Well my DD is 8 and she had similar issues at her last school...which happened to be an outstanding school.
We've since moved abroad to Australia....where they start them off much slower with literacy and numeracy.
When my DD was in year 2, it was pretty tough....she had a lot of help but hated it all. She hated the pressure.
Many children simply don't have the required toolkit at 7 to learn to read and write quickly...or the phonics system does not suit them.
I wouldn't be thinking of changing her school if you're happy with the place in other aspects. If she loves it and has friends, that's far more important at this stage in her life than her academic ability.
I think it's good that her teacher is easing her in...remember sometimes schools have low Ofsted results for things other than teaching.
Have you read the report to see where they're failing exactly? That might be a good idea.
In the meantime, build up DD's confidence, read to her yourself daily or as often as humanly possible....don't press her to read herself unless she wants to.
My DD is as I said, now 8 and whilst she's certainly not a fabulous little writer or reader, she at least WILL read....and she does write...yes it's messy and poorly spelled but she's very happy at her school...adores it...loves her friends and her teacher.
That's everything. Having seen the other side of this where my friend's child hated school and had no friends...the social stuff is vital.