Supermarket Industry Porters 5 Forces Porter (1980) illustrates in this analytical tool 5 variables that determine the attractiveness

of an industry for organisations in terms of profitability in their immediate environment. Using the forces in this model we can analyse how attractive the UK Supermarket industry is to enter, the 5 forces are as follows. The threat of potential new entrants Barriers to entry in the UK supermarket industry relies on the entrants capability of matching capital requirements of existing firms, the UK supermarket industry is dominated by firms known as Tesco, Asda, Sainsburys and Morrisons (Big 4) owing up to 69% of market share in the UK. Looking at the experience curve (1960: Boston Consultancy Group) A new entrant would have to achieve the economies of scale needed to achieve cost parity with the big 4 and compete on cost advantage. In the supermarket industry achieving economies of scale is not on production but other factors such as efficiency, pricing, range of goods and value of products. Tesco for example have very low cost margins in comparison to the scale of their operations and distribution channels but they are able to achieve high sales because the convenience, range of products and different services they offer. Product differentiation is another barrier to entry, a new entrant would need to achieve and individual level of differentiation and attain an identity through promotions and costly advertising, total advertising costs for the big for in 2009 was approximately 140m. New entrants also face disadvantage in lack of expertise and knowledge of consumer trends, access to distribution channels and location to gain competitive advantage. The big 4 are also highly responsive to competition and what they do, any move will be counter acted to sustain market share. The threat of new entrants in this industry is Medium.

Experience Curve High Cost Decline of 20%30% every time production doubles.

Cost Per Unit

Low Low Cumulative Output High

The bargaining power of buyers The bargaining power of buyers in this industry is quite high, not on any individual level but as a whole the supermarkets must be responsive to the needs of its customers, the cost and quality of products offered are important to the buyers. In the UK supermarket industry, the buyers are high in number but low in concentration, low switching costs and homogenous group of products means that consumers have the power to look for alternative supply companies without affecting product quality or cost. Since the recession hit in 2007, more power has shifted into the hands of buyers as Supermarkets like Tesco branded them as being biggest discounters in the UK and Sainsburys offered cheaper substitute products too. This shows the responsiveness and flexibility towards consumer needs in the supermarket industry. The bargaining power of suppliers As there is a higher number of suppliers and higher concentration of buyers (supermarkets) in the UK supermarket industry it is relatively clear that suppliers have less bargaining power in the face of major supermarket retailers. According to the new UK chief executive at Tesco, the retail industry thrives on commercial tension between suppliers and supermarkets; he admitted the company benefits from putting pressure on its suppliers adding the constant push for customer satisfaction and innovation of products demands tension between retailers and suppliers to make industry more efficient and creative (Fresh Produce Journal: 19/10/2010). Not just Tesco but majority of the leading supermarkets firms have a

considerable amount of power over the suppliers. Furthermore forward integration is less likely for these suppliers as they can not put themselves in the position of the supermarkets giving them less power, less the supermarkets are able to play off suppliers against each other to suppress prices and increase quality of products (Hill & Jones: 2008: essentials of strategic management). Suppliers in this industry tend to have very little power. The threat of substitutes The threat of substitution is quite high in this industry, consumers are able to substitute to other major retailers, smaller convenience stores, niche product outlets, restaurants, bakeries, butchers, farmers or grow their own if substituting food. Supermarkets like Tesco and Asda have a range of products and services that have close substitutes, this effects price elasticity of demand because the market is sensitive to price. The demand for a particular brand or retailer will increase or decrease concurrent to the movement of price in comparison to its competition. The UK supermarkets are always trying to increase the quality of products and services resulting in a constant need to differentiate products and services from competition to make them less price sensitive. The extent of competitive rivalry The supermarket industry is a semi-consolidated industry with relatively low levels of product differentiation, you have the big 4 operating majority of the market share, yet there are many other smaller independent retailers also in the market. Therefore many of these firms as we already know engage in a value for money based competition that consists of price, promotions, location, convenience combined with a range of products/services (Mintel: 2010). The result is slow growth and high levels of rivalry as companies will try to obtain market share off each other, the economic outlook for the supermarket industry will see increase in VAT, public spending cuts, long term interest rate increases and impacts on consumers levels of expenditure. As wage growth is squeezed consumers revert to saving this increases pressure of competition. Declining demand excites rivalry among established companies and dampens industry profits. The demand in the Supermarket industry will shift to lower priced and lower margin goods so market leaders will suffer in both sales and margin terms this therefore increases rivalry between low cost retailers such as Aldi and Lidl and Iceland and pushes the bigger firms to respond. Overall the levels of competitive rivalry are high in the supermarket industry due to the current economic situation of the industry. Summary Threat of entrants: Buyer power: Substitutes: Supplier power: Extent of rivalry: Low High Medium Low High

