The Five Factors Or Forces Affecting Competition Marketing Essay

Founded in 1956, Tesco has come a long way since its first-opened store in a converted cinema in Maldon. Today, 51 years after it was founded by Sir Jack Cohen, TESCO is Britain’s leading retailer. Despite being a market leader, the organisation is not yet resting on its laurels of success, but instead, continuously innovating and developing their company in order to maintain what it has managed to achieve up to this time. Thus, they have constantly formulated competitive strategies in order to attain this. According to  (1998), the essence of formulating competitive strategy is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm’s environment is the industry or industries in which it competes. Forces outside the industry are significant primarily in a relative sense; since outside forces usually affect all firms in the industry, the key is found in the differing abilities of firms to deal with them.

The most dominant strategic management paradigm in recent years is known as the strategies model ( 1991).  (1998) claims that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Rather, competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors. The state of competition in an industry depends on five basic competitive forces, which will be discussed in the following sections.

 Concentration, fixed or variable costs, differentiation, capacity, pricing, behaviour and market and company growth are some of the factors considered in this force. First, there is a need to identify Tesco’s industry competitors. In their kind of industry, the concentration of rivals is very large, evidenced by the numerous number of their competitors, come of the top rivals being ASDA Group Limited, BP PLC, Carrefour S.A., ExxonMobil Corporation, The Big Food Group PLC, J Sainsbury PLC, Marks & Spencer Group PLC, Royal Dutch/Shell Group, Safeway Inc., Somerfield, The Boots Group PLC, Wm Morrison Supermarkets PLC, The Carphone Warehouse Group PLC and John Lewis Partnership PLC. Rivalry tends to intensify as the number of competitors increases and as they become more equal in size and capacity. Therefore it can be said that the intensity of rivalry in the retailing industry where Tesco belongs is very stiff. Also in this force, rivalry is usually stronger when demand for the product is growing slowly, as is the case of the retailing industry. Rivalry is likewise more intense when competitors are tempted by industry conditions to use price cuts or other competitive weapons to boost unit volume and is also stronger when the products and services of competitors are so weakly differentiated that customers incur low costs in switching from one brand to another. Further, rivalry increases in proportion to the size of the payoff from a successful strategic move and becomes more volatile and unpredictable the more diverse the competitors are in terms of their strategies, personalities, corporate priorities, resources, and countries of origin. The above conditions all apply to the arena of retailing industry where Tesco plays, thus the bigger need for the firm to focus on strategic management in order to gain competitive advantage over their competitors.

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POTENTIAL ENTRANTS

            According to  &  (2001), barriers to entry are related to economies of scale, the existence of learning and experience curve effects, brand preferences and customer loyalty, capital requirements, cost disadvantages independent of size, access to distribution channels and government actions and policies. The economies of scale, for instance, implies that the more scale economies, the less threat of entry in that if entrant cannot quickly get large market share, it will have a major cost disadvantage. Incumbent can additionally threaten to increase output and cut price. Having 51 years of experience in the kind of business that they are in and with the incumbent retail giants existing (i.e. Sainsbury, Asda, Marks & Spencer), the said combination puts up a considerable barrier to entry. Where in the earlier days it is relatively easier to enter the industry because of little competition and the giants now were just medium-sized firms before, the contemporary retailing landscape is proving more and more difficult to enter into. Potential entrants will find that barriers are imposed on them, either explicitly or implicitly, by the conglomerate incumbents. Access to distribution channels will also prove harder for those who want to enter the industry. As the incumbents have already cornered the more common distribution channels, it will be difficult to both compete with the already established chains in the distribution channels and look for new channels with which to dispense of the retail products.

BUYERS

 &  claims that the leverage and bargaining power of customers tend to be relatively greater when customers are few in numbers and when they purchase in large quantities and when customers’ purchasers represent a sizable percentage of the selling industry’s total sales. In the retailing industry, the number of customers is very large, and often, they do not purchase in bulk. From this alone it can already be said that the bargaining power of consumers in weak.

When the supplying industry is comprised of large numbers of relatively small sellers and when the item being purchased is sufficiently standardized among sellers that customers can not only find alternative sellers but they can also switch suppliers at virtually zero cost, the buyers’ buying power is strong. Fortunately for Tesco, their competitors are not as large as their own organization, which makes the market disciplined, and the competitors likewise have a disciplined approach in price setting, partly due to set government regulations. When it is economically feasible for customers to purchase the input from several suppliers rather than one, their power also increases, which does not happen in this particular industry, as it is more economic to purchase from one retailer than from a host of retailers.

SUPPLIERS

A group of supplier firms has more bargaining power when the input is, in one way or another, important to the buyer and when the supplier industry is dominated by a few large producers who enjoy reasonably secure market positions and who are not beleaguered by intensely competitive conditions ( &  2001). In Tesco’s kind of industry, they have the extreme advantage of being able to dictate the price that they are willing to pay the supplier, as the suppliers, if the retailing giants refuse to pay the formers’ asking price, will be left with no one to sell to save the small supermarket chains, which would not be a wise move on the suppliers’ part. Additionally, when the suppliers’ respective products are differentiated to such an extent that it is difficult or costly for buyers to switch from one supplier to another and when the buying firms are not important customers of the suppliers, supplier power increases. In the retailing industry, this is clearly not the case, thus it can be deduced that suppliers do not exert as much power as they would have liked to. Switching from one supplier to another will not be costly for a retailing giant such as Tesco. In fact, as suppliers, they will be clamouring for the firm’s attention to choose them as supplier in the event that the company decides to switch suppliers.

