Critical Examination of Porter's Five Forces and Tesco's Relevance

This study critically examines the relevance of Porter's five forces model in current marketing practices by taking the example of Tesco. It evaluates the strategy of Tesco and its competitive advantage.

STRATEGIC MANAGEMENT
(Critical examination of the porter’s five forces concerning the relevance of
Tesco)

EXECUTIVE SUMMARY
Each and every company strives to achieve many objectives and one of the vital
among them is survival and development for a longer period of time within the industry they
operate. Within the business corporation, the strategy involves long term plan of the company
for making sure that it has a competitive advantage as compared to rivals in the market.
Competitive advantage helps an organisation to differentiate itself from rivalry firms as well
as to maintain and improve its market share (Rothaermel, 2015). This supports the company
in cementing its position within the sector.
Further, the strategic management concept is required to be incorporated into the
leadership team for assuring that the firm will fulfil this purpose. The Porter’s five forces
model has been applied in this study to evaluate the strategy of Tesco and its competitive
advantage. The study will attempt to critically examine the relevance of Porter's five forces in
current marketing practices by taking example of Tesco case. The mentioned theory will be
discussed and compared. Practical example and application of Porter's model will also be
evaluated in the final section of the report.

Table of Contents
Introduction to the Company.....................................................................................................1
Overview of Porter’s Five Forces Model and Application to Tesco.........................................2
Bargaining power of the suppliers..........................................................................................2
Bargaining power of buyers...................................................................................................2
Threats of Substitutes.............................................................................................................3
Threats of New Entrants.........................................................................................................4
Competitive Rivalry...............................................................................................................4
Criticism of Theory and its Application to Tesco......................................................................5
Effectiveness of Porter’s Five Forces model to Tesco...........................................................7
Limitation of the model for Tesco..........................................................................................7
Recommendations to Tesco....................................................................................................7
Conclusion..................................................................................................................................7
References..................................................................................................................................8
List of Figures
Figure 1: UK Grocery Market Share..........................................................................................2

Introduction to the Company
Tesco plc is one of the largest grocery retailers not only in the United Kingdom but
the world. Founded in 1919, the company has more than £m 57,000 turnover and recorded
£m 992 as profits in FY 2018. Though Tesco has a commanding position in the market, there
are many firms and supermarket which give intense competition to Tesco. The majority of
these competitors are local retailers of the United Kingdom (Harrell, 2011). The company has
been growing fast from the past several years because of its better customer services. The
leading global brand currently has operations into more than 10 countries other than the UK
such as Ireland, China, Malaysia, India, Czech Republic, Poland and Hungary.
The customer-centric philosophy of the company helps it to provide excellent
shopping services to consumers for realizing company’s objectives. The company aims to
increase customer loyalty and overall consumer base. The key success factor behind realizing
these strategies are product range, service quality, competitive pricing and innovation such as
recently launched ‘Click & Collect’ services. Pertaining to this, the multinational retailer of
UK was able to gain an economic edge over the other rivalry firms operating in the same
market (Jenkins and Williamson, 2015).
Figure 1: UK Grocery Market Share
(Pettinger, 2014).
The above figure illustrates, the market share of Tesco and leading supermarkets of
UK’s grocery market industry. ASDA, Sainsbury and Morrisons have around 17, 16 and 11
percent of total market share. Tesco is the leader among all by having 29 percentage of the
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total market in the United Kingdom. The subsequent section of the study will critically
examine the Porter's five forces models applicability to the company.
Overview of Porter’s Five Forces Model and Application to Tesco
The model is being developed by Michael Porter in the year 1979 in order to assess as
well as analyse the competitive strength as well as the position of the business. Five forces
are being included within the model i.e. buyer power of the buyer, threats of substitution,
threats of new entrants and bargaining power of the supplier (Boons and Lüdeke-Freund,
2013). All these forces serve to ensure that the business upholds their forte and makes
improvement in their weaknesses for evading errors.
