Power of suppliers analysis

Analysis

Each of the five forces will now be evaluated individually in terms of the UK supermarket industry to see how attractive the industry is.

Background information on the UK supermarket industry

The industry consists of the following UK supermarkets: “Aldi, Asda, The co-coperative, Iceland, Lidl, Marks and Spencers, Morrisons, Netto, Sainsburys, Somerfield, Tesco and Waitrose” (Supermarket, 2009). Researching into these supermarkets show that they were all established in the late 1800’s and early 1900’s. This shows how established they are within the industry and how they have continued there success.

“The UK food retailing industry is dominated by four major supermarkets (Tesco, Asda, Simsbury’s, Morrisons), who together account for over two-thirds of UK retail food sales” (Fearne et al, 2005, p570). The UK grocery market is worth ‘£146.3bn for the calendar year 2008’ (IDG, 2009) and has been steadily rising each calendar year:

The bargaining power of suppliers Analysis

The UK supermarket industry would not be capable of running without suppliers to stock their shelves. This means that the bargaining power of suppliers is an extremely important force to look at in depth, as, if the bargaining power of suppliers is high it makes the industry less attractive as the suppliers will be able to push prices up and take control of the supermarkets power. There are many different elements that are looked into to analyse to the full extent of the bargaining power of the suppliers which are looked at below:

Porter states that suppliers are more powerful “if there are only a few suppliers” (Lynch, 2009: 97). With the supermarket industry they have to deal with a large number of suppliers of goods and products that they will stock in their shops. This means they are in constant communications with different suppliers. This means that the UK supermarket industry are in a very strong position, as there are thousands of different products and ranges this means the supermarkets can pick and choose their suppliers depending on price, quality and service, meaning the bargaining power of suppliers in this sense is not high as they need to get there products into the supermarkets and therefore need to have contracts with huge Supermarkets like Tesco and Asda. However, Tescos and many other supermarkets have started to create relationships and good working ethics between themselves and suppliers. For example Tesco have created a ‘supplier partnering approach’ which is “by forging long-term partnerships with our suppliers and identifying new innovative suppliers” (Tesco, 2009) which ” as a result, our supply base is distinguished by its long-term constructive relationships” (Tesco, 2009. Tescos has over 1,5000 suppliers who have been working with them for over five years, this shows that Tescos has learnt that working in co-operation with the suppliers causes better relationships as has Simsbury’s who have recently launched there ‘supporting fairtrade’ campaign.

“If there are no substitutes for the suppliers they offer” (Lynch, 2009: 97) it is said that the suppliers are more powerful as they will exert there power if they know they do not have anyone to compete with, therefore setting higher prices and in the case of supermarkets holding power over them. In the supermarket industry this can be looked at from two different views as most Supermarkets offer a range of different brands to substitute each other along the same line, for example Supermarkets stock both Nestle and Kellogg’s cereal, so in that respect they do have different substitutes within product lines but in this case the supermarkets and branded products both need each other. The brands need to get shelf space to gain market share and the supermarkets need to offer the products being marketed to the consumer to attract customers into the shops. Due to the huge market shares of the main supermarkets the suppliers have little bargaining power at all.

Porter also believes that “if suppliers prices form a large part of the total costs of the organisation” (Lynch, 2009: 98) then the bargaining power of the supplier is high. This means that if suppliers prices were to be raised then the supermarkets in this case would also have to raise their prices and they would be adversely affected. In the case of the UK supermarket industry, the top supermarkets are not affected by the suppliers prices changing as the suppliers have such large dependency on the supermarkets for contracts and repeat business meaning they are in some ways controlled by the prices the supermarkets are willing to pay as the power they have means they can just find another cheaper supplier. However, with the smaller supermarkets they do not have as much control as the supplier’s price will affect them and they may not have the higher market share meaning they cannot exert any power over the suppliers as they can choose to supply the bigger supermarkets instead. Overall, it would not benefit the supplier to change to higher prices as supermarkets buy in such high volume and their relationship is crucial therefore the bargaining power is low.

Overall, taking into account all aspects of Porters theories on bargaining power of suppliers is low as, “the fact that a handful of supermarkets control access to consumers means that they are increasingly in a position to exercise buyer power. This is because distribution through these outlets is critical to manufacturers and suppliers as these suppliers have no other viable means of setting up distribution that offers the same scale and economic benefits” (Dobson et al, 1998 as cited in Fearne et al, 2005, p571) and “the key players in the UK food industry are dominated, led and controlled by retailers to a large extent” (Howe, 2008 as cited in Robson et al, 2001, p 39). However it can be seen that the supermarkets in the UK are working towards forging strong relationships with suppliers.