SUBSTITUTES

The price and availability of acceptable substitutes for a product places a ceiling on the prices which the producers of that product can charge, and unless the sellers of a product can upgrade quality, reduce prices via cost reduction, or otherwise differentiate their product from its substitutes, they risk a low growth rate in sales and profits because of the inroads substitutes may make. In the retailing industry, as mentioned above, there is a large number of competitors. This amount of rivalry is the main force that drives the prices of all companies in the industry down. For example, Sainsbury can match the low prices that Tesco offers in the market and even equal the quality of the products that they offer, making the substitute force high in the retailing industry where Tesco operates. Further, the competition from substitutes is affected by the ease with which buyers can change over to a substitute, a key consideration being that usually the buyers switching costs-the one-time costs facing the buyer in switching from use of a product over to a substitute for it, is low. Since switching from one chain to another will create a relatively low cost or fuss for the consumer, the substitute force in the industry is relatively high. This opens an avenue for Tesco to improve quality and differentiate from their competitors while driving down costs at the same time.

ADVANTAGES & DISADVANTAGES OF ANALYSIS

            If these forces are properly assessed, individually and collectively, this will lead to the identification and subsequent deployment of appropriate (i.e. profitable) strategies. The approach should make transparent Tesco’s strengths and weaknesses, as well as opportunities and threats. The combined strength of the five forces determine the definitive earnings probability in the trade, where profit potential is calculated in terms of long-run return on capital. According to  (1998: ), ‘not all industries have the same potential. They differ fundamentally in their ultimate profit potential as the collective strength of the forces differs; the forces range from intense in industries like tires, paper and steel – where no firm earns spectacular returns – to relatively mild in industries like oil-field equipment and services, cosmetics and toiletries and the retailing industry – where high returns are quite common. The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favour. Since the collective strength of the forces may well be painfully apparent to all competitors, the key for developing strategy is to delve below the surface and analyse the sources of each’.

Further according to  (1998: ), ‘knowledge of these underlying sources of competitive pressure highlights the critical strengths and weaknesses of the company, animates its positioning in its industry, clarifies the areas where strategic changes may yield the greatest payoff, and highlights the areas where industry trends promise to hold the greatest significance as either opportunities or threats. Understanding these sources will also prove to be useful in considering areas for diversification, though the primary focus is on strategy in the industry. Structural analysis is the fundamental underpinning for formulating competitive strategy and also applies to diagnosing industry competition in any country or in an international market, though some of the institutional circumstances may differ’.

Experience shows that opportunities or threats can arise from many different sources ( &  1988). Thus, obtaining information about several different sectors furnishes the CEO with more relevant information in aligning the firm’s competitive strategy with environmental conditions ( 1984). For example, obtaining and analyzing information on competitors’ lowering or raising its product prices may enable a firm to formulate and implement strategic actions to maintain current customers or secure additional ones. Moreover, in investigating rivals’ manufacturing processes, a firm may learn of new and improved methods and processes that allow it to remain competitive. Thus, securing information across several environmental sectors may enable a firm to gain competitive advantage or maintain its market position.

According to  &  (2001), although the five forces approach provides sound theoretical basis and allows systematic analysis, it has the disadvantage of not providing how to measure and weight the many different components which determine each of the forces. Also, it is only possible to make an unambiguous judgment on the strength of a force if all the indicators ‘point’ in the same direction. If indicators contradict each other, there is the problem of how to balance them.

USING THE MODEL TO SAFEGUARD FUTURE PROSPECTS

            The five competitive forces – suppliers, buyers, competitive rivalry among firms currently in the industry, product substitutes and potential entrants to the industry – reveal the fact that the competition in the retailing trade goes well further than the already existing chains. Customers, suppliers, substitutes, and potential entrants are all ‘competitors’ to firms in the industry and may be more or less prominent depending on the particular circumstances ( 1998). All five competitive forces mutually establish the amount of industry rivalry and productivity, and the most influential forces are prevailing and becoming decisive in terms of strategy formulation. In Tesco’s case, even them who have a very well-built market leadership in the retailing industry where entrants have little or no threat will receive small returns on their profits if it has to face a superior quality and lower-cost alternative.

OTHER FACTORS TO BE CONSIDERED

            The strength of the competitive forces in an industry determines the degree to which the inflow of investment occurs and drives the return to the free market level, and thus the ability of firms to sustain above-average returns. ‘The underlying structure of an industry, reflected in the strength of the forces, should be distinguishable from the many short-run factors that can affect competition and profitability in a transient way’ ( 1998:). For instance, variations in the economic environment over the business cycle manipulate the short-run productivity of the retailing industry, as can material deficiencies, strikes, and the like. Even though such factors may have strategic implications, the focal point of the analysis of industry structure is on categorizing the basic, fundamental features of the industry rooted in its economics and technology that shape the arena in which competitive strategy must be set ( 1998).

CONCLUSION

            The general, long-term development of the retailing industry is one characterised by a series of evolutionary periods that at times can best be described as revolutionary in nature ( &  1999). In line with this observation, Tesco PLC needs to constantly be on the lookout for strategies which would help in maintaining their market leadership. Problems in the industry today appear from so many angles, at so many levels and in so many directions that their pursuit without a regular path will soon become lost in details. Porter’s five force model will help any organisation determine the direction in which they are going to take through an analysis of the five forces: suppliers, buyers, competitive rivalry among firms currently in the industry, product substitute and competitive entrants to the industry. Using this tool, Tesco, as well as other firms, is challenged to understand an industry’s profit potential and the strategy necessary to establish a defensible competitive position, given the industry’s structural characteristics. Overall, the retailing industry in which Tesco belongs is a highly attractive industry which contributes a large share of the total profits of Tesco. With the intensity of rivalry kept in check by the retailing giants, high threat of industry entry, low supplier and buyer power, prospects for Tesco holds much promise.