AQA A Level Business

3.7.7 Analysing the external

environment to assess opportunities
and threats: the competitive
environment
Lesson objectives
• Porter’s five forces, how and why these might change, and the
implications of these forces for strategic and functional decision
making and profits
• An understanding of the five forces to include:
• entry threat (barriers to entry)
• buyer power
• supplier power
• rivalry
• substitute threat
• Students should consider how the five forces shape competitive
strategy.
Equipment needed for this lesson
• Worksheet 377
Starter – select 5
• From the list select 5 forces that may feel • Family
pressure from in your day-to-day life (you
don’t have to say what they are). • Finances
• Learning to drive • Application for university (UCAS)
• Athletics • Application for apprenticeships
• Drama or music productions • Application for jobs
• Image • Mental health and well being
• Acceptance • Exams and tests
• Poor sleep • Homework
• Not enough time to relax • Changes to routine
• Lack of support
• Fear of failure
Do businesses face the same kinds of pressures? • Anything else personal to you (you can just list
it as other)
An understanding of the five forces
Michael Porter
• Michael Porter is an American
academic who is known for his
theories on economic and
business strategies
• He is currently a professor at
Harvard Business School
• The 5 forces analysis is a method
for analysing competitiveness of
a business
• It helps a business to determine
the attractiveness of an industry
Porter’s 5 forces analysis
•Functional decisions relate to the; human resources,
marketing, finance and operational functions in a business
•For operations it may help in decisions about which suppliers
to use
•For marketing it will need to look closely at customer opinion
•For finance it may consider the impact on profit of new
entrants to the market
•For HRM they may consider training staff to neutralise the
impact of fierce competitive rivalry
Porter’s 5 Forces
Porter’s 5 Forces

Threat of new Bargaining power

entrants of suppliers

Rivalry among
existing
businesses

Threat of Bargaining power

substitutes of customers
Strategies to use to reduce the bargaining
power of suppliers and customers
• Bargaining power of suppliers;
• Limit power of suppliers by
looking for new suppliers
• Backward vertical integration and
merge or takeover the supplier
• Bargaining power of customers;
• Make it too expensive for a
customer to switch
• Forward vertically integrate
Strategies to use to reduce the threat of new
entrants and substitutes
• Threat of new entrants;
• Create barriers to entry to prevent
new entrants
• Heavily advertise to build strong
brands
• Threat of substitutes;
• Continuously invest in R&D and
develop patents
• Buy up patents of rivals and shelve
to prevent product production
Strategies to use to reduce the rivalry
amongst existing firms in the industry
In a very competitive market place there may
be a great deal of rivalry, example might be UK
supermarkets, retail clothing companies.
The intensity of this rivalry will have an impact
on the business that is trying to trade, it may
mean:
• Larger businesses trying to buy up rivals
through horizontal integration
• Businesses continuously introducing new
products to the market
• Businesses in the market having to heavily
advertise to maintain market share
Porter’s five forces, how and why these might
change, and the implications of these forces for
strategic and functional decision making and
profits
How the 5 forces might change
If an industry yields high returns and profits it will attract new entrants to the
markets. Fads, trends and fashions will also see more new entrants e.g. fidget spinners
Rivalry among
existing businesses
This may change due to more suppliers entering the market or PESTLE forces for
example weather can have an impact on food production
Bargaining power of The buyer power of customers depends on many factors but may change if new
buyers entrants are in the market, if there is a price war, if the business has more innovative
products or if they heavily advertise and promote
Threat of substitutes

