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Porters Five Forces: Named after Michael E. Porter this model identifies and analyses five competitive forces that helps in determination of an organisations strengths and weaknesses. These forces include
1. The threat of the entry of the new competitors.
2. The intensity of competitive rivalry.
3. The threat of substitute of products or services.
4. The bargaining power of customers (buyers).
5. The bargaining power of suppliers.
We will apply this model along with SWOT and PEST to Tesco and ASDA.
According to classical economics rivalries between companies must drive profits to zero because of the threat of substitutes. General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives (Porter M. 1980). For example, if Tesco's competitor ASDA provides substitutes for their goods then this will drive the price of groceries down for customers of both companies. Buyer power forces prices down. Fortunately the market is disciplined and they have a disciplined approach to price setting which prevents them from destroying each other in a profit war.
Bargaining power of supplier may have implications for Tesco and ASDA. Supplier power is demonstrated by supplier's demand that they are paid a certain price for their goods. If retailers don't agree they don't get the goods to sell. But large supermarkets like Tesco and ASDA have an overwhelming advantage over the small shopkeeper. These supermarkets can dictate the price they pay the supplier. If the supplier does not agree they will be left with a much smaller market for their products.
The new competitor factor of porter model also does not have much adverse implications on already established supermarket chains like Tesco and ASDA In fact they put up a lot of barriers to entry either implicitly or explicitly. For instance, Tesco may have cornered the market for some specific goods which the new supermarket will not be able to find cheap, reliable suppliers. Tesco and ASDA also has the advantage of economies of scale. They buy goods in bulk or in large volumes thereby considerably lowering the price they pay to supplier's per-item. A new small supermarket chain not well established can only buy a relatively small volume of goods and that will be at much higher rates.
Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers (Porter M. 1980). Tesco's Clubcard remains the most successful tool in customer retention strategy and is highly effective in dealing with this problem of bargaining power of customers.
PEST ANALYSIS FOR TESCO
Tesco with its massive operations on global scale is highly influenced by the political and legal conditions of host countries. For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994).
These factors mostly affect demands, cost, and profits and thus have implications for Tesco. They are largely beyond the control of Tesco, but their effects can be profound. Tesco is expected to do well internationally but is highly dependent on UK markets and any slowdown may have adverse affect on Tesco's performance.
Changing shopping trends indicate shift towards 'one-stop' and 'bulk' buying to accommodate this Tesco has increased the number of non-food items available. Changes in population demographic and eating habits means retailers are focusing on products with added-value.
The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains (Datamonitor Report, 2003). Tesco has fully integrated new technologies like intelligent scale, electronic labelling, self check-out machine with its operations.
The use of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).
SWOT ANALYSIS FOR TESCO
1. Increased market share: Tesco already holds major share in the world market and because of strong fundamentals and multi-format will continue to do so. Their main strategy of attracting more customers through various methods like Tesco Clubcard has been very affective in winning customers long term loyalty.
2. Insurance: In fiscal 2003 Tesco Personal Finance became the fastest growing motor insurance provider by crossing the important mark of one million motor insurance policies.
3. Tesco online is the world's biggest online supermarket with operations in more than 270 stores throughout the country.
4. Brand value: Tesco has a strong brand image, associated with its good quality, trustworthy goods representing excellent value.
5. Tesco has continued to develop a successful strategy to maintain its market leadership position.
1. Tesco's high dependence on the UK market may be of concern in future for example, the Morrison's group's takeover of Safeway chain may alter the power balance.
2. Debt reduction: Tesco has aggressive expansion plan which leaves little free cash for any other operations.
1. Expansion in non-food retail: Tesco's telecom is the latest example of how it can expand in non-food retail industry.
2. Expansion into health and beauty; Tesco currently operates 19 stores with opticians and nearly 200 stores with pharmacies.
3. Tesco's massive buying power gives it added advantage of economies of scale.
4. Tesco can further develop its revenue stream of online operation.
1. Lower profit margins because of rising raw material costs for food and non food.
2. Structural changes in domestic markets may trigger price war.
3. Wal-Mart/ASDA challenge: Wal-Mart's takeover of ASDA threatened Tesco's rank as the top UK supermarket.
4. International expansion is good but is expensive and requires heavy investment.
PEST ANALYSIS FOR ASDA
Like any other supermarket ASDA will also be affected by political factors whether they are new legislation regarding taxes or new employment laws. Thus EU enlargement, the euro etc all may have some implications for ASDA.
Factors such as national income, recession, inflation may have some adverse affect on the performance of ASDA. Unemployment is the most influential factor on the economy. It lowers the demand for many goods thereby affecting the demand required for production of such goods.
The type of goods demanded by consumers reflects their social conditioning. One important factor applicable especially in the UK is increasing ageing population which has increased the costs for firms who are committed to pension payments for their employees because of their staff are living longer. ASDA has started to recruit older employees to tap into this growing labour pool.
Technology is a major environmental variable which can help in development of many various beneficial processes and methods for cost reduction like improved efficiency in stock control due to bar coding, self scanning products etc.
