OxfordAQA A-Level Business: Analysing the industry environment (9725) – Revision Notes

Use these notes to revise section 3.3.3 (Analysing the industry environment) from the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. The section is International A-level only and Unit 3: Business analysis is where it is tested. If your course is the older 9625 one, follow the 9625 specification. The study guide has the full teaching and longer worked examples.

Exam-style set: practice questions · Course hub · Printable 9725 checklist · Free diagnostics

The five spec points in one line each

1. Meaning and significance: five pressures shape how much profit firms in an industry can make.
2. Influences on strength: each force is strong or weak for identifiable reasons.
3. Impact: the forces act on price, cost, volume and so on profit and every functional area.
4. Influencing the forces: firms can act to weaken a force in their favour.
5. Responding to change: when a force shifts, firms defend, adapt, combine or exit.

Key definitions

Term	Meaning
Industry	Firms whose products customers see as close alternatives
Porter’s five forces	A model of the competitive structure of an industry: rivalry, buyer power, supplier power, entry threat, substitute threat
Rivalry	How intensely existing firms compete on price, promotion and new products
Buyer power	Customers’ ability to force lower prices or better terms
Supplier power	Input suppliers’ ability to raise prices or reduce quality or service
Entry threat	How easily new firms can join the industry
Substitute threat	How easily customers can meet the same need with a different kind of product
Barriers to entry (AS, 3.1.1.3)	Entry costs, legal requirements, specialist knowledge, loyalty to existing businesses, access to resources or distribution
Switching cost	The money, time or effort a customer loses by changing supplier

Rule of thumb: strong forces mean lower industry profitability; weak forces mean higher.

What makes each force strong

Force	Strong if…	Firm might weaken it by…
Rivalry	many equal firms, slow growth, standard products, high fixed costs, hard to exit	branding, differentiation, niche focus, merger or takeover
Buyer power	few big buyers, standard product, easy price comparison, cheap to switch	wider customer base, higher switching costs, unique features, selling direct
Supplier power	few suppliers, unique input, costly to switch, firm is a small customer	multiple suppliers, long contracts, alternative inputs, backward integration
Entry threat	low set-up costs, no licences, little know-how needed, weak loyalty, open distribution	economies of scale, patents, exclusive distribution deals, loyalty
Substitute threat	close alternatives, better value, easy to switch	better value, product development, bundling

Useful numbers from AS

The forces are judged, but case data often lets you calculate evidence.

Four firm concentration ratio = sum of the four largest market shares (%)
Share of sales to a buyer     = sales to that buyer ÷ total sales × 100

Worked reminders.

• Shares of 22%, 19%, 15% and 9% give a concentration ratio of 22 + 19 + 15 + 9 = 65%. A higher ratio means fewer, larger rivals; whether rivalry is fierce still depends on growth and differentiation.
• Bracken Hollow Dairy sells £2.7 million of its £7.5 million output to one supermarket group: 2.7 ÷ 7.5 × 100 = 36%. That buyer has strong power over Bracken Hollow’s prices.

Method in steps: a five forces answer

1. Define the industry in the case (what product, which market).
2. Rate each force high, medium or low, using one piece of case evidence for each.
3. Calculate where the data allows (concentration, buyer share, cost change).
4. Explain the impact on this business’s price, cost, volume and profit.
5. Prioritise: which one or two forces matter most, and why.
6. Recommend or judge, saying what the answer depends on.

Method in steps: responding to a change in a force

1. Name the force and the direction of change.
2. Estimate the effect on profit (calculate if possible).
3. Give options: defend, adapt, combine, exit.
4. Weigh each against cost, time, risk and the firm’s objectives.
5. Decide, and say how long the change is likely to last.

Worked reminder. A regional parcel courier learns that its largest client, an online retailer, plans to build its own delivery fleet. Buyer power has risen, because the client can now supply the service itself. Options: cut prices to keep the contract (defend), offer services the client cannot easily copy, such as next-morning rural delivery (adapt), or win many smaller online sellers to replace the lost volume (spread the risk). The third reduces dependence on one buyer for good, but takes longest.