It is not impossible for a firm to start up in this industry and according to Porters 5 forces the model does not favour the UK Supermarket industry, however to set up favourable supply chains, distribution channels and brand awareness to the extent of the competing firms is extremely difficult and will require high levels of capital and low cost margins.

Critique Porter has been subject to many criticisms over the past 30 years, since the model was created the global economy has shifted, changed and become quite unpredictable. Thus making this model unpractical for analysis in current industries, major criticism for Porters 5 forces is as follows, The model assumes static market structures as it does not take into account the environment that affects complex industries and technological forces that are capable of shifting structures, changing business models and entry barriers. For example the electric car could have this effect on the current car industry. Must also analyse with Strategic group analysis, PESTEL and SWOT for a better analysis. Porter also assumes that firms are only interested in their own profit and is the only reason they operate in industries, however this goes against missions of charitable organisations and other companies whose main mission is survival. (Lynch: 2009) Porter sees all forces as threats and the need for competitive advantage over customers, suppliers and markets, however it does not consider strategic alliances, closer relationship with suppliers and higher level of customer engagement with companies. Porter also views all forces to have equal importance; this is not entirely true some forces are more important than others in the micro environment such as customers; they are widely believed to be the most important force affecting an organisation. Porter forces do not take into account the strength of resources in an industry, declining resources means inability to sustain a competitive advantage against competition (Arnold: 2008) Porter sees suppliers as just suppliers, when suppliers can be relative and important to the survival of the company as a partner, if the supplier went bankrupt then this could have major knock on affects. For example if EdF energy went bankrupt then this would have major knock of affects to other industries including car manufacturing companies. The same can also be said for petrol and oil industries. One of the major industries that must need to be taken into account is the banking industry, they play major roles in industries around the world including the defence industry which is the biggest industry and its biggest customers are the Governments. Porters model does not acknowledge this. According to Downes (Beyond Porter: 1997) states that porter should include 3 more forces to the model; these are Deregulation, Digitalization and Globalization. Deregulation of an industry reduces the level of authority government can have on an industry, increases in technology can very much restructure industries thus positioning companies to look for alternatives. For example telecommunications technology and deregulation helped collapsed the price of long distance calls in USA, regulation on the other hand still has a major influence in Global car industry. Digitalization is very important as power of information and technology grows companies have access to far more information thus creating new business models, for example technological advancements in the car industry such as hybrid and electric cars new companies entering have the power to restructure industries. Globalization is also important for factor for an industry, the improvement of communications, logistics and distribution has lowered physical borders to allow businesses to compete on a global level,

Furthermore, determining what an industry is and where the barriers start and end is difficult to conclude. Porter assumes industries have a start and stop line but this is not really true, for example does the car industry begin in the manufacturing plant? Or does it begin with the materials sourced in the steel industry? Barriers are difficult to determine as specificity of barriers is not defined by Porter. According to Andrew Grove CEO of Intel a sixth force should be in added to the model; power, vigour and competence of complementors, complementors are companies that (complement) add value to the products of companies in an industry so when the products are used together they satisfy customer demand better, his argument has a strong foundation in economic theory as substitutes and complementors influence demand in an industry, more over in high technology industry. For example major car companies like BMW outsource complementary value added products like sound systems and computer chips to add value to the product. Porter disagrees with many of the criticisms and retains that the model works subsequently the subject is still open to debate, nevertheless there is still a lack of empirical evidence from Porter to support his ideas and authors and strategists believe it more justification is required. Richard J. Speed (1993)