Strategic Management: Analysis of Porter's Five Forces Model for Tesco

This report analyzes the application of Porter's five forces model on Tesco, a British multinational retailer, and evaluates its effectiveness in the strategic management of the organization. It examines the competitive forces of threat of new entrants, threat of substitutes, power of suppliers, power of buyers, and industry rivalry. The report concludes that while the model provides valuable insights, it may not fully capture the complexities of the modern business environment.

Strategic Management

Table of Contents
INTRODUCTION...........................................................................................................................3
Findings...........................................................................................................................................3
1. Overview & Critique of Porter’s models of competition........................................................3
2. Company analysis....................................................................................................................5
3. Does this theory and practice work?........................................................................................7
CONCLUSION..............................................................................................................................10
Recommendation...........................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Strategic analysis can be defined process through which organisations’ environment can
be analysed. This is essential for formulating strategic planning for decision-making of the
organisation. This report aims at comparing theory and practice, and will analyse does porter’s
five forces model fit with practitioners experience. In order to carry out this comparison report
will involve analysing porter’s five forces for Tesco. Tesco is a British multinational groceries
and general merchandise retailer. Company was founded in 1919 by Jack Cohen and in
headquartered at Hertfordshire, England. Tesco operates at 6800 locations in around 10 countries
and products of Tesco involve Supermarket, Hypermarket, Superstore and Convenience shop.
Tesco employs around 450000 employees and Tesco operates in a highly competitive
environment and this is why Porter’s five forces can be very effective tool for analysing
environment.
Findings
1. Overview & Critique of Porter’s models of competition
This model was developed by Michael E. Porter and was published in “Competitive
Strategy: Techniques for Analyzing Industries and Competitors” in 1980. Porter’s five forces
model is a tool for analysis of competitive environment in which an organisation operates. This
is a widely used model to analyse how an industry is get structured and further this also help in
identifying corporate strategies to align with different conditions and structure of industry in
which organisation is operating (Huang, 2019). Porter identified that there are five key and
undeniable forces that shape an industry. Five forces are used to measure competitive intensity
and profitability and attractiveness of an industry. This helps both organisational already
operating within industry and organisations willing to enter into industry. Five forces of this
model are-
Threat of new entrants
This force is related to those organisations that can enter into a industry. This is because
power of company gets affected by new entrants. Less time and money required for computer to

enter into an industry and became an effective competitor make a significant impact on existing
position of a existing company. For an existing organisation high barriers to entry is an ideal
condition however for an organisation looking to enter into and industry having less and weak
areas of entry is a favourable condition.
Threat of substitutes
Substitute goods and services are those that can be used in place of a given product or
service. This product and services also is a threat for company and companies that produce
product and services which has no close substitute have strong position in an industry and those
with several substitute hasless power as customers have choices in terms of substitute products.
Power of suppliers
This is another force in model and this is concerned with power that suppliers have on
driving up the cost of inputs. Power in this force gets affected by number of suppliers and
uniqueness of inputs that the supply (Lumbanraja, Dalimunthe and Hasibuan, 2019).
Fewsuppliers for a given input enhance their bargaining power and they can increase cost of
input whereas high number of suppliers has less bargaining power as company can switch to
other supplier.
Power of buyers
Bargaining power of customers is power that they have to drive prices of goods and
services lower. This power is based on number of customers and significance of each customer
for company. Less buyers or customers have high power and more buyers have less power.
Industry rivalry
This is another force in this model and this pose refers to number of competitors and their
ability to affect a company e negatively. Larger Number of competitors and equipment product
and services they offer reduces power of a company whereas less number of competitors enables
company to have more power on determination of higher prices.
This model that involves identifying and analysing five forces of competition or industry
has several benefits for the organisation. Certain advantage and benefits of this model involves

helpful in planning and specifically strategic planning as organisation is aware of
competitiveness in industry. Dealing with buyers and suppliers is another benefit of this model,
this means when company know what enables them to have strong power they can create
strategies accordingly to deal with them. However, there are limitations of this model, this means
that this is not suitable for every industry and organisation. And this also ignores other factors
like product lifecycle and nature of product or service on the basis of elasticity (ÖNEREN,
ARAR and YURDAKUL, 2017). Another limitation for this model is that, an industry that
involve organisations with different sizes and different levels and when these organisations give
competition to a given organisation, in such situation this model is not suitable and neither can
bring effective results.
2. Company analysis
Tesco is a retail organization and operating at 6800 locations in around 10 countries and
one of the most successful retail organizations. Products of Tesco involve food products and
groceries and along with this also offer clothing, electronic, furniture and toys. This is why Tesco
gets affected by different industries and their competitive powers. Application of Porters’ five
forces model on Tesco is as follows-
Threat of new entrants
Tesco operates in retail organization and threat for new entrants is low because of high
capital requirements for entering into food industry. Further this becomes more difficult due to
brand name and position of Tesco. This means that for an organization entering into level and
competitor of Tesco it is similar to impossible and this is why threat is low. But retail stores that
offer more than one type of product can get competition from different types of organization in
entering into industry is not difficult. This means that at a location of Tesco there is a small
stores offering products and value similar to Tesco, it has a competition from that organization or
store and this is not difficult to enter into industry at small scale neither it requires high
investment capital (Hafezi, Akhavan and Pakseresht, 2017). But this can only impact and
influence a store and not complete Tesco organization. Other than this, Tesco has competition
from M&S, Sainsbury’s and these are all organizations offering value to customers and in order
to be successful in retail industry entrants will have to produce something that is exceptionally

