Tesco a Case Study

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Porters five forces at Tesco PLC

Porters five forces are named after Michael Porter. Strategic analysis of these forces can tell you a lot about a company.

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

Porters 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.

Porters five forces at Tesco PLC

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 like 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 Porters 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. The amount it pays suppliers, per-item, is a lot less than the corner shop. It achieves this, partly, through buying large volumes of goods. A small supermarket chain can only buy a relatively small volume of goods, at greater expense.

Porters 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.

Porters five forces - the bottom line

Porters five forces are 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.

Porters five forces in other industries

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