ACCA Applied Knowledge · Business and Technology

Competitive factors: formula sheet

Full chapter guide

Key formulas

Porter's generic strategy grid: Source of advantage (lower cost or differentiation) × Scope (broad or narrow) = Cost leadership, Differentiation, Cost focus, Differentiation focus; Cost focus and differentiation focus are the two forms of focus strategy. Many BT questions simply ask you to match a scenario to one of these.
Cost leadership: Lowest cost in the industry + broad market; Typical routes: economies of scale, tight cost control, efficient processes, low-cost inputs. Competes on price or on margin.
Differentiation: Unique, valued features + broad market + price premium; Uniqueness must matter to customers. The premium must exceed the extra cost of being different.
Focus: Narrow segment + (low cost or differentiation); Serves a niche better than broad competitors can. Risk: the niche may be too small or may be entered by larger firms.
Stuck in the middle: No clear cost advantage and no clear differentiation = weak position; Porter's warning against trying to do both without the means to do so.
Force 1: Threat of new entrants: High barriers to entry → low threat; low barriers → high threat; Barriers: economies of scale, capital needs, brand loyalty, patents, access to distribution, regulation.
Force 2: Supplier power: Few suppliers + unique input + high switching cost → high supplier power; Suppliers provide inputs to the firm. Power raises the firm's costs.
Force 3: Buyer power: Few large buyers + standard product + low switching cost → high buyer power; Buyers are customers of the firm. Power pushes prices down or demands higher quality.
Force 4: Threat of substitutes: Close substitute + low switching cost + good value → high threat; A substitute meets the same need in a different way. It is not a direct rival's identical product.
Force 5: Competitive rivalry: Many equal rivals + slow growth + high fixed costs + low differentiation → high rivalry; High exit barriers keep weak firms in the market, which also intensifies rivalry.
Primary activities (5): Inbound logistics → Operations → Outbound logistics → Marketing and sales → Service; These follow the flow of the product to the customer. Remember the order.
Support activities (4): Procurement; Technology development; Human resource management; Firm infrastructure; They support all primary activities. Procurement means buying inputs, not the inbound logistics of receiving them.
Margin: Margin = Value to customer (price paid) − Total cost of value activities; Porter shows margin as the end of the chain. Improve it by cutting cost or raising value.
Value chain versus value system: Value chain = one organisation's activities; Value system = chains of suppliers, the firm, distributors and customers; Use value system when a question mentions linkages outside the firm.
Relative market share: Relative market share = your product's market share ÷ market share of the largest competitor; Above 1 means you are the market leader. High or low share is judged against this, not against total market size.
PLC stages in order: Introduction → Growth → Maturity → Decline; Some textbooks add a development stage before launch. Use the four-stage version unless the question says otherwise.
Boston Matrix categories: High share + high growth = Star; High share + low growth = Cash cow; Low share + high growth = Question mark; Low share + low growth = Dog; Share is on one axis and growth on the other. Check which is which before you classify.
Usual strategies: Question mark: build or divest; Star: invest to hold or grow; Cash cow: hold and harvest; Dog: divest or harvest; These are standard textbook responses, not guaranteed answers. Always fit them to the facts given.
Perfect competition features: Many sellers + identical products + free entry and exit + full information = price takers; Firms accept the market price. Real examples are rare, so agricultural markets are only a rough guide.
Monopoly features: One seller + high barriers to entry = price maker; A pure monopoly is one seller. Regulators often treat a large market share as a sign of monopoly power.
Oligopoly features: Few large firms + interdependence + barriers to entry; Firms watch rivals' moves. Non-price competition is common.
Monopolistic competition features: Many sellers + differentiated products + low barriers; Branding and differentiation give some pricing power.
Concentration ratio: Concentration ratio = combined market share of the largest n firms; A high ratio suggests an oligopoly or monopoly. Always state which n is used, such as the top 3 or top 5.

Quick revision

Porter's generic strategies are cost leadership, differentiation and focus.
Focus can be based on cost or differentiation within a narrow market segment.
Competitive advantage means doing something better or cheaper than rivals in a way customers value.
Five Forces: threat of new entrants, supplier power, buyer power, threat of substitutes and competitive rivalry.
High barriers to entry reduce the threat of new entrants.
Value chain primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service.
Value chain support activities are procurement, technology development, human resource management and firm infrastructure.
Margin is the difference between the value created and the cost of the activities.
Product life cycle stages are introduction, growth, maturity and decline.
Boston Matrix categories are stars, cash cows, question marks and dogs, based on market growth and relative market share.
Cash cows generate cash that can fund question marks and stars.
Market structures such as perfect competition, monopoly and oligopoly differ in number of sellers, product type and price control.

Common mistakes

Treating cost leadership as charging the lowest price. Fix: Cost leadership is about the lowest cost base. The firm then chooses its price, which may be low or close to the market rate.
Calling any niche business a differentiator. Fix: If the target is a narrow segment, the answer is focus. Then add whether it competes on cost or on differentiation.
Mixing up buyer power and supplier power. Fix: Suppliers sell to the firm and affect its costs. Buyers purchase from the firm and affect its prices. Say who is selling to whom.
Treating a rival's product as a substitute. Fix: A rival sells the same type of product in the same industry. A substitute is a different product meeting the same need, such as rail travel replacing short flights.
Treating procurement as inbound logistics. Fix: Procurement is the act of buying and negotiating with suppliers. Inbound logistics is receiving, storing and handling those inputs. Procurement is a support activity; inbound logistics is primary.
Thinking technology development means only IT. Fix: It covers all know-how used in the business, including product design, R&D and process improvement. Software systems can also sit here.
Mixing up stars and cash cows. Fix: Always check market growth next. Fast growth is a star; slow growth is a cash cow.
Saying a star is a big cash generator. Fix: Remember stars need heavy spending to keep share in a growing market. Their net cash is often near zero. Cash cows are the real cash source.
Treating monopoly and oligopoly as the same. Fix: Count the sellers. One seller is a monopoly. A few interdependent large sellers are an oligopoly.
Saying firms in oligopoly always compete on price. Fix: Remember that price wars hurt every firm, so oligopolists often use branding, quality and advertising instead.

Exam tips

In objective tests, decide on source of advantage and scope separately, then pick the option that matches both.
Do not choose an answer just because a word like premium or low appears. Check the target market too.
For number-of-answers multiple response questions, select exactly the stated number and avoid options that describe a different strategy.
In Section B, name the strategy, quote a scenario clue and add one short consequence or risk. That structure earns the marks.
Expect scenarios that link this topic to Five Forces and the value chain. Know that the value chain shows where cost or differentiation is created.
Learn the five names exactly. Questions often use them as option wording, and a small slip can make an option wrong.
Read who the clue is about before choosing: seller to the firm, buyer from the firm, newcomer, different product or existing rival.
In multiple response questions, check each statement against the definition and select exactly the number the question asks for.