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

Section 3.3.3, Analysing the industry environment, sits inside 3.3 Business analysis of 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. None of it is examined at International AS: it is International A-level only. Students still taking the older 9625 course should rely on the 9625 specification for their exams.

Shorter version: revision notes · Questions with worked answers: practice set · OxfordAQA A-level Business hub · 9725 topic checklist · Free diagnostics

What this section covers

Spec point (3.3.3)	What you must be able to do	Stage
Meaning and significance of Porter’s five forces	Name the five forces (rivalry, buyer power, supplier power, entry threat, substitute threat) and explain why they matter	International A-level only
Influences on the strengths of each force	Explain what makes each force strong or weak in a given industry	International A-level only
Impact of the five forces on a business	Analyse effects on prices, costs, profit and the functional areas	International A-level only
How a business might influence the five forces	Suggest and assess actions that weaken a force in the firm’s favour	International A-level only
How a business might respond to changes in any of the forces	Assess responses when a force becomes stronger or weaker	International A-level only

Where it is tested. All of 3.3 belongs to Unit 3: Business analysis. That paper lasts 1 hour 45 minutes, carries 80 marks and makes up 30% of the International A-level; each of its two compulsory sections is a case study worth 40 marks. The specification includes some synoptic assessment, so expect links to AS barriers to entry and the four firm concentration ratio in 3.1.1.3 (What is business? study guide). Five forces findings also feed a SWOT (mission, objective and SWOT analysis guide).

1. Meaning and significance of the five forces

An industry is a group of businesses supplying products customers see as close alternatives. Porter’s five forces is a model for analysing an industry’s competitive structure. The profit firms can earn depends on five pressures:

1. Rivalry between existing firms.
2. Buyer power: the ability of customers to push prices down or demand more for the same price.
3. Supplier power: the ability of suppliers of inputs to push their prices up or cut quality.
4. Entry threat: the likelihood that new firms join the industry.
5. Substitute threat: the likelihood that customers switch to a different product meeting the same need.

Significance. When the forces are strong, prices are held down or costs pushed up, so industry profit margins tend to be low. When they are weak, firms have more control over price. The model helps managers judge whether an industry is attractive to enter, stay in or leave, spot threats for a SWOT, and decide where action is needed.

The model analyses an industry. You then apply the result to the business in the case: strong buyer power may hurt a small firm more than a large rival with a famous brand.

2. Influences on the strength of each force

Force	Stronger when…	Weaker when…
Rivalry	many similar-sized firms; slow market growth; little product differentiation; high fixed costs or spare capacity; high exit costs; low switching costs for customers	few firms or one clear leader; fast market growth; strong brands; customers face costs to switch
Buyer power	buyers are few and large, or buy a big share of the firm’s output; products are standardised; buyers can compare prices easily; switching is cheap; buyers could make the product themselves	many small buyers; differentiated product; buyers lack price information; switching is costly
Supplier power	few suppliers; input is unique or patented; no substitute inputs; switching suppliers is costly; the industry is a minor customer for the supplier; suppliers could enter the industry themselves	many suppliers of a standard input; the industry is a major customer; inputs can be swapped easily
Entry threat	low barriers to entry: low entry costs, few legal requirements, little specialist knowledge, weak customer loyalty, easy access to resources and distribution	high barriers: large set-up costs or economies of scale, licences, specialist know-how, loyal customers, control of supplies or distribution channels
Substitute threat	close substitutes exist from other industries; they offer better value for money; switching is easy	no close substitutes; substitutes are dearer or worse; switching is costly or inconvenient

Rivals versus substitutes. A rival sells the same type of product (another cement maker); a substitute meets the same need differently (steel or timber frames instead of concrete).

Worked example 1: rating the forces in an industry

Granthorn Cement is one of the cement producers in a coastal province. The case gives this data:

• Market shares by volume: Granthorn 31%, three other producers 24%, 17% and 12%; the rest is supplied by several small importers.
• Granthorn sold 1.2 million tonnes last year. Its three largest customers, all national construction groups, bought 0.54 million tonnes.
• A new kiln costs hundreds of millions and needs an environmental permit.
• Energy is 35% of production cost and comes from a single gas supplier.
• Steel and timber frames are used in some buildings, but most foundations still need concrete.

Step 1: calculate what you can.

Four firm concentration ratio = 31 + 24 + 17 + 12 = 84%
Share of Granthorn's sales to top three buyers
  = 0.54 ÷ 1.2 × 100 = 45%

Step 2: rate each force, with the evidence.

Force	Rating	Evidence
Rivalry	Medium	84% concentration means few large rivals, but cement is a standard product, so rivals compete on price
Buyer power	High	Three buyers take 45% of Granthorn’s sales; losing one would leave a large gap in output
Supplier power	High	One gas supplier; energy is over a third of costs
Entry threat	Low	Huge set-up cost and permits; importers are the main entry route
Substitute threat	Low to medium	Steel and timber replace concrete in some uses, not in foundations

Step 3: judge. The two power forces squeeze Granthorn’s margin from both sides, although weak entry and substitute threats keep the industry fairly attractive for existing producers.

