This report relates strategy concepts developed by Michael Porter to the supermarket chain Tesco. It will argue that although developed 30 years ago, Porters analysis is still useful in assessing the competitive environment of firms these days. However, because there have been many developments in technology, such analysis can prove to be static, simplistic and only partial. The second part of this report will look at management moves within Tesco in the past 5 years and attempt to evaluate to what extent they have contributed to achieving additional profits. The analysis will be based on product market and financial information.
Relevance of Porter’s concepts
Porter’s concepts can be applied to many organisations. His five forces analysis involves examining the external environment and focusing on the structure of the industry. The aim of this type of analysis is to devise a strategy that will enable firms to develop opportunities and protect them from threats. By doing so, firms can achieve possible competitive positioning or, in other words, differential advantage over the products or services of their competitors.
The five forces comprise barriers to entry, the threat of substitutes, consumer power, supplier power and the degree of rivalry. In supermarket grocery retailing, barriers to entry are extremely high. Most obviously, the capital requirement of entry is going to be the primary factor to overcome for potential new firms. High initial investment and fixed costs are likely to deter many potential newcomers. Another barrier to entry is economies of scale. Tesco and other large supermarket chains are able to purchase large volumes of goods for a reduced price. In contrast, smaller start-up companies are more likely to buy smaller volumes at higher prices. New firms also have to be aware that customers have developed loyalty to existing firms. This reality can be seen in the example of discount stores such as Lidl or Aldi who have struggled and failed to establish themselves as major players in the grocery retail market. Another of Porter’s five forces is the threat of substitutes. Firms should analyse to what extent it is possible for customers to switch to the substitute. It is also important to keep up with competition if there is a threat of obsolescence. In such cases, firms should make sure that customers find their products or services more attractive. Alternatively, companies in the same industry may choose to compete on price, which will reduce profit margins. This can clearly be seen in the example of major grocery retailers who are engaged in a price war. For example, Tesco offers price check on its website.
Power of consumers is closely linked to the availability of substitutes. Geographically, most people have a choice between different supermarket chains, who compete on price and various promotions. Suppliers can be in a particularly strong position when they demand a price premium for their products and when the final product can be affected by their suppliers’ delivery schedules and quality. However, Tesco is controlling the situation by not relying on one big supplier but by having a number of smaller ones. This way, the bargaining power of Tesco is increased. If a particular supplier is charging too much, Tesco is in a position to demand a lower price. Should the supplier not be willing to do so, Tesco can switch to another supplier.
Lynch argues that the extent of competitive rivalry depends on how competitive the market is. All four of the major players are trying to increase their market share. Consequently, the grocery market is particularly competitive.
Porter's five forces is a "bottom line" way of analysing a company, from the perspective of the company. In the true spirit of capitalism, it looks at economic rivalry as being of central importance, and suggests that you should look only at factors affecting the company's profit in a systemic model defined by that rivalry.
If it is difficult to differentiate products or services, then competition is essentially price-based and it is difficult to ensure customer loyalty.
Porter also talks about generic strategies. There are 3 generic strategies- cost leadership, differentiation, and market segmentation. Porter argues that in order to be successful, a company needs to pursue one of the strategies and must not be ‘stuck in the middle’. There are essentially only two sources of competitive advantage, differentiation and low prices. He also suggests that firms with high market share are profitable because they pursue a cost leadership strategy whereas firms with low market share are profitable because they pursue differentiation or a market segmentation strategy. However, Tesco does not seem to fall in any single category. It has more than 30 per cent of the market share in grocery retailing in the UK. However, at the same time, it does not offer discount shopping and is not even the cheapest among the main supermarkets. It offers Tesco basic foodstuffs as well as Tesco Finest. Indeed, Lynch argues that there is empirical evidence suggesting that some companies do pursue both differentiation and low-cost strategies at the same time. Tesco, being one such company, uses low costs to provide greater differentiation and then reinvests the profits to lower their costs even further. Another part of Tesco’s strategy that could be seen as differentiating is its building of community. As far as Tesco’s customers are concerned, again, they cannot be ranked as belonging to a certain social group. By providing both cheap and expensive groceries, it offers products for people with limited budgets as well as those who are more well off. Although this contradicts Porter’s view of a successful strategy, it appears to be working in Tesco’s favour.
A company’s value chain consists of all the activities it performs to design, produce, market, deliver, and support its product. The value chains of companies that supply and buy from one another collectively make up an industry’s value chain, its particular configuration of competitors, suppliers, distribution channels, and customers. The value chain also includes the information that flows within a company and between a company and its existing or potential customers. Supplier relationships, brand identity, process coordination, customer loyalty, employee loyalty and switching costs all depend on various kinds of information.
Only one tool in a toolbox
By looking at competitive positioning and Porter’s five forces analysis, companies can obtain a better understanding of which strategy to undertake. This analysis can be very useful, particularly when looking at the major factors driving the dynamics of the industry. Porter’s model has real value because it raises issues in a logical and structured framework.
Drucker argues that traditional strategy models, such as the one described by Porter, “focus only on the last few hundred yards of what may be a skill-building marathon”. Furthermore, many suggest that building a strategy on a simple concept with long term goals is a mistake. Short-term horizons that are renewed when needed are proving to be more appropriate considering the speed of developments in the economy. This will be discussed in detail below.
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