Learning Outcomes
After reading this article, you will be able to explain the main phases of the industry life cycle and how they affect competition and business strategy. You will apply Porter’s five forces model to assess industry attractiveness and identify entry barriers, buyer and supplier influence, substitutes, and market rivalry. You will also understand how firms create sustainable competitive advantage and apply external industry analysis for exam questions.
ACCA Business and Technology (BT) Syllabus
For ACCA Business and Technology (BT), you need to understand how the external environment shapes a business's competitiveness, opportunities, and risks. For revision, focus on:
- The key stages in the industry life cycle and their typical features
- Application of Porter’s five forces model to analyse competitive position
- How barriers to entry, buyer and supplier power, substitutes, and rivalry affect profitability
- The strategic importance of achieving and sustaining competitive advantage
- The use of SWOT and value chain analysis as tools for evaluating business position
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- In which stage of the industry life cycle does price competition typically reach its peak?
- List two common barriers to entry that can protect established firms in a market.
- A supplier is one of only three major sources of a critical raw material. Which force in Porter’s model is likely to be strongest for buyers in this industry?
- True or false? Industries with many effective substitutes generally have above-average profit potential for existing firms.
Introduction
External analysis is essential for assessing a business's competitive position and strategic options. Industry life cycle models explain typical patterns of development, competition, and decline in markets. Porter’s five forces framework is a key tool for identifying the forces that influence an industry’s profitability and long-term survival. Understanding these models helps you evaluate the threat of new entrants, the power of buyers and suppliers, rivalry between firms, and the risk posed by substitutes.
Key Term: industry life cycle
The sequence of stages—introduction, growth, maturity, and decline—through which an industry typically progresses as products and markets develop.
Stages of the Industry Life Cycle
Industries do not remain static; over time, they tend to follow a predictable pattern with distinct stages. The characteristics at each stage shape the intensity of competition and strategic priorities for businesses.
Introduction Stage
- New industry with few competitors and low sales
- High costs for research, development, and promotion
- Customers are early adopters; awareness is limited
- Profitability is low; losses are common
Growth Stage
- Rapidly increasing demand and rising sales volumes
- Entry of new competitors attracted by growth
- Cost efficiencies emerge as production scales up
- Firms focus on expanding market share
- Profit margins improve, but rivalry slowly intensifies
Maturity Stage
- Market growth slows or levels off as saturation approaches
- Many competitors; often similar products and services
- Increased price competition and marketing battles
- Efforts shift to cost management and incremental improvements
- Some businesses leave the market or consolidate
Decline Stage
- Overall industry sales fall due to new technologies or changing consumer preferences
- Remaining firms compete for a shrinking market
- Businesses may exit, reduce investment, or target niche segments
- Price wars are frequent; surviving firms focus on efficiency or differentiation
Key Term: competitive position
A firm's relative strength compared with others in its industry, usually reflected in market share, profitability, and strategic capabilities.
Industry Life Cycle and Strategic Decisions
The life cycle stage affects the competitive behaviours, risks, and best strategies available to businesses:
- In the introduction and growth stages, priority is given to innovation, first-mover advantage, and building customer awareness
- In maturity, operational efficiency and brand loyalty become essential as margins shrink
- In decline, companies should evaluate whether to exit, retrench, or serve specific market niches
Worked Example 1.1
A company produces landline telephones. Over the past several years, sales have consistently dropped as more people rely solely on mobile devices. Some competing businesses have closed, while others offer only the lowest possible prices.
Question: Which life cycle stage is shown, and what actions should management consider?
Answer:
This is the decline stage. The business may consider exiting the industry, investing in a new product, or repositioning itself in a profitable niche.
Porter’s Five Forces Model: Analysing Industry Competitiveness
Industries differ in their attractiveness for new and existing businesses. Michael Porter's five forces model is widely used to assess the nature and strength of competitive pressures, helping managers understand whether a market offers good profit prospects.
Key Term: Porter’s five forces
A model describing five sources of competitive pressure that determine industry attractiveness and long-term profitability.