Bargaining power of the suppliers
It refers to the capability of the suppliers to affect changes in the prices of the
products offered by a firm. Each and every company is dependent on the suppliers for
numerous elements, raw materials and labour. This results in the buyer-supplier relationship
in which a powerful supplier has the ability to increase the prices of the supplies in order to
keep maximum profits in the overall supply chain. If the supplies are limited than company
becomes dependent on them and thus, they turned out to be more powerful (Chen, 2019).
This force plays a crucial role in the business. The importance of the bargaining
power of suppliers is involved in the other factors such as labours, expertise and raw-
materials forms. There are different kinds of factors that impacts the bargaining power of the
suppliers such as competition between the suppliers, level of differentiation in the input
between the other factors, the number of the suppliers for the all rival firms in the industry.
Speaking in relation to the retail industry of the UK, the position of the suppliers is not so
strong (McClaren, Adam and Vocino, 2010). The main reason behind this assumption is the
contractual relationship between Tesco and the suppliers which always put pressure on the
firm of losing the contracts. Accordingly, the position of the suppliers is not strong enough to
bargain with the firms. However, suppliers maintain relatively low bargaining power as top
retail stores like Tesco are their key customers and they cannot lose such business.
Bargaining power of buyers
If the power of customers within the industry is strong, it means that there are many
suppliers of the products and few buyers so that customers have more command to influence
the pricing. However, if the firm operate in a wider market with a greater number of buyers
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then bargaining power of buyers reduces and the firm has more command over the prices.
Generally, sellers always search for opportunities to attain a high return on investment and
buyers, on the other hand, search to buy quality products and services at the minimum rate.
As the industry to which Tesco belong has different competitors, customers have varied
options with zero switching costs. It is a tendency of the buyers that they shift to those sellers
who offer them quality goods at lower prices (Lovelock and Wirtz, 2010).
Tesco in this regard as aligned its performance strategies in such a manner that it
makes sure that customer friendly prices are being offered to them. Because of this, the firm
is also able to maintain a high base of customers. For illustration, the firm carries out a
comparative analysis of their prices with other market leaders regularly for the purpose of
making sure that their prices are fair for the buyers are not. Other than this, the company also
ensure that high-quality standards are being ensured and all its employees are trained enough
to render excellent services to their customers. Seeking help from this, Tesco can achieve a
competitive edge in the market and finds them in a position where they can attract more
customers towards their stores (Grant, 2016).
Threats of Substitutes
If the customers’ demands can be satisfied with substitutes at lower prices, customers
might switch to the alternatives. As a result, the profitability of firms reduces. For example, a
company markets a machine and if that machine can be substituted by another machine at
low price a customer might choose to purchase the alternative machine (E. Dobbs, 2014).
Thus, in this case, the company cannot have command over the prices. The technological
advancements ensure that threat of failing to continuously improving products and services
becomes imminent. For retaining their valuable customers, Tesco should essentially put
efforts to add value to its service proposition.
In the market of UK, different types of convenience stores are present which can be
reached easily by the customers because of the proximity to residential as well as working
areas. Because of this, Tesco faces a lot of threats and challenges (McDonald and Willson,
2011). Therefore, the firm always makes an effort to open express stores as well as metro
stores which are more convenient for the customers to reach. In addition to this, the company
has decreased prices of several non-food items during economic recession so that threat of
new entrants can be minimised. Pertaining to this, high number of customers of Tesco has
made a shift towards the convenience store which provides them merchandise at lower prices.
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Threats of New Entrants
This is also being regarded as the most vital force. If the market in which the firm is
operating is profitable then it will attract the interests of new companies and the profits of the
existing companies in the market get eroded. However, if the existing companies have strong
as well as long-lasting barriers to entry, they can survive in the market effectively. In a
competitive market, new entrants put new challenges for the rivalry firms. Nevertheless, all
these new entrants at the time of entering into the market face numerous challenges such as
huge fixed cost investments, funding needs and rigid distribution channels (Miller, 2011).
The retail market of the United Kingdom is being dominated by different retailers. Among
which Sainsbury, Morrisons, Tesco, ASDA and Safeway are considered as crucial firms. All
these firms have around 75% of the share in the market. In recent years, considerable
development in the grocery market wherein the leaders of the market are expanding their
operations and are also modifying their hypermarkets.
