Porter's Five Forces Model - Assignment Example

QS Porter’s Five Forces Model: Porter’s five force Model is a very useful tool for strategy assessment. It can be used to conduct industry analysis, to identify generic forces present in the industry and to look out for attractive industries. It is done at the strategic business unit level. Porter’s five force model will be applied Tesco. The following factors need to be taken into account for this analysis: Competitive Rivalry Threat of substitutes Threat of buying power of buyers Threat of bargaining power of supplier Competitive Rivalry Competitive rivalry is high when the market is undifferentiated, when there are high exit barriers, when market growth rate is slow and when the competitors are in balance. The threat of Substitutes: Threat to substitutes emanates from reduction in demands. Customers have the leeway to switch to alternatives. There are different types of product substitution for instance: 1. Product for product substitution 2. Substitution of need 3. Generic Substitution. The Bargaining Power of Buyers: The buying power tends to be high when the concentration of buyers in the industry is high; if the industry is increasingly fragmented and if it comprises of many smalls firms and the switching costs tend to be low. The Bargaining Power of Suppliers: The bargaining power of suppliers is high when switching costs are high, when there are only a few fragmented suppliers in the industry and when the supplier brand is very powerful. The Treat of New Entrants The threat of new entrant relies on various barriers such as capital requirements associated with entry, government action, expected retaliation, customer loyalty and access to distribution channels. Porter’s Five force analysis of TESCO: A company on which the five force analysis would be based on is the TESCO. Jack Cohen found Tesco in 1919. Threat of substitute products: In the grocery retail market the threat of substitute product is relatively low for food items and medium to high for non-food items. On the food retail front, small chains of convenience stores, off licenses and organic shops are not considered a threat to super market chains like Tesco who offer high quality products. On the other hand, the threat of substitutes for non-food items for example clothes etc is high. Threat of entry of new competitors The threat of entry in the super market chain in UK is relatively low. Not only does it require heavy capital investments it demands that new entrants in the market produce something at an exceptionally low price. This is because major brands have already captured this market. Tesco, Asda, Sainsburry’s and Morrison’s make up 80% of the shopping in UK. Competitive rivalry: In super market industry in the UK, there is intense competition. Tesco faces stiff and direct competition from competitors like Asda, Sainsbury’s, Morrison’s and Waitrose. All four chains compete with each on price, products and promotions. The market growth is slow because market shares from other competitors have intensified the market competition over the year. This in turn is threatening, Tesco’s market leadership position. Bargaining power of buyers The bargaining power of buyers is relatively high in this industry. In products which can’t be differentiated a lot and switching costs are low, buyers have the liberty to easily switch from one brand too others. Customers tend to opt for low prices and with online retailing today, the prices of products can be easily compared. Bargaining power of suppliers The bargaining power of suppliers is relatively low. Suppliers would not want to lose their business contracts with large supermarkets and are attracted towards major food and grocery retailers. This strengthens the position of super markets like Tesco who can negotiate further for lower prices. Porter’s Five force Analysis of British Airways: British Airways is the biggest airline in Europe today and is the national carrier of UK. Threat of entry of new competitors Due to heavy capital investment needed in this industry, the threat of entry for new entrants is relatively less. Competitive rivalry: Competitive rivalry in the air line industry in UK is intense. British Airways, Debonair, Jet Airways, Easy jet, Ryan air, Debonair, AB airlines, Virgin Express etc dominate the industry. The competitors compete with each other on different services, cut fares, and flyer membership purchases. Bargaining power of buyers Customers have the option of bargaining on domestic travel as the competition is intense there on. However on international travel, there is very little leverage to bargain on. Bargaining power of suppliers Suppliers are limited in the industry. There are very few suppliers in the industry who supply airbuses etc and hence the bargaining power of suppliers is a perceived threat. Threat of substitutes: In Air line industry in UK, there are substitutes like train and road travel available for domestic travel. For travelers preferring cheaper sources of travel would prefer train or road then air travel in UK. However, for international travel, the threat of substitutes is not there as the travelers have no other option QS 2 What is the role of corporate parenting? Corporate parent implies the management level which is above the business units. It hedges on direct communication with buyers and competitors. Three primary styles of corporate parenting are as following: 1. Financial control 2. Strategic Planning 3. Strategic control Financial control: In this the domain, the role of the corporate parent is to assess and evaluate the overall financial performance of the investment portfolio of different business units operating in the organization. The corporate managers function as agents on behalf of the financial markets and look out to acquire viable assets and businesses. The business unit managers are given the power to carry out various business activities and to make decisions for their level. However the corporate parent sets out the benchmark performance standards that would be evaluated during control Strategic Planning: This is the second style of corporate parent. In this style the role of corporate parent is to encourage synergies all over in business units. This could be done through proper envisioning and seeking a common purpose, facilitating co-operation across businesses and arranging central services and resources. Strategic Control: This is the third style of corporate parent. In this role, the corporate parent makes use of its resources and competences to conjure up a value for its businesses. For instance the corporate could be a value brand or a specialist skill. The corporate parent utilizes its parenting capabilities to seize opportunities for growth. The Virgin Group Ltd is a group of independently run British companies under the Virgin brand and the leadership of Sir Richard Branson. Travel, entertainment and lifestyle are the core business areas of this company. The success of Virgin Group has been attributed to its