Utilisation of Porter’s Five Forces Model in Evaluation of a New Market with Reference to Tesco Jeewan Pudasaini Greenwich University BA (Hons) in Business Studies 2011 Utilisation of Porter’s Five Forces Model in Evaluation of a New Market with Reference to Tesco Jeewan Pudasaini Blake Hall College Submitted To University of Greenwich in accordance with the requirement of BA (Hons) in Business Studies December 2011 Word count: 2905 Contents Introduction 1. Porters’ Model:4 1. 1Threats of new entrants:4 1. 2Degree of rivalry:4 1. 3Threats of substitute:5 . 4Suppliers’ power:5 1. 5Buyers’ power:5 2. Tesco6 3. Application of Porters’ Model in Tesco with respect to new market:7 3. 1Threats of new entrant:7 3. 2 Degree of Rivalry:8 3. 3 Threats of substitute:9 3. 4 Suppliers’ power:10 3. 5 Buyers’ Power11 Conclusion………………………………………………………………………………………………………………………. 12 Bibliography13 Introduction 1. Porters’ Model: In order to make an assessment of the profit potential in any type of business organisation, Michael Porter’s Competitive Forces Model is one of the frequently adopted frameworks.
This competitive forces model of Porter’s comprises of collective strength of five forces which differs from one business organisation to other (Porter, 1980). The five forces as illustrated by Porters can be mentioned as: * Threats of new entrants * Degree of rivalry * Threats of substitute * Suppliers ‘ power * Buyers’ power 1. Threats of new entrants: It is one of the important components of Porter’s model which depicts with limitation or prohibition of the new entrance. The entry of new business organisation is mainly due to high profit margin.
Although certain major components such as experience, learning, volume brand image, loyalty, capital requirements for new entrants, switching cost, ease in distribution and cost disadvantages can create barrier to new entry in the competitive market(Porter,2008). 2. Degree of rivalry: This component of Porter’s Model deals with the involvement of the competitors either in the new or current business market. Close competition between competitors is obvious until certain aggressiveness is adopted by some of the strong business organisation (Porter, 2008).
Factors such as numbers of competitors, growth of the industry, high fixed costs and diversity plays an intimate role either for proliferation or deterioration of any business organisation (Porter, 1985). 3. Threats of substitute: This force of Porter’s Model creates a revolution which can either ruin the business organisation completely if not coped with change in certain technologies. Although there may be demand of same product, but change in the technology can eventually cause the shift in the business growth and if not coped then the competitors can easily take over the market. 4. Suppliers’ power:
Any business which has monopoly in the market can exert its bargaining power where customer group is not so much important for them. Similarly, brand loyalty from the customer eventually creates suppliers’ power where branded company can play its monopoly pricing even in the presence of the competitors. This mainly focuses that if the product is really important for the customers, then suppliers have benefit to raise its pricing. Thus, brand product producing business organisations have power to retain their customer s and even customer can wait for certain duration of time to get that product. 5. Buyers’ power:
In any competitive market, there is a great ability for customers or buyers to have bargaining power. This can lead in either lowering the price or can even force the business organisation to increase their quality and better service. Some factors such as volume, differentiation or standard product, buyers’ profitability, level of knowledge can determine the bargaining power of the buyers. So buyers’ power is one of the important forces of Porters’ Model where any business organisation should setup certain strategy for attracting more customers towards their product and service and grab the competitive advantage from other competitors. . Tesco Tesco is one of the biggest British retailer and the world’s third largest retailer across Europe, USA and Asia. The main vision of Tesco is to be the most highly valued from the customer with accordance to the service it served, even by the communities where they serve their service. Similarly the loyal and committed staffs are the main key elements of the Tesco from which the customers can get full service. Thinking locally and acting globally usually resemble the business strategy of the Tesco. Tesco has made certain values which made them to be the market leader in retail industry.
The fundamental principles of Tesco are to understand the customers, be first to meet their needs, acting responsibly for the communities, work as a team, trust and respect each other, share knowledge and experience (TESCO plc, 2011). The main aim of Tesco is to benefit their performance and competitiveness with the utilisation of the skills and scale of the group. As per the annual statement provided by the Tesco, it reveals that Tesco has shown excellent growth in Europe and Asian as well as encouraging performance in newly setup market in United States.
Certain core objectives are been focused as substantial changes in UK business to sharpen execution and competitiveness for the customers. Similarly, investment in the price and promotions, service and store environment helps in the proliferation of the business even in the new market. Although other competitors like ASDA and Sainsbury have decided to go with the same level of pricing and promotions in new market, the key element that kept Tesco at the top most position is due to its good supplying capacity having good resources of the materials (TESCO, 2011).
