- Incase of many suppliers, they might join together and decide to push their prices up (e.g.) Tesco and other supermarkets might meet and decide on how to set up their prices on goods.
- Product differentiation also determines supplier power because if its products are highly differentiated and alternatives are not s good then the industry has more power. An example with Tesco maybe that its location is differentiated or unique. Most of geographical location of most tesco stores is similar and the local council does not allow other major supermarkets to start their business close to other big supermarkets.
- Ease of switching: If changing suppliers is difficult and expensive then a firm sticks to it usual suppliers. Changing suppliers may mean loosing identity in firms like Tesco. It may also mean loosing money, popularity and reputation too since it’s a big trade mark company.
BUYER POWER
- Buyer power means that the buyer is able to negotiate the price. The power will be high if the industry is concentrated. If the buyers are few then it means that they have more buying power.Tesco’s prices fruits are low because it’s a big powerful customer and hence insists on low prices from its suppliers.
- Collaboration by customers also determines buyer power. This means that customers sometimes come together and campaign about prices(mostly over prices)some companies work internationally whereby they use cheap labor from developing countries where they have set up their industries but they over price their products in stores. GAP Company was in media after customers complained about their high prices compared to the cost of production that they spent.
- Substitution: Prices tend to be low if products can easily be switched. An example with Tesco is that Asda came up with relatively low prices on clothing that were more or less similar to ones sold at Tesco.Customers found it easy to switch to Asda
A major reason why British Motor Vehicle Industry lost to rivals like Renault and Volkswagen in the 1980s was that customers proffered foreign cars to their inferior ones(surrige et al)
- The more products are unique the harder it is for people’s desire to change (e.g.) Tesco store have come up with restaurants in the supermarkets, open for 24 hours, online shopping ,home deliveries which the supermarket offers for both telephone and online orders, and others in order to try to be unique than other major supermarkets so that its customers can have power to choose them over other supermarkets.Tesco’s online shopping website is www. Tesco.com
- The structure of a company also determines the buyer power(i.e.)Legislation governing the company, barriers to entry etc
According to Mintel 1998, Asda, Safeway, Sainsbury and Summerfield and Tesco held 77.8 per cent market share by turn over in 1997.This means that power has shifted from manufacturers of groceries to the grocery retailer
THREATS OF SUBSTITUTES
- Substitutes refer to products in other industries, a products price elasticity is affected by a product’s substitute. This mainly comes from products outside the industry.
Substitutes of products that meet the same need are; for example a pen and a paper- you cant use a pen without a paper hence, they are strong substitutes.
Products that remove the need for other products (e.g.) use of escalators removed the need for use of lifts.
Tesco industry deals with this force but sometimes can be threatening (e.g.) Asda came up with the idea of selling organic foods only. This showed their concern of healthy eating and was a big threat to Tesco.Tesco now has their own range of organic foods too.
Threat of substitute mainly affects the traditional product providers like the use of lighters instead of matches.Tesco has now in-built escalator instead of stairs. It has also increased its capacity and added Tesco home department.
THREAT OF ENTRY/BARRIERS TO ENTRY
- The possibility that a new firm may enter a firm affects the competition. Barriers to entry are when industries inhibit their rivals for entering the market. Whenever an industry makes profit, there are always new industries that enter the market so that they can take advantage of the profit being made by existing industries but if the situation is the other way round then some industries come out of the market where loss is being made. Barriers reduce the rate of entry of new firms hence maintaining a level of profit to those in the market.
- Threat of entry can be controlled through firms imposing
Hyundai and Daewoo car manufactures moved into UK in the 1970s due to low barriers (Palmer et al 2003)
- Cost economies for existing firms
- Existing relationships between firms and suppliers can put newcomers off.
- Distribution channels- if the channels are many or complicated then entrance to the market would not be easy
- Location of industries my also threat new entrants to the market
- Tesco enjoys its big economies of scale whereby it pays less for large amounts of goods whereas a new supermarket in the market would not pay the same for the same volume of goods.
COMPETITIVE RIVARLY
Classical economics predicts that rivalry between companies should drive profits to zero. This force describes the intensity of competition between existing companies in an industry. Pressure on prices and profit margins brings about competition. Rivalry exists when there are many industries of the same size. When industries have the same strategies, when products are not highly differentiated, when the growth of a company is mainly determined at the expense of another industry. and when barriers for exit are high.Tesco has rivals like Sainsbury that can substitute its products hence forces it to lower its groceries down in both companies.
Rivarly occurs when:
-Competitors are numerous or are equal in size and power. Tesco’s competitors are, morrisons, sainsbury’s, Asda, waitrose, e.t.c
-The industry growth is slow
-Lack of switching costs
-Fixed costs are high
This rivalry can be avoided if
- Switching costs are high
- Products are highly differentiated
- Haing a dominant industry which can determine prices
- High industry growth rate
Example of Porter’s five factors in an industry
REFFERNCES AND BIBLIOGRAPHY
Business explained
The Business Environment- Malcom Surridge, Tony Burshel and Philip Gunn.
The Business environment by Ian Worthington and Chris Britton
De Montfort university Leceister.
The Business Environment forth Edition by Andrian Palmer and Rod Hartley.
Business and the Environment by Andre Clark
