Tesco Company’s Porter’s Five Forces and Value Chain Analyses

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This paper aims at critically analyzing the external environment and internal competencies of Tesco using the five Porter forces and value chain analysis, respectively.

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A Brief Outlook of Tesco Company

Established in 1919, Tesco begun its operations in London where it opened its earliest store. As one of the leading food retailers in the globe, Tesco has about 500, 000 employees in 14 countries where they operate. In 2009, the company’s revenue went over £54 billion. The company has main outlets in Europe, United States and Asia and the total number of stores in these regions and other areas adds up to about 4500.The company’s head office seats at Hertfordshire, in the United Kingdom. Tesco operates express stores, metro stores and super stores. The Express stores sell mainly fresh foods in areas of operation. Metro stores, on the other hand sell different food products in towns and cities, while Super stores sell both foodstuff and non-edible products such as textbooks and tapes (Datamonitor 2012).

Tesco conducts online marketing and selling through its website (Tesco.com). The Company also provides broadband connections and financial services to its customers.

An Analysis of Porter’s Five Forces

Porter (1985, p.15) reveals that there are five forces of competition including “buyer power, suppliers’ power, threat of substitutes, barriers to entry and rivalry”. Hence, an analysis of the configuration of an industry is vital when establishing potential areas of competitive advantage. The following is the analysis of Tesco using the five Porter forces.

Buyers Bargaining Power

Buyers have a high bargaining power. Tesco products have a slight difference with products from other companies. Therefore, buyers can easily switch to other products without much cost. Customers do their best to acquire the finest transaction for the most reduced cost, and online shopping websites provide excellent platforms for customers to compare prices and decide where to buy (Euromonitor 2012).

Suppliers Bargaining Power

Suppliers have a low bargaining power because they tend to rely on principal grocery and food retailers and fear destroying their business relationships with leading supermarkets. Therefore, Tesco and other major food retailers have better chances of bargaining with suppliers on prices of food items and other commodities.

Rivalry Intensity

Industries that pose stiff competition to Tesco include Morrisons, Asda and Sainsbury’s (Euromonitor 2012). These industries mostly compete in areas of price, promotions and products. During the fiscal year 2011/2012, Sainsbury experienced a 0.3% rise in market share while that of Asda and Morrisons grew by 0.2% and 0.3% respectively (Euromonitor 2012). The increasing growth among these rival industries has deepened competition in the market, posing threat to Tesco’s top position.

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Threat of Substitute Products and Services

Food items are hardly replaceable and therefore there is a low threat of substitutes. While the market also comprises organic shops and small chains of other stores, they do not pose any threats to Tesco because its products are superior. Tesco’s express stores in towns and cities also counter these substitutes and makes it hard for them to penetrate the market. Conversely, non-food products such as DVDs face a high threat of substitutes (Datamonitor 2012).

Threat from New Entrants

The possibility of new brands joining the food retail industry is low, because the process of authorization to conduct business in the industry is slow and the resources required to put up and advertise new supermarkets are high. Most customers prefer to shop from major food retailers such as Tesco, Sainsbury, Asda and Morrisons because they offer high quality products at low prices (Keynote 2010). Therefore, a new entrant into the market must offer products of exceptional quality at minimum price in order to attract customers.

Value Chain Analysis

The value chain analysis by Porter aims at enabling industries to build the best value for their consumers (Lynch 2003). The process involves analyzing activities that precede the delivery of a product (primary activities) and then adding support activities to them. The following is a value chain analysis of Tesco.

Operations Management

The business makes efficient use of IT in managing operations and this has contributed significantly to its low cost leadership policy. Euromonitor (2012) reveals that the company invested approximately 80 million pounds in reorganizing its operations through the Tesco Digital program. After the launch of the program, Tesco’s profits increased by £550 million. Stock holdings at Tesco have also reduced significantly since the introduction of the system.

Inbound Logistics

Inbound operations at Tesco are swift and the company achieves this by often improving its ordering systems and upgrading clients’ lists. Tesco also takes advantage of its economies of scale and its top position in the market to obtain low cost goods and services from the suppliers.

Outbound Logistics

Outbound logistics at Tesco are excellent and that is why the company continues to lead in all dimensions of its food retail. Keynote (2010) reveals that Tesco has a wide range of store types, including Metro, Express, Superstores and Extras, which are in strategic places, for maximum customer experience.

Sales and Marketing

Tesco promotes its brands through Loyalty programs like Tesco-club-card. The company uses IT to develop such programs, which deter customers from swapping over to rival companies. The company also runs an environmental scheme known as Greener Living. The aim of this scheme is to enlighten Tesco consumers on how to cut down amounts of food wasted together with their carbon footprint during food preparation (Datamonitor 2012).

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Tesco places much weight on its customer service as the company operates on two main strategies of cost leadership and differentiation (Keynote 2010). Monetary services, self-service stalls, focused direct marketing and promotions are some concepts that derive from these two main strategies.

In conclusion, Tesco is still the leading company in the highly competitive food retail industry. The company has retained its position due to its unique strategies in cost leadership and differentiation. The company has also succeeded in building a high degree of value in relation to other players in the industry. The use of IT and the existence of a streamlined supply management chain have contributed significantly to the excellence of the company. The impact of the Greener Living scheme to customers’ perspective of the brand is also great.

While Tesco maintains a leading position, we also realize from the above analysis that rival industries are growing significantly, thus intensifying competition. Going forward, the company should work on ways of reducing prices further, while still maintaining high quality. For instance, the company may consider producing fresh foods internally by establishing a farm rather than buying from suppliers. This will obviously reduce buying costs with a significant margin, and consequently make it possible to reduce selling prices, while still making reasonable profits.


Datamonitor 2012, Company Profile – Tesco: Datamonitor Europe.

Euromonitor 2012, Industry Profile –Food retailing: Euromonitor International.

Keynote 2010, Keynote report on food retail industry: Keynote International. Web.

Lynch, R 2003, Corporate strategy, 4th edn, Pearson Education Limited, Harlow.

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Porter, M 1985, Competitive advantage: creating and sustaining superior performance, The Free Press, New York.

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