Caring about the customers and staff helps in the playing an active role in the communities is mainly focused by Tesco. Caring the environment, responsible selling of products and services, active participation in local communities, provision of healthier choices for the customers along with creation of good jobs and careers tends Tesco to grow its market even in the new environment. Along with its retailing business, Tesco has entered in banking and oil sector which is a new market where it has to face a large number of competitors like Lloyds TSB, Barclays in banking sector and BP, Shell in oil sector.
In order to cope in this competitive market, Tesco needs to broaden its strategy with further enhancement of availability almost everywhere (TESCO, 2011). This can be done with the competitive pricing and promotion of its product and service. Induction of new features and availability of most of the elements from grocery, clothing to electronic items has eventually broadened the market of Tesco. Since customer usually prefer to buy most of their items in single for their ease which is the main considered point adopted by Tesco to proliferate its business with huge success.
Even in the recession period, Tesco has played significant role in capturing new customers even in the new market. Porters’ five force can be used to analyse further Tesco’s business in new market. 3. Application of Porters’ Model in Tesco with respect to new market: 1. Threats of new entrant: Since UK grocery is dominated by the few major competitors where Tesco lies at the market leading position followed by ASDA, Sainsbury’s and Safeway. So in grocery sector, Tesco has a high market position in comparison to other. Over all 70% the grocery market has been abducted by these super market chains.
Small chains of supermarket like Somerfield, Waitrose and Budgens have 10% market share (Clarke, Bennison, & Guy, 1994). This clarifies that the grocery market has been transformed into the supermarket dominated business (Ritz, 2005). Since, Tesco has a high operating efficiency, one-stop shopping and major marketing expenditure which have created a great barrier to other new entrants to reach at that position as setup by Tesco. Although various investors and business tycoons are attracted towards the supermarket chain business related to grocery sector.
So there is always threat of new entrants but the range setup by the Tesco is at such a level where investment and management is a crucial role for any new entrants (Ritz, 2005). Huge investment by Tesco in advanced technology for check outs and stock control systems ultimately impact the new entrants and even the currently operating competitors as well. Considering other sectors, Tesco has also broadened its business around the world. As context with the USA, Tesco need to face a great competition as Wal-Mart has become the market leader.
Similarly, other newly emerging supermarket chains have created tough competition for Tesco. As considering the new market, Tesco is involved in various other products beside grocery such as cloth lines and electronics where already established and branded companies are well setup such as Mark & Spencer, Next, Primark in cloth line and similarly Argos, Curry’s in electronic field. So this creates a great range of competition for Tesco to be successful in other market as well. Even on this, other great competitors of Tesco have abducted the same principles of launching its own cloth line up and electronics item as with ASDA.
Similarly, various new entrants are trying to elucidate its business with various promotions and pricing. Investment in the oil and banking sector itself made Tesco new entrant in these sector. So, it’s a great risk for Tesco where well established companies already have their good basement. 3. 2 Degree of Rivalry: Since, large superstores have made a market dominance in grocery the sector due to their size, increased retailer concentration and wide utilisation if the range of the format where Tesco is one of them (Acur & Bititci, 2004).
Tesco being the market leader in grocery sector in United Kingdom, even has had to face various tedious competitions from other market followers such as ASDA and Sainsbury’s. The intense competition in grocery sector has created a minimal profit margin since if one tries to increase the price in order to make more profit then it is for sure that strategy can ruin the business very badly. So, Tesco has setup many more stores all around the UK so as to grab more and more customers.
To make one stop shopping, Tesco tries to provide all the necessary items in same store which may be grocery, clothing lines and even electronics. In order to operate in flat and mature market where growth is rather tedious and consumers demand are generally changing , demanding and getting sophisticated, Tesco is gathering great number of customer information which ease them to easy know their demand (Ritz, 2005). This phase of strategy creates a unique attributes and shows good impact on business ultimately leading in the threat to the rival.
Investment in the oil sector, banking, cloth lines and electronics have made Tesco bit vulnerable in the market where various other strong competitors are currently running their business in full phase in respective and related field. This brings great rivalry to the Tesco as well. In order to be in good position, Tesco strategy regards promotions and pricing needs to logical with proper attractiveness towards the customer. Similarly, Tesco in respect to abroad business basically in Asia needs to be more price conscious where the economic condition of the customers are not so much good in respect to Europe and USA.