SWOT FOR ASDA
1. ASDA after its takeover by world giant Wal-Mart has increased its market share considerably and at present is just behind Tesco in UK markets.
2. Major employer in UK markets thus it has a major pool of talented and experienced work force. It has a focused strategy in place for human resource management and development.
3. Well established brand name with strong social image.
4. ASDA's strategies of smart price, price guarantee offer and ASDA direct have really changed the way customers look at them.
1. In comparisons to its competitors ASDA has low market penetration.
2. Lack of smaller superstores to compete with Tesco express, metro etc.
3. Product recalls which not only affects the business financially but also adversely affects the brand name.
1. ASDA can widen its product range especially non-food retail.
2. Expansion into European markets. With well established management strategies and strong parent firm like Wal-Mart this is the area where it should focus.
1. Major threat to ASDA is from its competitors especially Tesco mainly being the threat of substitute products available through the competitor stores at lower prices.
2. ASDA's major market is still in UK, so any slowdown or downturn in UK economy may affect ASDA very badly.
3. Consumer tastes and shopping trends are continuously changing. It is important for ASDA to continuously accommodate those changes if they want to keep their competitive edge.
4. Rising labour cost can also cut into ASDA's profits.
SCENARIO PLANNING AND GAME THEORY
Every organisation in order to develop strategic options and be future prepared needs to anticipate and think through how different options will impact them. Most organisations therefore use scenario planning and game theory to be future prepared.
Tesco and ASDA
Scenario 1: My way
The conditions: Customers have "do it yourself attitude".
The society and economy is dynamic with consumers requiring more product information therefore the companies would have to continuously invent new methods to maintain their competitive edge. Products and services have undergone major changes with advanced technology like smart packaging that refrigerates individual packaging, fuelled by cells that automatically turn off on the use-by date. (The grocer, 2007). Consumers no longer trust big brands and do business through network of friends causing major change in retail structure with power balance shifting to individuals with high level of consumer trust. Large supermarkets chains like Tesco and ASDA will have to become logistics expert at local level.
Scenario two: Sell it to me
Customers have "do it for me attitude"
In this scenario there is high customer confidence, good economy and customers trusting big brands and expecting organisations to solve problems for them. Large supermarkets like ASDA and Tesco do not undergo major changes and still dominate. The only major change that comes is the more personalised touch they give to their businesses like customised products based on the customers nutritional or personal requirements.
Scenario three: from me to you.
Here we have uncertain economy, less prosperity, environmental disasters, climate change. Consumers have "do it yourself attitude" as they don't trust the government and large organisations. Brand loyalty is almost nonexistent and customers prefer home grown cheaper solutions.
Retail structure is badly affected with high street struggling.
Scenario four: I'm in your hands
The economy is shaky, slow growth, debt crisis, with "do it for me attitude" of customer. Only trusted brands have survived. Development of new technologies is at much slower pace. It is the most favourable situation for Tesco and ASDA with smaller units struggling to survive with them dominating high streets. They enjoy strong customer trust with compulsory loyalty card schemes. (The grocer, 2007).
We now with the help of Porters diamond try to identify which of Tesco or ASDA is more competitive.
Tesco gained competitive advantage over ASDA through advanced factors mainly by successful technological integration into their business. Tesco has been successful in using these factors to make themselves more attractive to the customers. It was the first to diversify into various other nonretail sectors like mobile phones, insurance, digital entertainment. ASDA although has embraced these changes but by being first Tesco has gained an upper hand over ASDA.
Tesco was the first one to start own-label products. These are highly appreciated and in demand among the main middle class target group of these supermarkets because of low prices and good quality. Unlike ASDA Tesco stores are differentiated into various formats on basis of sizes and location like Tesco extra, Tesco metro, Tesco express making them easily accessible to everyone locally.
Related And Supporting Industries
Tesco gained advantage in this third attribute by mainly developing new products and selling it to existing customers.
Strategy, Structure And Rivalry
Tesco's cost leadership strategy has given it a competitive edge over ASDA. Tesco is still continuing with its initial approach of "pile it high, sell it cheap".
Tesco stores in UK are divided into 6 classes depending upon their size, structure and range of products they sold. These size based structure helps it to serve their main target middle class group more effectively than ASDA.
VISION MISSION AND GOALS
Mission statement: "Creating value for customers, to earn their lifetime loyalty."(Tesco PLC, our values, 2010).
Tesco's people centred value, our success depends on people both people who shop with us and people who work with us, explains how they would go an extra mile to win the loyalty of their customers and employees. Their Clubcard initiative has been their most successful customer retention strategy by gaining customer's loyalty.
Mission statement: "To be Britain's best value retailer exceeding customer's needs.. always"
Statement of purpose: "To save everyone money, everyday". (ASDA, all about us,2008)
Thus according to the mission statement they want to become best retailer with priority on the customer satisfaction. ASDA has been working relentlessly towards this aim laying down various strategies to become market leader. One of these strategies as discussed in SWOT analysis is of price guarantee where the customers can easily do an online comparison with other supermarkets and if they are not cheapest then customer gets a printable voucher redeemable at ASDA stores. This along with ASDA smart price strategy shows their commitment towards their mission statement.