Porters Five Force of Tesco Plc

A Porter's five forces analysis can complement other techniques, like a SWOT analysis. A SWOT analysis focuses on the company, while a Porter's five forces analysis looks at the external factors impacting on a company.

* Porter's five forces are listed in the left margin. Degree of Rivalry is emboldened because it is the central force, which involves all the other forces.

Classical economics predicts that rivalry between companies should drive profits to zero. This is part of the threat of substitutes. For instance, Tesco has competition from companies from Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies.

Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined -- the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war.

Another of Porter's five forces, supplier power, is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don't pay the price, they don't get the goods to sell. Large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper--they dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with no retailers to sell to. Tesco and the other large supermarkets will have all the customers.

Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. It will pay a lot less for large volumes of goods from suppliers. A new, small supermarket chain can only buy a relatively small volume of goods, at greater expense.

* Porter's five forces have now been introduced. Stop for a moment, review them, and make sure you understand how they impact on a company like Tesco.

Porter's five forces is a "bottom line"