The bargaining power of buyers Analysis

Within the analysis of the UK Supermarket Industry the ‘buyers’ in Porters five forces are the customers. There are four main ways in which the bargaining power of buyers is high and they are under the following conditions:

“If the buyers are concentrated and there are few of them” (Lynch, 2009: 98). The UK Supermarket Industry has thousands of customers all around the UK, this meaning that the power of the customers is not high in this sense as their target market is phenomenally large with 6,410 supermarkets covering most of the UK meaning they are easily accessible for a huge range of customers.

Another condition which means the bargaining power of buyers is high is when “the product from the organisation is undifferentiated” (Lynch, 2009: 98). This means that the customers can switch from one supermarket to another as they all basically offer the same products, this is an issue in the supermarket industry as most customers are not loyal to just one supermarket, but the volume of customers is so high this does not really have a negative impact on the supermarkets this meaning the buyer power is not strong enough to create a problem for the industry unless a high percentage of loyal customers decided not to use the supermarket again, however the supermarkets are continuously running advertising campaigns to attract new customers and to retain there original loyal customers.

“If backward integration is possible” (Lynch, 2009: 98) then the bargaining power of the customers is high. In the UK Supermarket Industry it is impossible for the customers to integrate backwards and take over the supermarkets role, so the bargaining power of buyers is non-existent.

This shows that the bargaining power of buyers/suppliers is extremely low in the UK supermarket industry as there are so many customers that the supermarkets will always be in demand but because of the nature of the industry and UK customers always needing them to supply them with their weekly shopping etc so they do not have any bargaining power.

The threat of potential new entrants Analysis

“Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases” (David, 1997: 128). Porter states there are seven major sources of barriers to entry, as UK supermarkets are highly profitable the industry looks attractive in that sense, but the real issue is whether or not the industry can be entered easily.

If the UK supermarket industry has low barriers of entry this means that the industry becomes more competitive and if you are already established this is not good news as the competition becomes fierce as David (1997) suggests; however if the barriers of entry are high and you are already established this is very comforting news as it means there will not be many competitors and new competitors very unlikely.

The economies of scale in the industry need to be looked at closely, especially as it has a huge effect. This is because in terms of stock, supermarkets can purchase products from suppliers on a huge scale, meaning they get better deals and reduced costs, a new entrant to the supermarket industry would find this hard to do as the capital needed would be extremely large and not achievable straight away.

The second source of barriers to entry is the “branding, customer knowledge, special levels of service and many other aspects” (Lynch, 2009: 99), which can create high barriers. This is very true in the UK supermarket Industry as the supermarkets are established and have already created different strengths within the market; most of them from the late 1800’s. The extent to which the supermarkets already established are recognised is an enormous advantage, this meaning the barriers of entry are very high as lots of money would have to be spent marketing, setting up and creating a successful supermarket idea that would be sustainable amongst the long established competitors.

The capital requirements to enter the UK Supermarket Industry are financially challenging to compete with the established supermarkets; raising such funds and taking such a high financial risk, makes the barriers to entry extremely high.

Switching costs deal with the motion that if customers are happy with the supermarkets already within the industry then the cost to a new entrant would be very high to persuade the customers any different; therefore making the industry unattractive, as there is already lots of choice within the supermarket industry I feel it would be very hard to make customers switch therefore the costs would be very high.

Porter argues that the ‘access to distribution channels’ is a threat to new entrants. Within the supermarket industry however this links in with could a new entrant find suitable locations to distribute its products that would be easily accessible and would these kinds of sites be too costly to fund from the beginning; also with high competition levels around each town or city.

The “cost disadvantages independent of scale” (Lynch, 2009: 99) also need to be looked at as possible new entrants need to assess how easily they will be able to gain stability and a foothold in the market, they will do this by seeing how well the other supermarkets in the industry are established, have constant customers that are loyal and trusting and the supermarkets knowledge of the marketplace. As many of the supermarkets in the industry are extremely well established and recognisable for their different traits this makes an extremely high barrier of entry for new entrants, as they do not have this bank of knowledge and experience.

Government policy has a big effect on new entrants, as within the supermarket industry there are many different laws. Legislations and regulations that have to be abided by especially as food products are being sold. This means that a new entrant within the supermarket would find this process very costly and timely, therefore raising the barrier to entry.

Overall, the threat of new entrants within the UK supermarket industry is very low as the costs to enter the market will be extremely high and the competition against the established supermarkets would be high due to their knowledge, experience and networks with suppliers and distribution channels.