The Five Competitive Forces
Threat of New Entrants
- Examines how easily new firms can enter the industry
- Strong barriers to entry protect incumbents and limit competition
Key Term: barriers to entry
Structural or strategic factors that make it difficult or costly for potential new firms to enter an industry.
Bargaining Power of Buyers
- Buyers have more power if they purchase in large volumes, see little difference between suppliers, or can easily switch
- High buyer power pressures prices down and increases demands for quality or service
Bargaining Power of Suppliers
- Suppliers are powerful when few alternatives exist, their products are unique, or switching suppliers is difficult or costly
- High supplier power means higher input costs and lower profit margins
Threat of Substitute Products
- Substitutes limit industry profitability by offering alternative ways for customers to meet the same need
- The risk is highest when substitutes are affordable, accessible, and perform similarly
Rivalry Among Existing Firms
- Competition is most intense when many firms compete, products are similar, or growth slows
- Intense rivalry can trigger price wars, costly advertising, and shrinking profits
Key Term: competitive advantage
A business's ability to outperform its rivals by providing lower costs, unique products, or better service that is hard for others to imitate.
Worked Example 1.2
Renix PC Manufacturing faces a saturated market with dozens of competitors. Retailers drive hard bargains, while component suppliers are plentiful. However, tablets and smartphones have sharply reduced demand for traditional PCs.
Question: Which force is most problematic here, and what implications does it have for Renix?
Answer:
The main issues are high rivalry and threat from substitute products (tablets and smartphones). Renix should consider diversifying or focusing on specialised customer needs.
Barriers to Entry and Industry Attractiveness
Barriers to entry represent obstacles that discourage or prevent new firms from entering an industry. They play a large role in sustaining profits for established companies.
Common barriers include:
- High capital requirements or start-up costs
- Strong brand identities based on reputation or advertising
- Exclusive access to distribution channels or suppliers
- Legal protections such as patents or licences
- Economies of scale that make it hard for new entrants to compete on cost
Industries with high entry barriers face less threat from newcomers and tend to be more profitable.
Worked Example 1.3
A new food products company wants to supply large supermarket chains. The existing suppliers have national advertising campaigns, established brands, and long-term shelf space agreements.
Question: What barriers to entry does the new business face?
Answer:
Strong brand loyalty, large marketing budgets, and limited access to key retail channels. The new company could focus on product innovation, online sales, or forming strategic alliances.
Achieving and Sustaining Competitive Advantage
Industry structure shapes profits, but firms compete by building and defending competitive advantages. These advantages are typically achieved by:
- Cost leadership: providing goods or services at a lower cost than rivals
- Differentiation: offering features, quality, or customer service that is unique and valued by buyers
- Focus: specialising in serving a specific segment or niche market very well
Key Term: SWOT analysis
A technique that reviews an organisation’s internal strengths and weaknesses alongside external opportunities and threats.Key Term: value chain
The series of activities through which a business adds value to its products or services, from raw materials to delivery.
Businesses use SWOT analysis and value chain analysis to identify how their strengths can take advantage of industry opportunities or manage threats, and where process improvements can increase efficiency or differentiation.
Exam Warning
Competitive pressures vary across industries and over time. In exam scenarios, tailor your Porter’s five forces and industry life cycle analysis to the specific context provided, rather than applying generic statements.
Summary
Understanding the industry life cycle and the five forces helps businesses predict competition, profit potential, and strategic risks. Attractive industries typically have high entry barriers, weak buyer and supplier power, limited substitutes, and low rivalry. Choosing the right competitive strategy is informed by analysing industry pressures and a company’s internal capabilities with tools like SWOT and value chain analysis.
Key Point Checklist
This article has covered the following key knowledge points:
- Describe the introduction, growth, maturity, and decline stages of the industry life cycle
- Explain each of Porter’s five forces and their effect on industry profitability
- Identify and give examples of barriers to entry
- Discuss how buyer, supplier, and substitute power shape competitive position
- Outline strategies for achieving sustainable competitive advantage
- Apply SWOT and value chain analysis in business planning
Key Terms and Concepts
- industry life cycle
- competitive position
- Porter’s five forces
- barriers to entry
- competitive advantage
- SWOT analysis
- value chain