Porter¶s Five Forces Model for UK Supermarket Industry
Porter¶s Five Forces Model (1979) holds the purpose to analyse a n industry in order to determine the level of intensity regarding the competition and attractiveness of the industry. industry. They consist of those forces close clos e to a company that affect its ability to serve its customers and make a profit. The nature of competitiveness in a given industry can be viewed as a composite of the following five forces: the extent of competitive rivalry, threat of potential new entrants, threat of substitutes, bargaining power of suppliers, suppliers, and the bargaining barga ining power power of customers. There is a constant battle between firms competing in the same industry, in order to win customer share. There are many significant firms in the UK supermarket industry with the five most dominant ones being Tesco, ASDA, Morrisons, Morrisons, CO-OP and Sainsburys. This T his highly competitive market has fostered an accelerated level of development, resulting in a situation in which UK grocery retailers r etailers have had to be innovative to maintain and build market share. Competitors have responded by refocusing on price and value, whilst reinforcing the added value elements of their service. Competitive Competitive rivalry is considered a high threat in the UK S upermarket industry. industry. Threat of potential new entrants in the Supermarket industry is limited. Over the last 30 years, the grocery market has been transformed into the supermarket-dominated business, according to Ritz (2005). Most of the large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. The industry now possesses a strong barrier for new entrants. It makes it rat her difficult for new entrants to raise sufficient capital because of large fixed costs and the highly developed supply chains. chains. Other barriers to entry include economies of scale and differentiation achieved by Tesco a nd Asda seen in t heir aggressive operational tactics. Substitutes do not entirely replace existing products but may introduce new technology or reduce the costs of pr oducing the same product. Effectively, substitutes substitutes may li mit the profits in an industry by keeping the prices down. In the grocery industry this is known as productfor-product or the substitute of need and is a lso weakened by new trends, such as t he way smaller chains of convenience stores are emerging in the industry. For example, Tesco are opening smaller express convenience stores in inner cities. Therefore substitute is seen as a low threat. The power of suppliers suppliers can be influenced by major grocery cha ins and that fear of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match. There is little threat a s often large supermarkets dictate the price t hey pay to the supplier. If the supplier does not agree to Tesco¶s price t hen the supplier will be left with no retailer . Customer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Tesco¶s famous loyalty card ± clubcard remains the most successful customer retention strategy that significantly increases t he profitability of Tesco¶s. In meeting customer needs, customising customising service, ensure low prices, better choices, constant flow of in-store pr omotions enables enables brands like Tesco to control and retain their customer base. In recent years a crucial change in food retailing has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that
shows a greater need for supermarkets to sell non-food items. Consumers also have become more aware of the issues surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World producers. The co-operative is known for their wide range of fair trade stock. Criticisms Since Porter introduced the Five Forces framework in 1979, it has been subject to much critique. One major influence during the last decade has been the internet as it has changed the economic conditions drastically. The growth of the internet has strongly influenced all industries. In fact, P orter¶s framework is based on the economic situation in the eighties, and therefore is now outdated. The eighties saw strong competition, cyclical developments and relatively stable market structures. An industry¶s competitive advantage develops from strengthening its own position within the framework. Hence, P orter¶s Five Forces framework cannot explain or analyse today¶s dynamic changes that have the power to transform whole industries. Larry Downes argues that the assumptions Porter makes are no longer viable and identifies three new forces that should require a new strategic framework; these are digita lisation, globalisation, and deregulation. Digitalisation is important as over the last 10-15 years there has been a rapid growth in technology it allows all players in the market to have access t o far more information, as a result completely new business models will materialise in which even players from outside an industry are capable of changing the basis for competition in the industry. An example of this in the supermarket industry is that of the loyalty cards that Tesco¶s introduced. Downe¶s states that Globalisation is another factor that needs to be introduced in order to have successful strategies in today¶s world. Advances in distribution logistics and communications have enabled businesses access to buy, sell and cooperate on a more global level than ever before. It has made it possible for customers to shop around on a global level and compare prices. Porter¶s framework does not accommodate for such advances in globalisation. Deregulation also makes Porter¶s framework outdated according to Downes as the rise of technology has led to shrinkage in government influence for industries such as supermarkets it allows the industry¶s the ability to completely restructure themselves and look out for alternatives. Porter doesn¶t accommodate for government intervention in his framework. In relation to the UK Supermarket industry this is evident in t he case of Tescos, as they control over a third of the UK grocery market. Government investigations have been called for a s there is reason to believe that it could lead t o them having monopolistic power. Joseph Lampel states another drawback to the model, that ³it doesn¶t explain how to define the industry´. An example can be used here as whether or not the Tesco supermarket is in the same industry as its smaller convenience store, or is t his entering a different industry, due to the expertise of the lawyers they have, they are still allowed to open thousands of stores across the country. Overall Porter¶s Model is highly criticised mainly for its inability to adapt to changes in the industry¶s economic environment. His model doesn¶t have the influence that is used to in the
1980s. In context with the UK supermarket industry it would be safe to say that using Porter¶s five forces that the industry would not be an attractive or profitabl e market to enter considering the fierce competition out t here today.