The threat of substitutes Analysis

“Substitution reduces demand for a particular class of products as customers switch to alternatives” (Johnson et al, 2005: 82); it can be argued that there is no substitute to food but whilst looking at the UK supermarket industry each supermarket is each other’s substitute, hence the competition being fierce and constant as each food product they offer the competitor will also offer. The way in which supermarkets have overcome this however, is that they each have there own different strategies and strengths for example Asda offers a huge range of low cost products where as Waitrose focuses on having high quality products at a higher price. There are also other substitutes outside of the supermarket industry which really need to be analysed like local corner shops, newsagents, farm shops, markets and budget shops.

The threat of substitutes has taken on a different meaning during the recession as

“UK supermarket giant Tesco has lost market share to discounters Aldi and Lidl as consumers cut back on spending” (BBC News, 28.04.09), where there has been a “shift by shoppers from high-end to low-end stores” (BBC News, 27.06.08). This means that the threat of substitutes have become an issue within the UK supermarket industry as other retail shops like Poundland and Wilkinson’s offer discounted products which have become more attractive to the UK customers due to the recession.

This means that the threat of substitutes has risen over the past years making the industry become less attractive.

The extent of competitor rivalry Analysis

“Rivalry among competing firms is usually the most powerful of the five competitive forces” (David, 1997: 127). Competitor rivalry plays a huge role in the UK supermarket industry, “Competition may take the form of price competition, advertising and promotion, innovation, or service during and after sales” (Thompson, 2003: 296)

The reason why competitive rivalry is high in the UK supermarket industry is because most of the competitors are of equal size, therefore meaning that if one competitor decides to try and gain more market share then the rivalry considerably increases. This has happened recently with Asda as they are constantly running advertising campaigns showing how much cheaper they are than all the other supermarkets. Since this has happened the other supermarkets have fought back and have shown they are also just as cheap therefore raising the competition barriers and therefore rivalry. Here are some adverts below to show how they are naming their competitors and their prices:

There is also a high level of competition within the UK supermarket industry as ” it is difficult to differentiate products and services” (Lynch, 2009: 100) so therefore competition becomes based upon costing and offering the better deal to the customer to attract them to keep as many loyal customers as possible.

There are extremely high levels of competition within the UK supermarket industry making it an unattractive industry.

Conclusion of the UK Supermarket Industry according to Porters five forces

Analysing the above information the UK supermarket industry is attractive in three of Porters five forces – The bargaining power of suppliers, the bargaining power of buyers and the threat of new entrants. In the remaining two forces however, the industry is extremely unattractive – the threat of substitutes and the extent of competitor rivalry.

Critique of Porters five forces

Porters five forces gives a basis of analysing the environment within an industry, but there have been many criticisms, which will be explored further.

“The dynamic nature of industry structure” (Hax et al, 1991: 50) is something that needs to be analysed in terms of reliability with Porters five forces. As with most models and frameworks Porters model is static and is only a snapshot in time, where as in reality the nature of industries is that they are constantly changing, evolving and competing. The model may not be able to keep up with these constant changes and therefore not give a clear and accurate picture of the industry. For example the computing industry is constantly changing with new software available, new technologies therefore the level of competition constantly changing.

The model also does not take into account how to define an industry and this causes a lot of implications as looking at the UK supermarket industry it is hard to define the difference between that of a supermarket industry to that of a grocery industry and where one stops and the other starts. Porter assumes that the industry is easily definable, but in reality this is near impossible as most industries overlap and/or people have different views or perceptions of a make up of an industry. This was found whilst looking at the UK supermarket industry as it was very hard to define which shops were deemed as supermarkets or other retail outlets. Another aspect that was hard to define was the fact that the supermarket industry seemed to overlap the grocery industry making the information very hard to extract.

Another critique of the model is that it does not deem buyers, or in the supermarket industry case customers, as any more important than the other aspects within the micro-environment, where in fact in reality the customers are one of the most important aspects of being successful within an industry. This in turn means that within strategy development customers should be treated differently within the analysis.

Porters model also suggests that the main intention of the organisation is to address its own interests before others, where in reality charitable and governmental organisations have different intentions therefore making this function of the model incorrect in some cases and industries. It can also be seen that just to survive is a main concern of most businesses rather than just focusing on profits.

The model is also based on the idea of competition and that competitive advantage is essential both over other market competitors, customers and their suppliers. As Porter focuses on this he does not take into account ‘strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise networks or others” (The Manager, 2001) It can also be seen that Porter ignores the Human Resource aspect of strategy which includes management skills and cultures which form some industries beliefs and how they carry out their work therefore affecting the industries attractiveness.

