The social environment

Demographic change is the slowest-moving and most reliable force in business — and therefore the most forecastable. An ageing population simultaneously creates a large, wealthy market (healthcare, leisure, financial services, accessible design) and shrinks the working-age population, tightening the labour market and pushing up wages. It also raises the tax burden on those still working, denting their disposable income.

Population movement: urbanisation concentrates customers, changes retail formats (smaller convenience stores, dense last-mile delivery) and drives up property costs. Migration expands the labour supply and creates new consumer segments.

Changing lifestyle and buying behaviour: health consciousness · convenience and single-person households · environmental awareness and demand for ethical sourcing · the collapse of "9-to-5" retail · and above all the growth of online business, which has restructured entire sectors.

Your turn — sizing a demographic segment

Your turn — the shift online

Corporate Social Responsibility

CSR is the idea that a business has obligations beyond making a profit for its owners.

The two competing concepts:

• The shareholder concept (Friedman) — the business's only social responsibility is to increase its profits, within the law and the rules of the game. Spending shareholders' money on social causes is, on this view, a manager spending other people's money on a cause the owners did not choose.
• The stakeholder concept — the firm depends on employees, customers, suppliers, communities and the environment, and a business that damages them is destroying the foundations of its own long-run profit.

Carroll's CSR pyramid orders the responsibilities, bottom to top:

The honest evaluation: Carroll's foundation is economic — an unprofitable firm cannot be responsible to anyone, because it will not exist. But the business case for CSR is real and increasingly measurable: it attracts and retains employees (especially younger ones), it builds a brand that supports a price premium, it reduces regulatory and reputational risk, and it is increasingly demanded by institutional investors. The risk is greenwashing — CSR as marketing, which, once exposed, does more damage than never having claimed anything.

CSR or greenwashing?

The technological environment

Technology reaches into every function — and the examinable skill is tracing it across all four:

• Marketing — digital advertising, personalisation, dynamic pricing, e-commerce, social media, direct-to-consumer.
• Operations — automation and robotics, 3D printing, real-time inventory, predictive maintenance, mass customisation.
• Finance — analytics, automated ledgers, crowdfunding, fintech payments.
• HR — remote and hybrid working, algorithmic scheduling, e-learning — and the destruction and creation of whole categories of job.

Strategically, technology can be sustaining (it makes the existing model better) or disruptive (it makes the existing model obsolete). Disruption typically arrives looking inferior — cheaper, lower quality, serving customers the incumbent does not care about — which is exactly why incumbents dismiss it until it is too late. Streaming looked like a poor substitute for a DVD. Digital cameras looked like a toy.

Evaluation: the risk of adopting new technology is wasted capital and disrupted operations. The risk of not adopting is obsolescence. The judgement turns on how fast the technology is maturing, whether the firm's competitive advantage depends on the old way, and whether it can afford to wait and be a fast follower — often the cheaper, safer position.

Porter's five forces

Porter's argument: the average profitability of an industry is not luck — it is determined by five structural forces. Strong forces compete the profit away; weak forces let it accumulate.

• Threat of entry — high when barriers are low. Barriers: capital cost, economies of scale, brand loyalty, patents, access to distribution, regulation.
• Buyer power — high when buyers are few and large, the product is undifferentiated, switching costs are low, and buyers can integrate backwards.
• Supplier power — high when suppliers are few, their input is critical or unique, and switching is expensive.
• Threat of substitutes — a different product meeting the same need. (Video-conferencing is a substitute for business air travel — not a rival airline.)
• Competitive rivalry — intense when there are many similarly sized firms, growth is slow, fixed costs are high, exit barriers are high, and products are undifferentiated.

Match each of Porter's forces to what drives it

Tap an item on the left, then its partner on the right.

Which force is at work?

Tap a market feature, then tap the force it strengthens or determines.

Measuring rivalry: the concentration ratio

The n-firm concentration ratio adds the market shares of the largest n firms. A high CR4 means a few firms dominate — an oligopoly, where rivalry is often less price-based (firms avoid mutually destructive price wars) but buyer power against suppliers is enormous.

Your turn — concentration ratio

Your turn — CR4 after a merger

Reading the concentration ratio

Buyer power in action

How the five forces shape strategy

The model is not a description — it is a to-do list. Each force suggests a counter-move:

• Entry threat high? Build barriers: invest in the brand, patent the technology, achieve a scale rivals cannot match, lock up distribution.
• Buyer power high? Reduce dependency on any single buyer, differentiate so you are hard to substitute, raise switching costs (loyalty schemes, integrated systems), or integrate forward towards the customer.
• Supplier power high? Dual-source, integrate backward, redesign the product to use a commodity input, or build a long-term partnership that gives the supplier a stake in your success.
• Substitutes threatening? Increase differentiation and value; or — the hard, honest answer — cannibalise yourself before someone else does.
• Rivalry intense? Escape price competition through differentiation or focus (Porter's generic strategies, 3.8.2), or consolidate.

Limits of the model: it is a snapshot of an industry that may be redefined tomorrow; it assumes clear industry boundaries, which digital platforms have shredded; it under-weights complementors and collaboration (joint ventures, ecosystems); and it says nothing about the firm's own internal resources — which is why you pair it with ratio analysis, core competences and SWOT.

Disruption through Porter's lens

Thinking like an examiner

• Five forces explains industry profit, not firm profit. A brilliant firm in a brutal industry can still earn nothing. Use Porter to explain why the industry is the way it is, then use core competences to explain why this firm outperforms within it.
• Substitutes are not rivals. A substitute meets the same need a different way — and that is why incumbents miss it.
• Rank the forces. Naming all five is AO1. Saying which one is decisive for this firm, and what it should therefore do, is AO3/AO4.
• Demographics are the most forecastable force in business. A firm surprised by an ageing population had 40 years' notice.
• CSR must be structural. If it contradicts the operating model, it is a reputational risk, not an asset.

The big ideas to know

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