As Tesco occupies around 30% of the total market share of the UK, a new firm might
find it difficult to crack the market pie of Tesco. The company has invested a huge amount of
capital in the British grocery retail and the new firm would find it very expensive to put such
a big scale investment. Other than this, Tesco has invested a huge amount in the markets of
the United Kingdom to accomplish the first objective of the company regarding growing the
core of UK (Moore, Bruce and Birtwistle, 2012).
Moreover, it also includes ensuring that the stores in the nation help in enhancing the
shopping experience of the customers. The firm has started many stores at the international
level and the main rivalries are Wal-Mart and Carrefour in 12 nations of the world. Pertaining
to this, the entry of new companies is quite minimal. Besides, the brand image of the firm
also provides an added advantage. The firm can utilize positive brand image to increase
customer loyalty through strategic business policies.
Competitive Rivalry
This force speaks about the number of competitors existing in the market and the
relative capabilities. In the situation where many competitors in the market provide a same
product, the attractiveness of the market decreases (Hill, Jones and Schilling, 2014).
Therefore, in such type of condition, adequate power over the market is reduced by the firm.
Nevertheless, if the competitors within the market are very few than the companies will have
high strength within the industry. Tesco operates in a tough competitive international retail
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sector due to the frequent changing of customers’ demand in regards with innovative services
and products, differentiation as well as diversification of the products.
Tesco faces tough competition from retailers like Wal-Mart and Carrefour at the
international level (Porter, 2016). For example, in the market of China, the company has to
face immense competition from Wal-Mart and Carrefour for the purpose of attracting a high
number of customers. Furthermore, Tesco has also announced to depart from Japan because
of such pressures. In the markets of the United Kingdom, Tesco has invested a sufficient
amount of capital for the purpose of maintaining its leading position in the market.
Competitors such as ASDA and Sainsbury also give huge competition in the local market and
thus, there is a need of comparison of prices and products from time to time to achieve a
competitive edge in the market. There are many stores in the UK such as Aldi and Lidl which
are big discounters in the market and are offering products at lower and discounted prices for
capturing customers. All these small rivalries of Tesco have also gained around 25 percent of
the growth during the economic crisis of 2008 (Daft, 2015).
Criticism of Theory and its Application to Tesco
Several alterations can be experienced in the business world, from the time when the
model is being developed in the year 1979. Globalization, as well as digitization, has been
increased these days and both these two factors are not taken into account in this Porter's
model. In this current dynamic world, technology has highly impacted almost every market.
Thus, it becomes really difficult to develop a marketing strategy which is dependent solely on
analysing the Porter's five forces (Palmer, 2011).
Articulating in relation to Porter's five force model, it significantly supports the firms
in making a judgement about their competition. Firms use this model often as the first stage
in formulating strategic marketing plan (Boons and Lüdeke-Freund, 2013). As per the
argument of Porter, the main root of the competition lies in the economic structure. This
model also pays attention to rivalry firms as a single group and it is not applicable to each
individual competitor in isolation (Freeman, 2010). If the competitors are many within the
industry this model will not be going to reflect the effect on a single individual competitor.
Porter’s model is successful in evaluating the external environment of Tesco. Along with
major competitors of Tesco like Sainsbury within the UK, the firm places a barrier on the
entry of new firms. Further, all retailers employ different tactics to block the new entrants and
offer a benefit at the time when customers purchase products in greater part.
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Even though the new companies have very little chance to penetrate the market,
current competitors in the market pose a great threat and offer their customers a high power
of bargaining. If the firm augments the prices and decreases the value of their products and
services than the valuable customers of the firm can easily move towards the new market
(Euromonitor, 2012). The switching costs of the customers are zero and thus, they can change
the providers without any difficulty. In terms of competition, Tesco is holding a strong
position in the food industry. They rely majorly on promotion strategies related to the
product. But, the position of the company is competitive in the market of United Kingdom as
per Porter's five force model (Urde and Koch, 2014).
It is quite apparent that the theory, as well as the practical aspect, of Porter's five
forces model appropriately analyse the key external factors for Tesco’s marketing strategy.
