In this topic 6 sections
Define the question before applying a model
Industry analysis studies the pressures on prices, costs, investment and returns. Define the offering, customers, geography and time horizon before collecting evidence. A school-uniform supplier serving local schools may face different buying patterns and distribution requirements from an international fashion retailer.
Do not merge unlike markets merely because their products look similar. Equally, do not define the market so narrowly that alternative ways of meeting the same need disappear. Analyse a period long enough to distinguish a temporary disruption from a lasting change.
Concept sources: OpenStax, Principles of Management, section 8.4 — the industry environment; ACCA, Porter's Five Forces — application to a distinct market or business unit.
Porter's five forces
The model examines more than direct competitors. Buyers, suppliers, potential entrants and substitutes can also capture value or constrain profitability.
| Force | What makes the pressure stronger? | What the accountant should measure |
|---|---|---|
| Threat of new entrants | Entry is affordable; customers can try new providers easily | Start-up investment, scale requirements and customer acquisition cost |
| Threat of substitutes | Another solution meets the need at an attractive price | Total customer cost and switching behaviour |
| Buyer bargaining power | Large buyers can switch or negotiate collectively | Revenue concentration, discounts and cost to serve |
| Supplier bargaining power | Few alternatives exist or switching is costly | Purchase concentration, input sensitivity and switching costs |
| Rivalry among existing competitors | Slow growth, similar offers and costly exit encourage aggressive competition | Prices, spare capacity, margins and retention |
Concept sources: Harvard Business School, The Five Forces — the framework and drivers of industry profitability. The measurement column is an original application.
Entry barriers can include large capital needs, economies of scale, patents, licences, customer loyalty and distribution access. A buyer's credible ability to make the input itself can strengthen bargaining power; a supplier may gain power by moving towards the final customer. A substitute meets the same underlying need differently; a rival competes within the defined industry. These distinctions help avoid counting the same observation repeatedly.
Concept sources: ACCA, Porter's Five Forces — entry barriers and integration; OpenStax, section 8.4 — rivals and substitutes.
Make the assessment evidence-based
Record the evidence, judge the force's strength, explain the financial effect and propose a response. A response might change service design, customer mix or supplier dependence rather than merely cut prices. Estimate competitors' possible responses, especially when a move threatens their main source of revenue. Separate known facts from assumptions about competitor behaviour.
- Define the market
- Gather evidence for each force
- Explain the effect on returns
- Compare feasible responses
- Set indicators and review
Concept sources: ACCA, Porter's Five Forces — measurement and performance implications. The laboratory example and workflow are original.
Scan the wider environment with PEST
PEST looks beyond the industry at political, economic, social and technological conditions. It identifies influences; the business's position determines whether each becomes an opportunity, a threat or both.
| Lens | Questions to ask | Possible information |
|---|---|---|
| Political | Could policy or trade restrictions change access or costs? | Policy proposals, tariffs and licensing conditions |
| Economic | What happens to demand, funding and inputs under different conditions? | Interest rates, exchange rates, employment and business-cycle scenarios |
| Social | How are needs, expectations and available skills changing? | Demographics, education, purchasing behaviour and stakeholder concerns |
| Technological | Could production or delivery change the cost of competing? | Equipment options, digital channels and adoption costs |
SLEPT makes legal issues explicit; PESTEL also separates environmental factors. The guide also uses STEEPLED, drawing attention to education and demographics. Acronym expansions differ between authors, so use the guide's labels for study and explain the actual factor being analysed. An education trend can already sit within the social lens; it need not be counted twice.
Concept sources: OpenStax, section 8.3: PESTEL — macro-environment categories, including education and demographics within sociocultural factors. The extended acronym wording above identifies the supplied guide's convention; it is not attributed to OpenStax.
Combine the tools into a strategic recommendation
The tools fit together: PEST explains broad change; five forces examines industry pressure; value-chain and resource analysis test the organisation's response; SWOT brings the most important findings together. Product life cycles and BCG help assess the product portfolio. Select tools for the decision rather than filling every framework mechanically.
An effective recommendation states the action, supporting evidence, expected benefit, funding needed, main risks and a review trigger. Include social and environmental consequences where relevant. Explain what would change the decision. A model organises judgement; it cannot supply missing evidence or guarantee success.
Sources and further reading
- Harvard Business School: The Five Forces — Porter's original framework explained by his institute.
- ACCA: Performance Management Models — Porter's Five Forces — use in accounting and performance analysis.
- OpenStax: Micro Environment and Macro Environment: PESTEL — scope and classification.