Impact on functional areas

Area	Typical effect of strong forces
Marketing	Pressure to differentiate and build loyalty; promotional spend rises
Operations	Push to cut unit costs; search for alternative suppliers or inputs
Finance	Lower margins and retained profit; powerful buyers may delay payment
Human resources	Less room for pay rises; possible job cuts or retraining

Must-know distinctions

• Rival vs substitute. A rival makes the same kind of product; a substitute meets the same need in a different way (a ferry operator’s rival is another ferry; its substitute is a bridge or a flight).
• Buyer vs consumer. The buyer is whoever the firm sells to, often a retailer or another business, not the end user.
• Five forces vs PESTLE vs SWOT. Five forces analyses the industry; PESTLE (3.3.4) analyses the wider external environment; SWOT (3.3.1) combines internal strengths and weaknesses with external opportunities and threats. Five forces and PESTLE feed the O and T of SWOT.
• Entry threat vs rivalry. Rivalry is about firms already in the industry; entry threat is about firms that might join.
• Industry vs firm. The forces describe the industry; their impact differs between firms in it.

Evaluation points to keep ready

• The model is a snapshot; technology and laws can shift forces fast.
• Industry boundaries are a judgement call, and so is each rating.
• Firms in one industry differ, so the same force hits them unequally.
• Influencing a force costs money and time; the benefit may arrive late.
• Use it alongside PESTLE, internal data and the firm’s objectives.

Quick self-test

1. Name the five forces in the 9725 specification.
2. Give two reasons why buyer power might be high.
3. Four firms hold 28%, 21%, 13% and 8% of a market. Calculate the four firm concentration ratio.
4. Distinguish between a rival product and a substitute, with an example.
5. State two barriers to entry listed in the AS specification.
6. A component costs £2.40 and its only supplier raises the price by 25%. A firm uses 40,000 a year. Calculate the rise in annual cost.
7. Give one way a firm could reduce supplier power, and one drawback.
8. Why might high rivalry reduce a firm’s profit even if its sales are steady?
9. How can a firm raise buyers’ switching costs?
10. State two limitations of the five forces model.

Answers

1. Rivalry, buyer power, supplier power, entry threat, substitute threat.
2. Any two: few, large buyers; buyers take a big share of output; standardised product; easy price comparison; cheap to switch; buyers could make the product themselves.
3. 28 + 21 + 13 + 8 = 70%.
4. A rival sells the same type of product (another bakery); a substitute meets the same need differently (breakfast cereal instead of bread).
5. Any two: entry costs, legal requirements, specialist knowledge, loyalty to existing businesses, access to resources or distribution.
6. New price = 2.40 × 1.25 = £3.00; rise = 0.60 × 40,000 = £24,000.
7. Example: use several suppliers; drawback: smaller orders may lose volume discounts. (Or backward integration; drawback: needs capital and new skills.)
8. Firms compete on price and spend more on promotion, so margins fall even though volume holds.
9. Examples: loyalty schemes, contracts, products that work only with the firm’s own parts or software, data and service history kept with the firm.
10. Any two: a snapshot; ratings are subjective; industry boundaries unclear; ignores differences between firms; needs PESTLE alongside.

Where marks are usually lost

• Rating a force “high” with no evidence from the case.
• Writing about the firm’s strengths instead of the industry’s structure.
• Calling a substitute a competitor (or the reverse).
• Treating the end consumer as the buyer when the case firm sells to retailers or businesses.
• Listing ways to influence a force without cost, time or risk.
• Treating a high concentration ratio as automatic proof of fierce or weak rivalry.
• Giving five equal paragraphs with no view on which force matters most.
• Recommending a response without saying what it depends on.

Next steps

• Full explanations: study guide
• Exam-style questions: practice questions
• Related A-level section: mission, objective and SWOT analysis revision notes
• AS background on barriers to entry: What is business? revision notes
• Find your gaps: free diagnostics

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Published by OxfordAQA.