3. Impact of the five forces on a business

Strong forces work through price, cost and volume. Rivalry, buyer power and substitutes limit price; supplier power raises costs and rivalry raises marketing spend; entrants and substitutes take volume. Lower margins then mean less retained profit for investment and lower shareholder returns.

Effects reach every functional area: marketing may differentiate to escape price competition, operations may cut unit costs or find new suppliers, finance may face tighter cash flow if powerful buyers demand longer credit, and human resources may face pressure on pay.

Worked example 2: the impact of a stronger supplier

Saffron Crate sells meal kits for £9.40 a box. Variable cost is £6.10 a box, of which £0.80 is packaging. It sells 15,000 boxes a week and has fixed costs of £38,000 a week. Its packaging supplier, the only local maker of insulated boxes, raises its price by 45%.

New packaging cost   = 0.80 × 1.45 = £1.16 (rise of £0.36)
Old contribution     = 9.40 − 6.10 = £3.30 per box
New contribution     = 3.30 − 0.36 = £2.94 per box
Old weekly profit    = 15,000 × 3.30 − 38,000 = £11,500
New weekly profit    = 15,000 × 2.94 − 38,000 = £6,100
Fall in profit       = (11,500 − 6,100) ÷ 11,500 × 100 = 47.0%

Can Saffron Crate pass the cost on? Raising the price by £0.36 to £9.76 (a 3.8% rise) restores the £3.30 contribution, but customers can switch to rival kits, ready meals or takeaways. If volume falls 8% to 13,800 boxes:

Profit = 13,800 × 3.30 − 38,000 = £7,540

Better than £6,100, still well below £11,500: the supplier force cut profit, and the buyer and substitute forces limit the recovery.

4. How a business might influence the five forces

A business can act to weaken the forces it faces. Each action has a cost, so assess it, don’t just list it.

Force	Possible actions	Drawbacks to weigh
Rivalry	Differentiate through brand, design or service; take over or merge with a rival; target a niche	Branding is costly and slow; takeovers need finance and may face competition law
Buyer power	Widen the customer base; add features or services that raise switching costs; loyalty schemes; sell direct to end users	New customers take time to win; loyalty schemes cut margins
Supplier power	Use several suppliers; sign long-term contracts; find substitute inputs; buy or set up a supplier (backward integration)	Smaller orders lose volume discounts; integration needs capital and new skills
Entry threat	Build economies of scale; protect ideas with patents; tie up distribution with exclusive deals; build strong loyalty	Large capacity adds fixed costs; exclusive deals may be challenged legally
Substitute threat	Show better value than the substitute; develop the product to meet the need better; bundle related products	Development spending is risky; substitutes may keep improving

Example of influence. Granthorn could cut supplier power by adapting some kilns to a second fuel, and cut buyer power by winning smaller regional builders so its top three buyers take less of its sales. Both take time.

5. Responding to changes in the forces

Forces change: a new technology creates a substitute, suppliers merge, or a trade agreement lets importers in. A useful approach:

1. Identify which force has changed and in which direction.
2. Measure the likely effect on price, cost, volume and profit.
3. List options: defend (cut costs, lower prices, add value), adapt (move to a niche, change the product), combine (merge, form an alliance), or exit.
4. Judge using the firm’s resources, objectives and how long the change will last.

Worked example 3: responding to a stronger entry threat

A trade agreement removes import tariffs on cement, so overseas producers can sell in Granthorn’s province more cheaply. The entry threat rises.

• Cut price to match imports: keeps volume but cuts margin; works only if unit costs are low enough.
• Compete on reliability: local plants can promise next-day delivery, which importers struggle to copy.
• Long-term contracts with major buyers: locks in volume, but powerful buyers will demand lower prices in return.
• Drop basic grades: leave the cheapest segment to imports and focus on specialist mixes.

Judgement. Price cutting alone risks a price war that weakens all local producers. Reliable supply plus specialist grades is stronger because it avoids head-on price competition. The choice depends on Granthorn’s costs compared with importers and how long the tariff change lasts.

Evaluating the five forces model

Strengths: simple, structured, covers suppliers and substitutes that a quick look at rivals would miss, and links clearly to profit.

Limitations: it is a snapshot of a changing industry; boundaries are hard to draw (is a meal-kit firm in food retail or delivery?); the forces are judged, not measured; firms within one industry differ in size, brand and cost; and it should be used with PESTLE analysis (3.3.4), because laws, the economy and technology shift the forces.

Common errors

• Treating the model as an analysis of one firm’s strengths. It analyses the industry; you then apply it to the firm.
• Confusing substitutes with rival products of the same type.
• Saying “buyer power is high” with no evidence from the case, such as buyer concentration or switching costs.
• Listing ways to influence a force without the cost, time or risk of each.
• Ending an evaluation without a judgement on which force matters most for this business.

Next steps

Recall it with the revision notes, test it with the practice questions, and see OxfordAQA A-level Business exam preparation for technique.

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.