Competitive forces: formula sheet

Key formulas

Threat of new entrants: barriers to entry

Barriers high → threat low; barriers low → threat high

Typical barriers: economies of scale, capital requirements, brand loyalty and differentiation, switching costs, access to distribution, government policy, and expected retaliation by existing firms.

Supplier power

Supplier power is high when few suppliers dominate, inputs are unique or costly to switch from, and suppliers could integrate forward

Power is also higher when the industry is not an important customer to the supplier.

Buyer power

Buyer power is high when buyers are few or large, buy in volume, face low switching costs, and could integrate backward

Price sensitivity and full information on alternatives also raise buyer power.

Threat of substitutes

Substitute threat is high when a different product meets the same need at a comparable price and performance, with low switching cost

A substitute comes from outside the industry. A rival's similar product is not a substitute.

Competitive rivalry

Rivalry is intense when competitors are many and similar in size, growth is slow, fixed costs are high, products are undifferentiated and exit barriers are high

High exit barriers keep weak firms in the market and sustain price wars.

Industry attractiveness

The stronger the combined forces, the lower the potential industry profitability

Judge the overall picture. Do not just count forces.

Core rule

Higher barriers to entry → lower threat of new entrants → higher potential industry profitability

This is a judgement, not a calculation. Support it with evidence from the scenario.

Entry decision logic

Entry is attractive if expected returns after barriers and expected retaliation exceed the cost of capital

Use this to explain why entrants do or do not come. It is a reasoning aid, not a formula to compute.

Main barriers checklist

Economies of scale; capital requirements; switching costs; access to distribution; government policy

Add brand loyalty, experience, access to inputs and expected retaliation where the scenario gives evidence.

Buyer power: high when

Few or large buyers + standard product + low switching costs + price sensitivity + threat of backward integration + good price information

Not every factor must be present. Judge the net effect from the case facts.

Supplier power: high when

Few suppliers + unique or differentiated input + high switching costs + no substitute input + threat of forward integration + firm is a minor customer

Also consider whether the input is a large share of your total costs.

Power test

Power = relative dependence (who has more alternatives and lower cost of walking away)

A useful single question to frame any answer.

Ways to reduce buyer power

Differentiate + raise switching costs + widen the customer base + loyalty schemes + forward integration

Each should be tied to the firm's situation.

Ways to reduce supplier power

Multiple sourcing + develop alternatives + backward integration + partnership or long-term contracts + pool purchasing

Check feasibility and cost before recommending integration.

Substitute threat drivers

Threat ↑ when: relative price-performance of substitute ↑, switching costs ↓, buyer willingness to switch ↑

Substitutes meet the same need from a different industry. Apply to the need, not the product.

Rivalry drivers (higher rivalry)

Many or equal-sized rivals; slow growth; high fixed costs; low differentiation; low switching costs; high exit barriers

These are tendencies, not guarantees. Use only those the case supports.

Exit barrier examples

Specialised assets + redundancy costs + contractual commitments + emotional or political ties

High exit barriers keep surplus capacity in the industry and depress prices.

Substitute versus complement

Substitute: demand for one ↑ when the other's price ↑. Complement: demand for one ↓ when the other's price ↑

Complements are not a Porter force. Treat them in a wider analysis if the case gives them.

The five forces

Rivalry + new entrants + substitutes + buyer power + supplier power

Together they indicate industry profit potential. They do not predict one firm's results.

Sixth force (complementors)

Complementors: firms whose products raise the value of your product

Opposite in effect to substitutes, which reduce the value of your product.

Alternative sixth force (government)

Government: regulation, tax, subsidy, licensing, trade policy

Often covered by PESTEL. Name the version you use and say why it fits the scenario.

Core limitations

Static + industry-bound + competition-only + profit-oriented + qualitative

A quick memory list. Apply each point to the scenario instead of just listing it.

Industry life cycle stages

Introduction → Growth → Maturity → Decline

Some versions add a shake-out between growth and maturity. Use the stages the scenario supports.

Porter's five forces

New entrants + Supplier power + Buyer power + Substitutes + Rivalry

Assess each force at the current stage. Say whether it is rising or falling over time.

Typical rivalry pattern

Low in introduction → moderate in growth → high in maturity → high or varied in decline

This is a general tendency, not a rule. Decline rivalry depends on exit barriers and spare capacity.

Decline strategies

Leadership | Niche | Harvest | Divest

Choose by the strength of your position and how attractive the remaining demand is.

Quick revision

• Five Forces: new entrants, buyer power, supplier power, substitutes and rivalry.
• Stronger forces mean lower industry profit potential for the average firm.
• Entry barriers include economies of scale, capital needs, brand loyalty, access to distribution, regulation and switching costs.
• Buyer power is high when buyers are few, buy in volume, face low switching costs or can integrate backwards.
• Supplier power is high when suppliers are few, inputs are unique or switching is costly, or when suppliers can integrate forwards.
• Substitutes meet the same need in a different way, while rivals sell the same type of product.
• Rivalry is higher with many equal-sized competitors, slow growth, high fixed costs and high exit barriers.
• Five Forces looks at an industry, so define the industry boundaries before you start.
• Limits: the model is static, treats firms alike, ignores complementors and may not suit fast-changing or non-profit settings.
• The sixth force idea adds complementors or other outside players that raise the value of your product.
• Industry life cycle: introduction, growth, maturity and decline, and rivalry usually rises as growth slows.
• Always apply to the case, judge the strength of each force and finish with a conclusion on attractiveness or strategy.

Common mistakes

• Listing theory for each force without using the case. Fix: Open each point with a case fact. Then give the verdict and the consequence.
• Confusing substitutes with new entrants or rivals. Fix: A new entrant offers the same type of product and is a new firm in the industry. A substitute meets the same need in a different way from outside the industry. A rival is an existing firm in the industry.
• Listing barriers from memory without using the scenario. Fix: Use each barrier only if the scenario gives evidence, and quote that evidence. Skip barriers with no support.
• Confusing a high barrier with a high threat. Fix: Remember that high barriers mean a low threat. State the link explicitly in your conclusion.
• Listing Porter's factors without applying them to the case Fix: Use each factor only with a case fact next to it. If there is no fact, leave the factor out.
• Confusing buyer and supplier power Fix: Label who is who first. Buyers pay you. Suppliers sell to you. Then apply the factors.
• Treating substitutes as direct competitors. Fix: Ask whether the product is from the same industry. If it meets the same need in a different way, it is a substitute. If it is the same type of product, it is rivalry.
• Confusing complements with substitutes. Fix: Use the price test. If a higher price for A pushes buyers to B, B is a substitute. If it reduces demand for B, B is a complement.
• Listing criticisms with no link to the scenario. Fix: Tie every limitation to a named fact in the case and state what it means for the decision.
• Dismissing the model as useless. Fix: Say it is a useful starting point with specific gaps. Give a balanced judgement.

Exam tips

• Always tie each force to a fact in the case. Marks go to application, not recall.
• Rank the forces and state which matter most. Then give a clear conclusion on industry attractiveness.
• Keep the substitute versus new entrant distinction clean. A quick sentence defining each can stop you mixing them up.
• Follow the format the task asks for, such as a report or briefing note, because professional skills marks depend on it.
• Link your analysis to a recommendation or strategic implication, since SBL tasks usually ask what the organisation should do.
• Always tie each barrier to a fact in the scenario. Generic textbook lists earn little credit.
• Commit to a verdict on the threat. A balanced discussion that ends without a conclusion loses marks.
• Link the analysis to the requirement. If asked to advise, give clear recommendations for the firm.