Various other superstore well established in Asia have already knew about these things and have cope with the proper pricing of the product with customer convenience and affordable. Degree of rivalry for Tesco either in grocery or other business sector in local or worldwide concern such as cloth lines, oil, banking, and electronics is getting much higher where each competitor are looking for entry point where they can easily transform the currents Tesco’s business towards them. 3. 3 Threats of substitute:
General substitution is enough to decrease the demand of the certain product where there is a massive chance of customer diverting or switching towards the alternatives (Porters, 1980). In concern with the grocery sector, product for product or the substitutes of the needs has been less immune by the new trends (Yip, 2004). Hygienic and organic food are the most demanding now a days where frozen products are been consumed in very less quantity. Considering these things, Tesco further has focused on providing fresh and organic product with affordable price.
Consumption of canned food has been reduced greatly and replaced with fresh food which has directly affected the storing capacity of any superstore. In this case, Tesco has focused on continuous supply of fresh product directly from the supplier reducing the storing trend for long period of time. Serving of fresh cooked meat replacing the frozen cooked meat is a great example that Tesco has coped with the threats of substituted product. Along with the food, another major concern is related with the availability of stores as well.
It is impossible to setup large super store everywhere. So considering this various superstores has opened a mini store in order to reduce this threat. In context to Tesco, Tesco metro, express stores are the substitutes to Tesco extra (large Tesco superstore) which can be operate in local towns and city centres. This reduces huge burden from the customer for going far away to the superstore in order to do shopping. Time consumption in going to the superstore has been greatly reduced by opening of these small stores.
By this it can be said that Tesco has create a wide range of threat for other competitors like ASDA and Sainsbury. Since, people are getting busier day by day where they are not able allow time for shopping in the superstore. In this case, online shopping has reduced a huge burden from the customer. Tesco. com provides good service for the customer to do online shopping and allowing online payment. Although with the shopping, Tesco also provides home delivery for the customer which has made great for other retailers.
This kind of substitution has create a wide range of threat and if not coped with this kind of situation then there may be great chance of losing customer resulting in the collapse of the business. 3. 4 Suppliers’ power: This force deals with the power of the suppliers which can be influenced by major grocery chains where they usually have fear to lose their business in comparison with other higher retailer or supermarket. With reference to other retailers, Tesco has good promotional price due to which it can get good customer values.
The small stores are unable to match these promotional prices due to which they don’t have power as Tesco to influence the customers (Ritz, 2005). Although there is great threaten to the Tesco as being UK retailer where there is growing ability of large retailers to source their products from abroad at very cheaper deals. The level of customer attraction by Tesco is really worthiness where each and every customer believes to get good and required product at vey great deal.
Ability to provide the needed product at accurate and reliable price has made Tesco to have good supplier power in comparison to other super retailer. The forces of competitive rivalry have reduced the profit margins for Tesco and also for other super market chains and suppliers. This can be considered due to high range of competition. While entering in the cloth lines, oil and banking sector, Tesco need to analyse each and every perspective of their business where already various other market occupier are in these business.
In context to the new market, Tesco has to be specific towards its product and service where various other larger super markets have already setup their positions and have grab most of the customers. Thus, initially it can be seen that Tesco as a supplier seems to have less suppliers’ power due to high competition. Similarly, in new business sector Tesco need to reconsider its value and position so that it can drift other retailers’ customers towards itself. Deals and promotional price even in new products and in new markets has made Tesco good reputation and has created its own brand value.
Even in the flat business market, Tesco has made remarkable sale and profits which has made other superstores and renowned retailers to re think about this. Tesco has a good market value in UK due to which it creates a good supplier force than any other superstore. 3. 5 Buyers’ Power According to Porter (1980), more products which become standardized or undifferentiated leads in lower the switching cost and terminate at yielding more power to the buyers. Grocery sector is considered as one of the competitive sector where most of the retailers deal with.
In UK grocery sector, various superstores like ASDA, Sainsbury are in competitive phase which creates Tesco to come to the pricing strategy. Customers have various choices for making decision for buying their products. Tesco’s famous loyalty card called club card is one of the best and successful customer retention strategy which has significant impacts on increasing the profits to 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 make a control and retaining the customer base.
In recent years, most of the customers are doing their shopping in the supermarkets due to various offers and discounts as offered by these superstores. Due to high competition and availability of superstore most of the places have provided range of choice for the customer make the decision where to buy their needs. So this creates a good customer power to get discounts if not then can bargain with the price. In new business sector or market, Tesco has to face great buyers’ power. So, to cope with this situation, Tesco need to go with pricing and promotional strategy along with competition.
Conclusion: With the application of Porters’ five force model in Tesco in new market, it can be concluded that Tesco has a great chance of eliciting its business. The strategy of pricing and promotion can give good range of profits. Loyalty and trustworthiness of customers have kept Tesco in good level even it has entered in new market and with new product. Every points of Porters’ model have been applied in Tesco in context with new market and can be concluded that management and business strategy have made good effort to stand up and give challenge to other rivals and competitors.
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