unique and is available at lower prices. Tesco has strong power in this force of competitive
environment.
Threat of substitutes
Threat of substitutes in retail industry is low for food items and moderate for non-food
items. This is because Tesco offers different choices in food products and there can be non-food
substitute that can be utilized in place of food. Tesco offers both food and non food items and
this is why in this threat it has moderately strong position. However, there are substitutes in form
of brand, quality, and taste in both food and non-food items. This means customers can easily
switch to other brands for same food items and other groceries. Other than, competitors of Tesco
substitute also involve small stores and organic shops offering same or similar products as Tesco.
However as Tesco offers high quality products at low prices and this is why these stores and
shops has low competition for Tesco. But in products like clothing, electronics, and furniture has
separate substitutes for all these products. This means that other than retails selling clothing
Tesco also has competition from clothing companies and similarly for electronics and furniture
products has substitute in several forms. Tesco has strong position and power in this force of
competition. Product of Tesco are also known to be supermarket, hypermarket and these also
have substitutes in form of online shopping and e-commerce websites.
Bargaining power of suppliers
Tesco is a retail organization and works with thousands of suppliers in UK and
internationally and this is why no supplier can exert significant power on Tesco (Kibria, Amin
and Rifat, 2017). As discussed above power of suppliers is power that they can use to increase
price of output. In relation with Tesco suppliers can have power even when they are in number of
hundreds but Tesco works with thousands of suppliers and this is why they have no power on
Tesco. This is because there are thousands of other suppliers who can provide and supply
requires resources and input to Tesco. Tesco provide high quality product at low cost and this is
because of suppliers of Tesco that enables company to create low cost products having effective
quality. Higher number of suppliers also enables effective negotiation of Tesco with suppliers
and this enable to further reduce price and cost of inputs for Tesco. Low suppliers power enables
Tesco to maintain higher profit margins.

Bargaining power of buyers
Bargaining power of buyers is concerned with power that customers of Tesco have over
price determination. This power of buyers is high in Tesco and this requires Tesco to maintain
lower prices of products and services of Tesco. Power of buyers gets affected by their number
and feasibility in which they can switch to other products. Bargaining power in case of Tesco is
high and this lowers power and position of Tesco in this competitive force. Along with this, there
are several products and competitors that provide similar value to customers and this is why
customers can select other brand and retail stores. This is also one of the reasons that even after
providing high quality products Tesco have to keep its price low (Shokeen, 2016). This suggests
that Tesco has weak position in this force and this requires Tesco to develop strategies to attract
customers and retail them loyal for organization.
Industry Rivalry
Industry rivalry is concerned with number of competitors and their ability to affect Tesco
and its competitive position. Tesco operates in a highly competitive environment because of
larger number of competitors and in retail industry. Tesco has significant competition from
Sainsbury’s, M&S and ASDA and all these companies similar to Tesco have strong competitive
position. This is why competitive intensity of Tesco in food and groceries is extremely high.
Competition is mainly based on price and quality and also on accessibility and availability of
stores for customers. Tesco offers high quality product, at low prices and also has strong
availability of stores in UK. This has contributed in success of Tesco and has managed to
maintain customer loyalty for company. On the basis of this Tesco has strong position in retail
industry.
Discussion outlines that Tesco is being affected by all these forces and in most of the
forces it has strong position and power. This involves bargaining power of suppliers, threats of
substitute and threats of new entrants (Varelas and Georgopoulos, 2017). However in relation
with power of buyers and industry rivalry Tesco has low and moderate power. But overall
attractiveness of industry for Tesco is at moderate level.

