Porter's Five Forces Explained | Supermarket Industry Examples

Summary

Porter's Five Forces is a framework developed by Michael Porter in 1979 to analyze competition within a market and its impact on profitability. The model examines five key forces: Threat of Entry, Buyer Bargaining Power, Threat of Substitutes, Supplier Bargaining Power, and Rivalry. By applying this framework, businesses can assess market conditions, position themselves strategically, and develop effective business plans. Using the UK supermarket industry as an example, the script explains how each force plays out in practice, with companies like Aldi and Tesco adapting their strategies to navigate intense competition, rising customer expectations, and changing market dynamics.

Takeaways

• 😀 Porter’s Five Forces is a framework developed by Michael Porter in 1979 to assess market competition and profitability.
• 😀 The Five Forces model includes: Threat of Entry, Buyer Bargaining Power, Threat of Substitutes, Supplier Bargaining Power, and Rivalry.
• 😀 High barriers to entry reduce the threat of new competitors in a market, benefiting existing businesses.
• 😀 In the UK supermarket industry, new entrants like Aldi have disrupted established players despite high barriers to entry.
• 😀 Buyer bargaining power is strong in competitive markets, leading to price wars, reduced profit margins, and the need for differentiation.
• 😀 In the UK, supermarkets like Tesco and Sainsbury’s use loyalty programs, quality differentiation, and marketing to combat strong buyer power.
• 😀 The threat of substitutes has increased in the supermarket industry due to online grocery shopping, delivery services, and meal subscription services.
• 😀 Amazon’s entry into the grocery market, offering fast delivery and a unique shopping experience, is a significant threat to traditional supermarkets.
• 😀 Supplier bargaining power is weak in the UK supermarket sector due to large players with significant buying power over suppliers.
• 😀 Supermarkets in the UK have been criticized for exploiting supplier power, which can result in negative publicity and strained relationships.
• 😀 Rivalry in the UK supermarket industry is intense, with many competitors offering similar products, leading to price cuts, marketing wars, and reduced profitability.

Q & A

What is Porter’s Five Forces model and who developed it?

Porter’s Five Forces is a framework developed by Michael Porter in 1979. It identifies five key competitive forces that influence the profitability and competitiveness of a market.

What are the five forces in Porter’s Five Forces model?

The five forces are: 1) Threat of New Entrants, 2) Buyer Bargaining Power, 3) Threat of Substitutes, 4) Supplier Bargaining Power, and 5) Rivalry.

How can businesses use Porter’s Five Forces model?

Businesses can use Porter’s Five Forces model to analyze their market, assess potential profitability, define their value proposition, and develop strategies to increase success and profitability.

What does the 'Threat of Entry' refer to in Porter’s Five Forces?

The 'Threat of Entry' refers to how easily new businesses can enter the market. A high threat of entry means new businesses can easily compete, which could harm the profitability of existing businesses.

What factors contribute to high barriers to entry in a market?

Factors include economies of scale, brand loyalty, the dominance of established businesses, and high capital requirements. These make it harder for new businesses to compete.

Can you give an example of a business that successfully entered a market with high barriers to entry?

Aldi is a prime example. Despite the UK supermarket market having high barriers to entry, Aldi entered in 1990 and grew to become a major competitor with over 900 UK stores by 2021.

How does buyer bargaining power affect profitability in the UK supermarket industry?

Buyer bargaining power is strong in the UK supermarket industry due to high competition and numerous alternatives for consumers. This forces businesses to lower prices and invest heavily in quality and marketing, reducing overall profitability.

What is the 'Threat of Substitutes' and how does it affect supermarkets?

The 'Threat of Substitutes' refers to alternative products or services that customers can choose instead. In the supermarket industry, substitutes like online grocery shopping, convenience stores, and meal delivery services are growing threats, which can reduce customer loyalty to traditional supermarkets.

How have supermarkets responded to the threat of substitutes?

Supermarkets have adapted by investing in online shopping platforms, convenience stores, and partnerships with other businesses like Timpson and Greggs to offer more services and increase customer convenience.

How does supplier bargaining power influence supermarket profitability?

In the UK supermarket industry, supplier bargaining power is generally weak due to the dominance of large businesses that can negotiate lower prices. This helps supermarkets maintain profit margins, but has also led to criticism for exploiting suppliers.

What role does rivalry play in the competitive landscape of the UK supermarket industry?

Rivalry is intense in the UK supermarket industry, with many competitors offering similar products. This drives businesses to lower prices, increase marketing efforts, and diversify their offerings to maintain competitive advantage, which can reduce profitability.

What are some strategies supermarkets use to cope with high rivalry in the market?

Supermarkets use strategies such as offering differentiated products, expanding into non-grocery areas like clothing and electronics, developing loyalty programs, and forming partnerships with other businesses to improve customer experience.