Porter's Five Forces

Topics: Strategic management, Management, Porter five forces analysis Pages: 11 (3135 words) Published: November 1, 2010
Porter’s Five Forces Model

Porters five forces
Each element of a Porters five forces model is best considered in the context of other elements in the model. Examples: supplier power is increased if there is a high degree of rivalry between companies trying to obtain the supplies; entry barriers are increased if there is a substitutes threat. A Porter's five forces analysis can be usefully performed alongside SWOT analysis, PESTLE analysis, and other analysis techniques. The next two sections outline how analysis techniques can be used together in the pursuit of an understanding of the multitude of elements affecting the bottom lines of companies like Tesco plc. Porters five forces and SWOT analysis

A Porters five forces model can be enhanced by using SWOT analysis. A SWOT analysis is an analysis of the strengths, weaknessesopportunities and threats affecting the company. Each element of a Porters five forces analysis can be looked at in the context of each element of a SWOT analysis, leading to twenty different ways of looking at the company. Porters five forces and other analysis techniques

Other corporate analysis techniques, like PESTLE analysis and Gap analysis, add further possibilities for understanding a company. PESTLE analysis can give you an impression of the political, economic, sociological, technological, legal and environmental factors that influence Porter's five forces. Gap analysis allows you to see the gap between where a company is and where it should be, and what forces need to be applied. Porters five forces at Tesco PLC

This 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 supermarkets, 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.

Porter's five forces in other industries

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....
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