Porter’s Five Forces Model for UK Supermarket Industry

Porter’s Five Forces Model (1979) holds the purpose to analyse an industry in order to
determine the level of intensity regarding the competition and attractiveness of the industry.
They consist of those forces close to a company that affect its ability to serve its customers
and make a profit. The nature of competitiveness in a given industry can be viewed as a
composite of the following five forces: the extent of competitive rivalry, threat of potential
new entrants, threat of substitutes, bargaining power of suppliers, and the bargaining power
of customers.

There is a constant battle between firms competing in the same industry, in order to win
customer share. There are many significant firms in the UK supermarket industry with the
five most dominant ones being Tesco, ASDA, Morrisons, CO-OP and Sainsburys. This
highly competitive market has fostered an accelerated level of development, resulting in a
situation in which UK grocery retailers have had to be innovative to maintain and build
market share. Competitors have responded by refocusing on price and value, whilst
reinforcing the added value elements of their service. Competitive rivalry is considered a high
threat in the UK Supermarket industry.

Threat of potential new entrants in the Supermarket industry is limited. Over the last 30
years, the grocery market has been transformed into the supermarket-dominated business,
according to Ritz (2005). Most of the large chains have built their power due to operating
efficiency, one-stop shopping and major marketing-mix expenditure. The industry now
possesses a strong barrier for new entrants. It makes it rather difficult for new entrants to
raise sufficient capital because of large fixed costs and the highly developed supply chains.
Other barriers to entry include economies of scale and differentiation achieved by Tesco and
Asda seen in their aggressive operational tactics.

Substitutes do not entirely replace existing products but may introduce new technology or
reduce the costs of producing the same product. Effectively, substitutes may limit the profits
in an industry by keeping the prices down. In the grocery industry this is known as product-
for-product or the substitute of need and is also weakened by new trends, such as the way
smaller chains of convenience stores are emerging in the industry. For example, Tesco are
opening smaller express convenience stores in inner cities. Therefore substitute is seen as a
low threat.

The power of suppliers can be influenced by major grocery chains and that fear of losing their
business to the large supermarkets. Therefore, this consolidates further leading positions of
stores like Tesco and Asda in negotiating better promotional prices from suppliers that small
individual chains are unable to match.
There is little threat as often large supermarkets dictate the price they pay to the supplier. If
the supplier does not agree to Tesco’s price then the supplier will be left with no retailer.

Customer power also acts to force prices down. If beans are too expensive in Tesco, buyers
will exercise their power and move to Sainsbury. Tesco’s famous loyalty card – clubcard
remains the most successful customer retention strategy that significantly increases the
profitability of Tesco’s. In meeting customer needs, customising service, ensure low prices,
better choices, constant flow of in-store promotions enables brands like Tesco to control and
retain their customer base. In recent years a crucial change in food retailing has occurred due
to a large demand of consumers doing the majority of their shopping in supermarkets that
shows a greater need for supermarkets to sell non-food items. Consumers also have become
more aware of the issues surrounding fairer trade and the influence of western consumers on
the expectations and aspirations of Third World producers. The co-operative is known for
their wide range of fair trade stock.

Criticisms

Since Porter introduced the Five Forces framework in 1979, it has been subject to much
critique. One major influence during the last decade has been the internet as it has changed
the economic conditions drastically. The growth of the internet has strongly influenced all
industries. In fact, Porter’s framework is based on the economic situation in the eighties, and
therefore is now outdated. The eighties saw strong competition, cyclical developments and
relatively stable market structures. An industry’s competitive advantage develops from
strengthening its own position within the framework. Hence, Porter’s Five Forces framework
cannot explain or analyse today’s dynamic changes that have the power to transform whole
industries.

Larry Downes argues that the assumptions Porter makes are no longer viable and identifies
three new forces that should require a new strategic framework; these are digitalisation,
globalisation, and deregulation.

Digitalisation is important as over the last 10-15 years there has been a rapid growth in
technology it allows all players in the market to have access to far more information, as a
result completely new business models will materialise in which even players from outside an
industry are capable of changing the basis for competition in the industry. An example of this
in the supermarket industry is that of the loyalty cards that Tesco’s introduced.

Downe’s states that Globalisation is another factor that needs to be introduced in order to
have successful strategies in today’s world. Advances in distribution logistics and
communications have enabled businesses access to buy, sell and cooperate on a more global
level than ever before. It has made it possible for customers to shop around on a global level
and compare prices. Porter’s framework does not accommodate for such advances in
globalisation.

Deregulation also makes Porter’s framework outdated according to Downes as the rise of
technology has led to shrinkage in government influence for industries such as supermarkets
it allows the industry’s the ability to completely restructure themselves and look out for
alternatives. Porter doesn’t accommodate for government intervention in his framework. In
relation to the UK Supermarket industry this is evident in the case of Tescos, as they control
over a third of the UK grocery market. Government investigations have been called for as
there is reason to believe that it could lead to them having monopolistic power.

Joseph Lampel states another drawback to the model, that “it doesn’t explain how to define
the industry”. An example can be used here as whether or not the Tesco supermarket is in the
same industry as its smaller convenience store, or is this entering a different industry, due to
the expertise of the lawyers they have, they are still allowed to open thousands of stores
across the country.

Overall Porter’s Model is highly criticised mainly for its inability to adapt to changes in the
industry’s economic environment. His model doesn’t have the influence that is used to in the
1980s. In context with the UK supermarket industry it would be safe to say that using
Porter’s five forces that the industry would not be an attractive or profitable market to enter
considering the fierce competition out there today.