Page 19 - DMGT401Business Environment

Business Environment

Notes customers and make a profit. A change in any of the forces normally requires a company to re-
assess the marketplace.

Caselet Porters five forces at Tesco PLC

his section considers how Porters five forces might be applied to the problems
facing Tesco PLC, including an investigation of the threat of substitutes from other
Tsupermarkets, buyer power in relation to grocery purchases, grocery supplier
power, and the power of the customer at the till.
Classical economics predicts that rivalry between companies should drive profits to zero.
This is partly down to the threat of substitutes. For instance, Tesco has competition from
companies like Sainsbury that can provide substitutes for their goods. This drives the
price of groceries down for customers of both companies.

Buyer power acts to force prices down. If beans are too expensive in Tesco, buyers will
move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies.
This means the market is disciplined; that is, the supermarkets have a disciplined approach
to price setting. Discipline stops them destroying each other in a profit war.
Supplier power is an important part of the Porters five forces model. Implications for
Tesco are many. 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.
But large supermarkets, like Tesco, have an overwhelming advantage over the small
shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce
the price, they will be left with a much smaller market for their produce.
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.
Before developing a Porters five forces model of Tesco consider other industries, from
real estate agencies to the bicycle manufacturing industry. This will give you the broadest
picture of how Porters five forces can be used. Here we'll consider, briefly, two industries
outside the supermarket sector.

The Sixth Force

According to Andrew Grove, the former CEO of Intel: "Porter's five forces model ignores a sixth
force: the power, vigor and competence of complementors". Complementary products are those
products that add value to some other product. They are consumed with some other product.
Because they are used together, the demand of one product depends upon the demand and
availability of another product.

Example: Like the demand of personal vehicles in a country depends upon the availability
and price of fuel. Demand for personal computers depends upon the availability and affordability

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