Nevertheless, this model pays attention to the competitive advantage on the basis of a single
approach i.e. macroeconomics. In recent years, the way firms carry out their business and
operations have changed a lot (Wood, Coe, and Wrigley, 2016). Even though the forces of
different stakeholders in the model such as buyers, suppliers, sellers and competitors are quite
relevant, several other factors such as technology also affect the firm’s external environment.
Unrelatedly, individual can make use of this model on the basis of the present force; it does
not provide suitable data in regards to the technological level. Therefore, it is a challenge to
determine the strategies being used by the firm in other vital facets supplementary to those
being defined by the Porter’s model.
Furthermore, its applicability is also focussed on the suppliers and competitors as a
solitary force. It is vital for Tesco to invest in development and management of technological
advancements in order to gain competitive advantage by meeting consumers’ changing needs
(Datamonitor, 2010). In the present era, information, as well as the communication
dimension, helps the firm in achieving a competitive edge within the industry they operate.
However, the current model in study does not evaluate these types of competitive strategies.
Therefore, the practical applicability of Porter’s model within such sector is subject to certain
limitations.
Further, the external forces being evaluated by this model are very crucial for
determining the competitive advantage of Tesco. However, the model does not provide all the
factors relating to the strategic evaluation of the firm (Jones and Nakamoto, 2011). Though, it
can be deduced that in order to attain a high position in the market the company need to make
use of its fundamental strategies, as its evaluation can express the actual strategies.
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Furthermore, strategic management involves both external and internal aspects of the firm.
Therefore, this model cannot be used exclusively to evaluate the competitive strategy of the
firm. Moreover, the model does not succeed in yielding out the anticipated outcomes to get
the position of the company. From the above analysis, it is inferred that though Porter's five
forces model is applicable to assess different external aspects of Tesco; it cannot be utilized
as a sole tool to evaluate all of the factors that yields competitive advantage of the firm
(Mintel, 2010).
Effectiveness of Porter’s Five Forces model to Tesco
Porters five force model is quite effective for Tesco as it supports in determining the
competitive environment of the firm that influences its profitability. The bargaining power of
the suppliers as well as buyers impacts the ability of Tesco to increase its prices and
effectively manage its costs. Furthermore, through evaluating all the five forces of
competition, the strategists of Tesco can achieve a comprehensive picture of the things that
influences the profitability of the firm in the retail industry. The firm is also able to determine
the trends that can change the game earlier and can speedily react to exploit the evolving
opportunities. Thus, it can be said that by understanding the porter’s five force model in great
detail will support the managers of the firm to shape the forces in their favour.
Limitation of the model for Tesco
Porter five forces model can be utilized effectively at the broader level of an entire
industry. If Tesco will make use of this model to assess the smaller level of sectors, general
markets and competitive groups, it will certainly not be going to yield strategically applicable
data. The factors in this model is being identified solely on the basis of the level of industry.
Thus, at the time of evaluating the markets which are too broad, large organizations such as
Tesco should consider this limitation while using this model.
Recommendations to Tesco
Tesco is one of the leading foods as well as general goods retailers in the United
Kingdom irrespective of too much competition in the market. The porters five force analysis
evaluates the external competitive environment of Tesco and it has clearly indicated that the
business world is altering rapidly. For coping with these changes and to remain competitive
in the market, it is vital for the firm to invest in technological advancement like augmented
reality and artificial intelligence. For example, the firm can utilize machine learning for
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offering their customers applicable recommendations on gifts for their friends and other
members of the family. In addition to this, it is also highly recommended to Tesco to institute
strategic partnership with other retail firms like Booker for diversifying their range of
products as well as brand portfolio. Through this, they will be able to reinforce its
competitive position in the retail market of United Kingdom.
Conclusion
In conclusion, it can be said that the current study has successfully presented strategic
management concepts and practices in a leading firm called Tesco. It was originated that the
firm operates in a highly competitive industry and surpass challenges by creating value for
the clients. Furthermore, it is vital for the firm to make sure that they maintain a high level of
quality of its products and services at lower prices so that the store become relatively
accessible to all. Moreover, Tesco is also required to maintain its brand, capability and
flexibility for continuing developing both in the international as well as local markets.
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