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Tesco - Porters 5 Forces

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Category: Business

Autor: antoni 08 March 2011

Words: 704 | Pages: 3

Porter's Five Forces

Porter's Five Forces allowed us to analyse the influences on the industry in which Tesco operates. It highlights where Tesco has developed a competitive edge over its rivals.

Potential entrants:

Throughout the recession Tesco has continued to invest into expanding the company and developing efficiencies, making it as competitive as ever to defend against the threat of new entrants (Datamonitor, 2010, p. 19).

The threat of a new competitor entering this sector is relatively low, due to the huge capital investment required to be competitive and establish a brand identity that stands out.

One of Tesco's main advantages is their ability to buy in vast quantities, making them highly price competitive.

Along with being the cost leader in many areas, they are also one of the few retailers to offer convenience services, like on-line shopping, home delivery and self-service checkouts.

All of which helps to protect them from the threat of new competitors.

Subsitutes:

There are many substitute options in the food retail sector and there are no switching costs to the consumer. Whereas, the switching costs for Tesco's financial services can be high and therefore a significant deciding factor for the customer.

To reduce the risk of customers turning to substitute major food retailers, Tesco expanded into many non-food areas including clothes, telecommunications, electronics and financial products, this provides customers the convenience of satisfying many of their consumer needs at one location.

Tesco also expanded into "express stores" to cater to the consumers who prefer the convenience of small local shops, thus combating against the substitute services of butchers, off-licences and convenience stores.

Buyers:

Most of Tesco's products are standardised or undifferentiated. They, therefore, have to invest heavily into attracting customers and promoting customer loyalty.

The loyalty "clubcard" has played a major factor in retaining customers for Tesco. According to Loyalty Square (loyaltysquare.com/about_us.php), marketing consultancy, the "Clubcard" is an important tool for collecting useful marketing data related to the buying habits of individual customers. Tesco then use this customer data to shape product offerings, create ranges, gain a better understanding of consumer segments and shopping profiles, help marketing to build loyalty and develop promotion offerings that suit target groups.

Datamonitor (2010, p.19) reports "18% more UK households are redeeming (Tesco) vouchers than a year ago". Money off vouchers are a very successful promotion tool during a recession, and thanks to information retained through the "Clubcard", they can be personalised to suit the needs of individual customers, therefore increasing customer satisfaction.

Suppliers:

Large organizations, like Tesco, are in the position of control when it comes to negotiating with suppliers.

In 2009, Tesco switched to sourcing many products directly from the UK, in an effort to lower prices in the Republic of Ireland to prevent shoppers heading North due to the devaluation of sterling against the euro. This allowed them to cut its prices by up to 22% in the border regions, helping them retain their competitive edge (http://www.independent.ie/business/irish/memo-shows-tesco-kept-switch-to-uk-suppliers-secret-1754805.html).

Closer relationships with the suppliers and significant changes to merchandising strategy are key to Tesco's continued success. The careful selection of suppliers enabled the company win the ‘Fresh Produce Retailer of the Year' Award in 2009. Quality fresh produce has gained prominence during the recessionary environment as the customers are increasingly eating at home as well. Tesco is aiming at increasing the proportion of local produce to improve quality. The focus on fresh produce will impact the sales positively. (Datamonitor, 2010, p.26).

Competitive Rivalry

The food retail industry is extremely competitive. Tesco competes with a wide array of retailers of different sizes and faces increased competition from UK retailers as well as international companies.

Tesco's main rivals are ASDA, Sainsburys, and Morrisons. If Tesco failed to compete with these rivals on areas including price, product range, quality and service could have an immense adverse effect on the Group's financial results (Tesco Annual Report and Financial Statements, 2010, p.42).

Through intensive market research Tesco endeavor to adapt their business plans to meet the needs of their customers. The main reason for their successful business model is their drive to stay ahead of their rivals through continually advancing technologically, through their product selection and expanding into new markets. This has proven successful in increasing sales and customer loyalty.

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