3. Does this theory and practice work?
Porter’s five forces involved analysing key factors and major influences that affect
position of organisation within industry. These factors impact every organisation working in an
industry however for organisation impact and power may differentiate on the basis of
organisation and its other elements like position and size of organisation. As the heading outlines
Does theory and practice work, on the basis of wide consideration it can be said that yes theory
and practice works. This is on the basis of linking theoretical elements with practical elements
and applying theory on the selected organisation. But as the theory suggests that model is for
analysing competitive position of organisation in its industry, there are several factors that
require consideration other than these five forces. This means that these forces were useful in
traditional industry that was operating on a limited scale and organisations were having direct
competition from other organisation. But in current complex and highly complicated business
and industry environment, this model and analysis is not completely suitable. For example direct
competitors of Tesco are other retail organisations, but other than these it has competition from
all other organisations creating and selling products and services that are created and sold by
Tesco (Wee, 2017). These products and services are beyond retail services and groceries and
food items. This is why composition of theory or model is not enough and adequate in fulfilling
its aim and objective in present business environment. Concerned with suppliers, Tesco has to
consider suppliers not in UK but internationally and on the basis of this it becomes very
complicated and difficult to analyse and measure power of suppliers for overall Tesco. There are
other forces through which even after larger number of suppliers Tesco can have weak position.
This means that organisation of suppliers or their deal in their favour and there are several other
possibilities that can affect power and position of Tesco in its power of suppliers. Such
possibilities have not been considered in theory of Porter’s five forces. Concerned with industry
rivalry factors and elements considered in theory are limited to number of organisations
providing similar products and services. There are factors like what kind of products are
provided and what value does each organisation provide to customers (Abalkhail, 2019). This
means that it is possible that one individual is customer of both Tesco and Sainsbury’s because
one has low prices and effective quality or because of some other reason. This has been added by
online shopping trends, this means that online shopping has offered a more feasible channel to
customers to connect with organisations and buy products online. This has become important

element and has added to industry rivalry. This means that one organisation can have strong
position in offline sales but there can be other organisation that has effective performance online,
this way both organisation can have strong competitive positions (Julita and Arianty, 2017).
Such elements have not been considered in theory of Porter’s five forces and this is another way
in which theory is inadequate in present business environment. This also has become inadequate
because at the time theory of this model was developed globalisation, and rapid technological
advances were not very prominent (Min, Liangwen and Yue, 2018). This is also one of the
reasons that using this model Tesco can measure elements in its local environment that are less
complex but in global organisation these elements can be more complicated.
Another element in the theory or model of Porter’s five forces is bargaining power of
customers or buyers. In theory this element is limited to number of buyers and sellers and
substitute products but in present times there are several elements that have influenced power of
customers. This power and position has influenced by factors like offering to customers,
different strategies to attract and retain customers and this has significant impact on customers’
power. Such strategies have become important in recent times and this is why this is not part of
strategy of Porter’s five forces. This has significant influence on customers and this is because of
psychology that organisations create in order to attract and retain customers. This theory has an
aim to identify attractiveness of industry and this gets affected by external and macro
environmental factors as well. This means that regulations governing industry, economic
condition of a industry and profitability expected from an industry are also certain factors that
has influence on attractiveness of the industry. Concerned with regulations, every industry and
organisation operating within industry gets affected by different regulations and difficulty and
complexity of these regulations has major impact on overall attractiveness of industry and this
factor have not been considered in theory of Porter’s five forces (Ulkhaq and et.al., 2018). But
this theory and practice work in relation with local environment of industry and with help of this
theory and wide idea can be collected regarding attractiveness of industry. And what are impact
of different forces on industry and firms operating within industry. Theory further help in
identifying major issues affecting industry and its attractiveness and on the basis of this,
organisations can create their strategies. This means that in certain industry suppliers have high
power strategies can be created by organisations to deal with and regulate power of suppliers.

CONCLUSION
On the basis of above discussion, it can be concluded that Porter’s five forces model is an
important and effective tool that has been widely used by organisations before strategic planning
of organisations. This report discussed about Porter’s five forces model and what are positive
and negative elements of the model. This outlined that model is effective in several ways and
help in identifying impact of certain key factors on an industry and organisation. However, in
present business environment these factors and forces are limited and there are several factors
and forces affecting and influencing competitive position and attractiveness of industry. Further
this report involves application of Porter’s five forces model on Tesco and analysis and
application outlined that Tesco has strong position in bargaining power of suppliers, threat of
substitutes and threats of new entrants. This is because of wide product, less substitutes, higher
number of suppliers and strong barriers to entry. Because of these reasons Tesco has strong
position in these forces and in power of buyers and industry rivalry it has weak position. This is
because businesses are customer based and this is why their power is strong and power of
business is weak. Concerned with industry rivalry there are several organisations in retail
industry and they have strong competitive position in industry and this is why there is intense
competition in industry. Further report discussed about does theory and practice work and on the
basis of discussion it can be concluded that theory and practice partially work because the time
theory was developed was having different kind of business environment and now business
environment have changed in several ways.
Recommendation
 Here it can be recommended that considering technological advances and their impact on
business, globalisation of business and varied industrial environment of different
countries are certain factors to be considered regarding attractiveness of industry.
 Tesco can further utilise its position in power of suppliers to create and provide value to
customers by expanding its market.

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