One of the five forces within the model is ‘bargaining power of suppliers’. Porter looks at suppliers as a threat to the industry where in fact in some organisations and industries “have found it very useful to engage in closer co-operation with suppliers” (Lynch, 2009: 101). Robson et al (2002) suggest that “Supermarkets are leading the way in developing vertical relations in the food industry”. It can be seen that some supermarkets have created a relationship and partnership between themselves and their suppliers as they are both as dependent on each other. Hence why working in harmony is a more ideal situation than Porters suggested aggressive approach to suppliers. This therefore means they are no longer a threat leading to the force not needed in some cases.

In different industries “not all forces are equally important” (Hax et al, 1991: 50) therefore the simplicity of the model gains only limited information and to make a complex evaluation thorough research into the different forces and how much weight they carry in comparison to others needs to be established before a conclusion can be made about how attractive the industry is. For example, “It could be very well be that many factors add to an unattractive position, and yet, when judged from its entirety, the industry still presents an overall attractive picture” (Hax et al, 1991: 50).

The government is a huge force that influences industry attractiveness or not. Porter does not suggest this within his chosen five forces but instead as a factor within the force of ‘threat of new entrants’. In recent economic times the government has been truly shown how it has in the final say of organisations. The recession and the recent break down within the banking sector showed the governments’ true role as it helped as it “In total, the Government has put £74 billion of taxpayers’ money into the banks, including RBS, Lloyds and HBOS, since the start of the financial crisis last year”(Winnett et al, Telegraph, 2009) . Thus showing that if the government was not involved then the banking sector would have completely collapsed hence the government playing a huge role in supporting industries, for example the banking industry.

Grant (2002) believes that there is a missing dimension in the five forces model. As the five forces model addresses the suppliers of substitute goods as threats, Porter does not explore that as well as substitutes for products there are also complements. Substitutes within the framework are shown as reducing the profit available in the industry where as “complements have a positive impact on value” (Grant, 2002: 90) and can help to “exercise bargaining power” (Grant, 2002: 91). This is because “the more complements there are and the closer their relationship to the products supplied by the industry, the greater the potential profit within the industry” (Grant, 2002: 90). In conclusion complementary businesses have to be taken into account as well as substitutes as dynamics within these organisations will affect the industry attractiveness; for example new technologies.

Overall there has been many different critiques about Porters five forces, the main theme seems to be that the model is useful to get a general idea of how attractive an industry is, but to make sure you get a fully comprehensive analysis you need to look much more in depth at the industries elements that are not necessarily mentioned within Porters model and realise that this is only a snapshot in time and will change considerably over times and different economic events that occur.

Reference List

Books

• Grant, Robert M (2002). Contemporary Strategy Analysis. Fourth Edition, Page 90, Blackwell Publishers Ltd
• Grant, Robert M (2002). Contemporary Strategy Analysis. Fourth Edition, Page 91, Blackwell Publishers Ltd
• Thompson, John L (2003). Strategic Management, Page 296, Thompson
• David, Fred R (1997). Strategic Management. Sixth Edition, Page 127, Prentice-Hall Inc
• David, Fred R (1997). Strategic Management. Sixth Edition, Page 128, Prentice-Hall Inc
• Johnson, G et al. (2005). Exploring Corporate Strategy. Seventh Edition, Page 82, Prentice Hall
• Lynch, Richard (2009). Strategic Management. Fifth Edition, Page 97, Pearson Education
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• Lynch, Richard (2009). Strategic Management. Fifth Edition, Page 100, Pearson Education
• Lynch, Richard (2009). Strategic Management. Fifth Edition, Page 101, Pearson Education
• Hax, Arnaldo C et al (1991). The strategy concept and progress. A pragmatic approach. Page 50, Prentice Hall

Bibliography

Books

• Grant, Robert M (2002). Contemporary Strategy Analysis. Fourth Edition, Blackwell Publishers Ltd
• Thompson, John L (2003). Strategic Management, Thompson
• David, Fred R (1997). Strategic Management. Sixth Edition, Prentice-Hall Inc
• Johnson, G et al. (2005). Exploring Corporate Strategy. Seventh Edition, Prentice Hall
• Lynch, Richard (2009). Strategic Management. Fifth Edition, Pearson Education
• Hax, Arnaldo C et al (1991). The strategy concept and progress. A pragmatic approach, Prentice Hall
• Hill, C et al (1995). Strategic Management, an integrated approach. Third Edition Houghton Mifflin Company
• De Wit, B et al (1998). Strategy process content context. Second edition, International Thomson business press
• Hitt, M et al (1995). Strategic Management, Competitiveness and Globalization, West Publishing
• Miller, A (1998). Strategic Management. Third Edition. McGraw-Hill

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