Can you complete the rest of the table? Answers on next slide
How the 5 forces might change
Threat of new If an industry yields high returns and profits it will attract new entrants to the market.
entrants Fads, trends and fashions will also see more new entrants e.g. fidget spinners
Rivalry among CMA may step in to prevent mergers (Sainsbury’s and ASDA) to stop monopolies
existing businesses forming, gradually larger businesses will grow and expand through merger and
acquisitions of smaller businesses
Bargaining power of This may change due to more suppliers entering the market or PESTLE forces for
suppliers example weather can have an impact on food production
Bargaining power of The buyer power of customers depends on many factors but may change if new
buyers entrants are in the market, if there is a price war, if the business has more innovative
products or if they heavily advertise and promote
Threat of substitutes If competitors in industry start to lower or raise the prices then customers may be
more tempted to switch to a substitute e.g. if trains become expensive passengers
may consider driving or using an airline
Impact of 5 forces on strategic decisions
• The Porter’s 5 Forces analysis
tool helps a business to
understand the opportunities
and threats in their industry and
to also understand the
competitive position of the
company
• Knowing who the competition
are and how that impacts the
business is the key to effective
strategic decision making e.g.
reactive not proactive decisions
Impact of 5 forces on
functional decisions
• Functional decisions relate to the;
human resources, marketing, finance
and operational functions in a
business
• For operations it may help in decisions
about which suppliers to use
• For marketing it will need to look
closely at customer opinion
• For finance it may consider the impact
on profit of new entrants to the
market
• For HRM they may consider training
staff to neutralise the impact of fierce
competitive rivalry
Companies competing on customer service avoid a
price war in a very competitive industry
Impact of 5 forces on profit
Increase in power Decrease in power
Threat of new entrants
Rivalry among existing
businesses
Bargaining power of Reduction in profit as buyers put on Increase in profit as costs are reduced
suppliers pressure for higher prices for raw
materials and inputs
Bargaining power of Reduction in sales revenue and therefore Increase in demand, therefore
buyers profit increase in sales, increase in
economies of scale and sales revenue
Threat of substitutes Reduction in sales revenue and therefore
profit as customers switch easily to
alternatives

Can you complete the rest of the table? Answers on next slide
Impact of 5 forces on profit
Increase in power Decrease in power
Threat of new More entrants means a possible Less entrants into the market mean higher
entrants reduction in market share and negative market shares and higher potential profits
impact on profit due to ability to charge higher prices
Rivalry among Intense competition may mean price Less competition means prices can remain
existing businesses wars which means lower profit margins stable and an increase in profit margins
Bargaining power of Reduction in profit as buyers put on Increase in profit as costs are reduced
suppliers pressure for higher prices for raw
materials and inputs
Bargaining power of Reduction in sales revenue and therefore Increase in demand, therefore increase in
buyers profit sales, increase in economies of scale and
sales revenue
Threat of substitutes Reduction in sales revenue and therefore If it is harder for customers to switch
profit as customers switch easily to products or services to a competitor then
alternatives higher prices can be charged and the
business can enjoy higher profit margins
How the ‘five forces’ theory shapes
competitive strategy
How the ‘five forces’ theory shapes
competitive strategy
• The analysis tool can help a
business to decide what industries
to enter or to stay in or withdraw
from
• Porter defines a link between
competitive rivalry in an industry
and profit potential
• If the business makes good
strategic decisions based on its
analysis it can improve its overall
profitability and strengthen their
position in the industry
Plenary quiz
• What is the purpose of the 5 forces analysis tool?
a

d
 Sample questions
These are taken from a mixture of past papers (current spec),
past papers (legacy spec) and SAM materials.
Sample question 1

Level 1 Level 2 Level 3

1-3 4-6 7-9
Answer question 1
How to level question 1
Level Guidance Marks

Level 3 A good response overall that focuses on many of the demands of the question 7-9

Level 2 A reasonable response overall that focuses on some of the demands of the 4-6
question

Level 1 A limited response overall with little focus on the demands of the question 1-3
Sample question 2
Answer question 2
• Answer is A
Case study
for
question 3
Sample question 3

Level 1 Level 2 Level 3 Level 4

1-4 5-8 9-12 13-16
Answer
question 3
Revision video
• Porter’s 5 Forces; Competitive rivalry, supplier power, buyer power, threat
of substitution, threat of new entry.
• Barrier to entry; This is a high start-up cost or other obstacle which will
prevent new entrants from starting in a market. For example, it would be
very hard to enter the mobile phone market, but easy to enter the candle
making market
• Substitute; An alternative, for example, a substitute for the train is a bus or
a taxi
• Competitive environment; The system in which a business competes e.g.
the soft drinks industry is dominated by two major companies
• Consolidation; When a number of businesses in a market merge so there
are fewer but larger companies