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Tesco Insead Case Study.

1491 words - 6 pages

SITUATION ANALYSISUK Supermarket Industry in the 1990sThe supermarket industry in UK was characterized by fierce competition and low profitability, with big players dominating the marketplace. Porter's five forces analysis (summarized in Exhibit 1) provides insights into the industry:Rivalry: Since there was little product differentiation between the multiples, price was commonly used as the competitive weapon. While the demographic profile of the shoppers of each chain was different, with Sainsbury at the top end, and Kwik Save at the bottom, most chains had a sub-brand (eg. Sainsbury with Savacentre; Safeway, with Presto) which targeted their competitors' market. As a result, margins were razor thin in the industry.Suppliers: Due to limited shelf space and the abundance of products to be displayed, supermarkets had traditionally strong bargaining position vis-à-vis the suppliers. While this held true for most suppliers, the growth of major FMCG companies like Nestle and Proctor & Gamble had tilted some of the power back to the suppliers. Overall, the power seemed to be relatively balanced between the two parties. In general, the power varied between retailers and between suppliers, with size the key determinant of power in this relationship.Customers: While the target customers were different for each major supermarket chain (with differentiation on income levels, age and geography), little product differentiation and extensive overlaps in target segments gave the consumers a lot of flexibility to shop at different chains. As a result of this low switching cost, supermarket chains were unable to raise their prices even though their margins were so slim. Therefore, customer power was judged to be from moderate to high.Substitutes: There were a number of traditional substitutes for the supermarkets, ranging from butcher shops, convenience stores (Eg. 7-Eleven), corner grocery stores, to department stores (Marks and Spencer had been in the department store and food business for almost a century). However, these were generally higher priced, and were rapidly losing out to the major chains. The major threat though, might come from discount stores like Walmart or Carrefour. Their entrance might put a further price pressure on the supermarkets, further squeezing their margins.Entry Barrier: New entrants into the industry were limited by the large scale that was needed to compete effectively. The UK supermarket industry was highly saturated with most good locations already been taken up by the existing players.Tesco's Customer Focused StrategyIn order to break out of the poor performance trap, Tesco commissioned consumer research in 1993, which showed that its customers were interested in a better shopping experience, and not just the best deal. This was the base for Tesco to launch a whole new customer-focused strategy which would eventually shift competition away from price, to greater differentiation through better customer relationship...

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