Lesson 5 of 8 · All lessons in this module
- The model's structure and the revenue forecast
- Operating costs, non-operating items and the pro forma income statement
- Forecasting the cash flow statement and balance sheetVideo lesson
- Behavioural biases in analyst forecasts
- Competitive factors: Porter's five forces, prices and costs
- Forecasting sales and costs under inflation and deflation
- Integrated cases: volume shocks, fixed and variable costs and assumption sets
- The forecast horizon and long-term projections
Lesson 5 of 8 · 13 min
Competitive factors: Porter's five forces, prices and costs
The strength of the five competitive forces decides how much pricing power a company has over buyers and how much cost pressure it faces from suppliers, which feeds directly into forecast growth, margins and ROIC.
In short
- Porter's five forces: threat of substitutes, rivalry, bargaining power of suppliers, bargaining power of buyers, threat of new entrants.
- Weak forces (low rivalry, few substitutes, weak buyers and suppliers, high entry barriers) let a company raise prices and negotiate lower input costs: forecast higher, more stable margins.
- Strong forces (e.g. fragmented market with powerful retail buyers and falling volumes) mean price competition: forecast cautious growth and lower margins.
- ROIC = net operating profit less adjusted taxes ÷ (operating assets − operating liabilities). High, persistent ROIC is often linked to competitive advantage.
- Government is not a sixth force: analyse how specific policies change the five forces. The link from forces to forecasts is judgmental, not mechanical.
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