Porters five forces model

To develop a comprehensive Porter's five forces model, try performing a SWOT analysis at the same time.

Porters five forces model - the big picture

Each element of a Porters five forces model is best considered in the context of other elements in the model. Examples: supplier power is increased if there is a high degree of rivalry between companies trying to obtain the supplies; entry barriers are increased if there is a substitutes threat.

Porters five forces and SWOT analysis

The elements in a Porters five forces model complement the elements in a SWOT analysis. A SWOT analysis is an analysis of the strengths, weaknesses opportunities and threats affecting the company. Each element of a Porters five forces analysis can be looked at in the context of each element of a SWOT analysis, leading to twenty different ways of looking at the company.

Porters five forces and other analysis techniques

Other corporate analysis techniques, like PESTLE analysis and Gap analysis, add further possibilities for understanding a company. PESTLE analysis can give you an impression of the political, economic, sociological, technological, legal and environmental factors that influence Porter's five forces. Gap analysis allows you to see the gap between where a company is and where it should be, and what forces need to be applied.

Porters five forces at Tesco PLC

The rest of this article looks in detail at how Porters five forces might be applied to the problems facing Tesco PLC, including an investigation of the threat of substitutes from other supermarkets, buyer power in relation to grocery purchases, grocery supplier power, and the power of the customer at the till.

Classical economics predicts that rivalry between companies should drive profits to zero. This is partly down to the threat of substitutes. For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies.

Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined — the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war.

Supplier power is an important part of the Porters five forces model. Implications for Tesco are many. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don't pay the price, they don't get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper—they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce.

Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The amount it pays suppliers, per-item, is a lot less than the corner shop. It achieves this, partly, through buying large volumes of goods. A small supermarket chain can only buy a relatively small volume of goods, at greater expense.

Porter's five forces in other industries

Before developing a Porters five forces model of Tesco consider other industries, from real estate agencies to the bicycle manufacturing industry. This will give you the broadest picture of how Porters five forces can be used. Here we'll consider, briefly, two industries outside the supermarket sector.

Porters five forces and the auto industry

It is obvious that Porters five forces and the auto industry are well suited to each other. Any prospective auto company would do well to consider these forces. The rivalry, barriers to entry might make them think again. Established auto companies, though, are more powerful than their suppliers and have little threat of substitutes for an established brand that moves with the technology. Car industry analysis using Porters generic strategies is ubiquitous. Porters generic strategy has been used at Skoda & many other auto companies. There are many critics of Porters generic strategies, but more happy users.

Porters five forces model in the airline industry

If you were a Tesco executive you might want to lay your hands on the Porters five forces model of Sainsbury, Asda or other supermarket competitors. But you should not limit yourself to your own area of industry. Looking at the single most powerful company in another area, but the same political environment, might be very useful. By looking at Porters five forces and British Airways, a Tesco executive might get some useful insights. Also, British Airways might be more willing to reveal their Business model to a company that is not a direct competitor (on a quid quo pro basis). A downmarket supermarket company like LIDL might use Ryanair and Porters five forces model. This kind of knowledge sharing is under-utilised in industry, but could be used to great competitive advantage.

The bottom line

A Porters five forces model provides a "bottom line" way of understanding a company. It considers economic rivalry to be of central importance, and suggests you should concentrate on factors affecting the company's profit in a systemic model defined by that rivalry. Critics of Porters five forces analysis suggest it is too limited, but it can be supplemented with other models like SWOT or PESTLE analysis.