. This makes the bargaining power of suppliers a stronger force within the industry.
• The suppliers do not provide a credible threat for forward integration into the industry in which Tesco operates. This makes the bargaining power of suppliers a weaker force within the industry.
• The industry in which Tesco operates is an important customer for its suppliers. This means that the industry’s profits are closely tied to that of the suppliers. These suppliers, therefore, have to provide reasonable pricing. This makes the bargaining power of suppliers a weaker force within the industry.

How Tesco can tackle the Bargaining Power of Suppliers?

• Tesco can purchase raw materials from its suppliers at a low cost. If the costs or products are not suitable for Tesco, it can then switch its suppliers because switching costs are low.
• It can have multiple suppliers within its supply chain. For example, Tesco can have different suppliers for its different geographic locations. This way it can ensure efficiency within its supply chain.
• As the industry is an important customer for its suppliers, Tesco can benefit from developing close relationships with its suppliers where both of them benefit.

Bargaining Power of Buyers

• The number of suppliers in the industry in which Tesco operates is a lot more than the number of firms producing the products. This means that the buyers have a few firms to choose from, and therefore, do not have much control over prices. This makes the bargaining power of buyers a weaker force within the industry.
• The product differentiation within the industry is high, which means that the buyers are not able to find alternative firms producing a particular product. This difficulty in switching makes the bargaining power of buyers a weaker force within the industry.
• The income of the buyers within the industry is low. This means that there is pressure to purchase at low prices, making the buyers more price sensitive. This makes the buying power of buyers a weaker force within the industry.
• The quality of the products is important to the buyers, and these buyers make frequent purchases. This means that the buyers in the industry are less price sensitive. This makes the bargaining power of buyers a weaker force within the industry.
• There is no significant threat to the buyers to integrate backwards. This makes the bargaining threat of buyers a weaker force within the industry.

How Tesco can tackle the Bargaining Power of Buyers?

• Tesco can focus on innovation and differentiation to attract more buyers. Product differentiation and quality of products are important to buyers within the industry, and Tesco can attract a large number of customers by focusing on these.
• Tesco needs to build a large customer base, as the bargaining power of buyers is weak. It can do this through marketing efforts aimed at building brand loyalty.
• Tesco can take advantage of its economies of scale to develop a cost advantage and sell at low prices to the low-income buyers of the industry. This way it will be able to attract a large number of buyers.

Threat of Substitute Products or Services

• There are very few substitutes available for the products that are produced in the industry in which Tesco operates. The very few substitutes that are available are also produced by low profit earning industries. This means that there is no ceiling on the maximum profit that firms can earn in the industry in which Tesco operates. All of these factors make the threat of substitute products a weaker force within the industry.
• The very few substitutes available are of high quality but are way more expensive. Comparatively, firms producing within the industry in which Tesco operates sell at a lower price than substitutes, with adequate quality. This means that buyers are less likely to switch to substitute products. This means that the threat of substitute products is weak within the industry.

How Tesco can tackle the Threat of Substitute Products?

• Tesco can focus on providing greater quality in its products. As a result, buyers would choose its products, which provide greater quality at a lower price as compared to substitute products that provide greater quality but at a higher price.
• Tesco can focus on differentiating its products. This will ensure that buyers see its products as unique and do not shift easily to substitute products that do not provide these unique benefits. It can provide such unique benefits to its customers by better understanding their needs through market research, and providing what the customer wants.

Rivalry Among Existing Firms

• The number of competitors in the industry in which Tesco operates are very few. Most of these are also large in size. This means that firms in the industry will not make moves without being unnoticed. This makes the rivalry among existing firms a weaker force within the industry.
• The very few competitors have a large market share. This means that these will engage in competitive actions to gain position and become market leaders. This makes the rivalry among existing firms a stronger force within the industry.
• The industry in which Tesco is growing every year and is expected to continue to do this for a few years ahead. A positive Industry growth means that competitors are less likely to engage in completive actions because they do not need to capture market share from each other. This makes the rivalry among existing firms a weaker force within the industry.
• The fixed costs are high within the industry in which Tesco operates. This makes the companies within the industry to push to full capacity. This also means these companies to reduce their prices when demand slackens. This makes the rivalry among existing firms a stronger force within the industry.
• The products produced within the industry in which Tesco operates are highly differentiated. As a result, it is difficult for competing firms to win the customers of each other because of each of their products in unique. This makes the rivalry among existing firms a weaker force within the industry.
• The production of products within the industry requires an increase in capacity by large increments. This makes the industry prone to disruptions in the supply-demand balance, often leading to overproduction. Overproduction means that companies have to cut down prices to ensure that its products sell. This makes the rivalry among existing firms a stronger force within the industry.
• The exit barriers within the industry are particularly high due to high investment required in capital and assets to operate. The exit barriers are also high due to government regulations and restrictions. This makes firms within the industry reluctant to leave the business, and these continue to produce even at low profits. This makes the rivalry among existing firms a stronger force within the industry.
• The strategies of the firms within the industry are diverse, which means they are unique to each other in terms of strategy. This results in them running head-on into each other regarding strategy. This makes the rivalry among existing firms a strong force within the industry.

How Tesco can tackle the Rivalry Among Existing Firms?

• Tesco needs to focus on differentiating its products so that the actions of competitors will have less effect on its customers that seek its unique products.
• As the industry is growing, Tesco can focus on new customers rather than winning the ones from existing companies.
• Tesco can conduct market research to understand the supply-demand situation within the industry and prevent overproduction.

Implications of Porter Five Forces on Tesco

By using the information in Tesco five forces analysis, strategic planners will be able to understand how different factors under each of the five forces affect the profitability of the industry. A stronger force means lower profitability, and a weaker force means greater profitability. Based on this a judgement of the industry's profitability can be made and used in strategic planning.