corporate parenting strategy. Its corporate strategy is to take charge as a venture capital firm based on Virgin brand. This strategy calls for non-related diversification for every business unit. Synergies are also encouraged and created from the hierarchical relationships and interaction of the corporate head office with individual business units. By leveraging and capitalizing on the Virgin brand which is already well positioned in the minds of the consumers, Virgin finds it easy to break into new business areas with a bang and shakeup of existing orders. The unique Virgin culture also makes it easy for Virgin to enter into new markets very effectively. The organizational structure at Virgin is decentralized. This gives entrepreneurial managers more room ant time to pursue their businesses effectively without worrying about the bureaucracy associated with centralized corporations. The individual businesses on the other hand benefit from the world wide repute of the parent corporation, Virgin brand and are able to capitalize on the brand name in their marketing efforts. These benefits of corporate parents would not have been available to them had they been operating under their own subsidiary brands. Another example of corporate parenting is that of Tesco. Tesco’s corporate parenting strategy was to include its own-brand products in all chains. These included the up market “Finest”, the mid range Tesco brand and the low price brand. The brands covered various product categories such as food, beverage, clothing, home and Tesco Mobile and financial services. A key aspect of its strategy was to incorporate innovative use of technology. It used uniform advertising across all its subsidiary business units in UK. Its main advertising slogan was “Every little helps”. The advertisements were seen on print media and electronic media and comprised of product shots against a white back drop. Thus Tesco capitalized on standardized branding and formatting for all its brands across the board. QS 3 When a firm is going for internationalization it must make sure that it opts for the best entry mode for its expansion strategy. There are six main entry modes. They are: 1. Exporting 2. Turn Key Projects 3. Licensing 4. Franchising 5. Joint Venture with a host country firm 6. Setting up a wholly owned subsidiary All six methods have their own advantages and disadvantages and the decision taken is in accordance with the internal and external factors. In licensing there are two entities involved: the licensee and the licensor. The agreement made stands to benefit both the entities. The licensor will sell away it’s know how right to the licensee while the licensee will have to pay the royalty fee in order to have the agreement with the licensor. In a wholly owned subsidiary mode, the firm owns complete ownership of the overseas entity. Wholly owned subsidiaries can be established in two ways. One is through green field venture and the second is through acquisition. Exporting is of two types: direct and indirect. In the direct exporting method, the organization makes a commitment to market overseas by itself while in indirect exporting a home country agency is employed to manage exports. In joint venture, the company is equity based. This means that the new company established has only a portion of the parent company. Porter’s diamond model explains why some countries tend and industries are more competitive than the others on the global scale. By using Porter’s diamond model companies may analyze and figure out which competitive factors are there in the local market and how can these factors may be exploited to gain global competitiveness. The diamond model comprises of four determinants which are factor conditions; demand conditions; related and supporting industries; firm strategy, structure and rivalry. Factor conditions comprise of factors which can be capitalized on by companies in a given nation. These can be seen as potential advantages to a company in another country. Some prominent examples of factor conditions are highly skilled work force, availability of resource and linguistic abilities of work force. Demand Conditions: If the local competition is intense, then efforts will have to be made to thrive in the competition; more emphasis will be put on improvements in foreign companies by the local firms. As a result the global competitiveness of local exporting companies will eventually increase. Thus a demanding local market can be seen as the driver of growth, innovation and quality improvements. Retail and Supporting Industries: When local competition intensifies, home country tends to become more cost efficient and innovative. This eventually leads to greater competitiveness for the firms at the global and national level. Firm Strategy, Structure and Rivalry: The strategy and management structure applied in firms in different countries can influence their competitiveness. For instance German firms are often hierarchical and this has given them advantages in engineering industry. Danish firms are flat which gives them an advantage in industries like bio chemical industry. Similarly, as mentioned before, if local rivalry is intense, then home countries can improve their competitiveness on the global scale. Intense local rivalry can be seen as major triggers for innovative growth and development in foreign markets. Tesco as mentioned above is in the Porter’s five force model question is a big super market chain in UK. It opted for expansion world over too and it used various multi-national entry mode strategies within one country. For instance in the Central and Eastern Europe, it started off by opening small chain stores in Hungary and a small super market business in Poland. In the Czech Republic it opened a small super market business. This strategy allowed Tesco to use minimal resources in case of any economic or political uncertaininity. After developing an understanding of this format, Tesco opted for the hyper market format. Porter’s Diamond Theory on Tesco: Factor endowments: Tesco gained global competitive advantage by capitalizing on their communication infrastructure, sophisticated and skilled labor, advanced research and technological capabilities. For instance entertainment, digital service, finance, insurance, phones and broad band. Demand conditions: Demand conditions with respect to production scale are a very crucial factor. Tesco enjoys 70% appreciation of its own brands in some cities for instance London where it’s “finest” brand is a huge hit. This brand is sold at 14.95 Euros locally while in Ireland it is sold at 20 Euros. Domestic rivalry: Domestic rivalry has also played a very crucial role in the success of Tesco. Domestic rivalry in super market industry is fierce and intense in UK and this inadvertently helped Tesco globally. References: L, B. (1985). Strategy and Environment: A conceptual study. Porter. (1990). Competitive Strategy. NY: NY Press. Simpson. (2002). Business Studies. 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