What Is the Six Forces Model?

The six forces model is a strategic business tool that helps businesses evaluate the competitiveness and attractiveness of a market. It provides a view or outlook by analyzing six key areas of business activity and competitive forces that shape any industry. The purpose of the model is to i🐷dentify♔ the structure of the industry—including strengths and weaknesses—to help formulate a corporate strategy.

How the Six Forces Model Works

The 澳洲幸运5官方开奖结果体彩网:five forces model was originally developed by Michael E. Porter of 澳洲幸运5官方开奖结果体彩网:Harvard Business School. It was used as a framework to analyze a company's competitive environment. As a means of analysis, there were certain limitations in that original model. Among those limitations was that the model was more applicable to simple and static markets rather than the complex and dynamic markets that exist today.

Furthermore, the five forces model did not account for factors and influences from outside of the market or industry itself. The pace of change in business has increased and new business models continue to emerge that do not follow the same patterns as incumbent, older businesses. Complementary products was added as a component to the model and the updated version includes six forces.

Power of Buyers/Users

The power of buyers is one of the forces that affect the competitiveness of an industry, and there are several factors that impact the power of buyers or customers. First, industry competition depends on the number of buyers in the market. Markets with few customers may face strong price, preference changes, or sensitive 澳洲幸运5官方开奖结果体彩网:customer theory implications as each individual buyer has more power compared to more saturꦿated markets.

The competitive nature of a market also depends on the size of the users. Large buyers have more power than smaller buyers as they represent a larger🍎 share of the market, have the ability to make large purchases, and have greater resources to sway change in their favorꦡ.

Buyers may also have more or less power based on the product being offered. For instance,꧙ as discussed below, buyers may have more bargaining power if there are suitable substitutes they can buy instead. On the other hand, if products are more important, customers may not have any negotiation power (i.e. med♛ication).

Power of Suppliers

The power of suppliers refers to the bargaining power that suppliers hold over an industry or market. Suppliไers can have a significant impact on an industry or market when they are the only source of a critical input. For example, if a supplier can manufacture a highly technical or specialized part of a larger manufactured unit, that supplier may hold more power in the process and development of the good.

Suppliers can also have significant control over the price and quality of that input should they leverage their position to their benefit. 澳洲幸运5官方开奖结果体彩网:Manufacturers may not be able to dictate their own prices or profit margins, as their supplier may impose upon them the prices that need to be paid for raw materials. On the other hand, industries with lower power☂ for suppliers may allow for greater profit profitability.

Risk New Entrants

The risk of new entrants refers to the threat that new competitors will enter an industry and disrupt the existing competitive landscape. When the barriers to entry for an industry are low, new competitors can easily enter the market, compete with existing firms, and steal market share. This can lead to 🃏lower prices for consumers꧅ and reduced profitability for firms as they compete for business.

On the other hand, when the barriers to entry are high, it is more difficult for new competitors to enter the market. This can help protect not only the profits but the existing client relationships a company has formed. Compa🐲nies who are able to enter the industry and maintain a presence are more likely to be rewarded in the long-term as not as many companies may be able to do the same.

There are several factors that can impact the risk of new entrants in an industry. Most often, there may be a financial hurdle that prevent a new market participant from easily being able to start a new company (i.e. consider the capital needed to start an oil drilling company). Other industries may already have competitor with very strong brand recognition (i.e. consider starting a n🍸ew company to compete with Coca-Cola). Last, some industries are heavily regulated and may make it legislatively difficult to join or exist (i.e. consider trying toဣ start your own bank).

Risk Substitutes

The risk of 澳洲幸运5官方开奖结果体彩网:substitutes refers to the threat of alternative products or services that can satisfy the same customer needs. Whereas companies may not be able to enꦯter the💃 exact same industry or offer the same exact product, competitors may be able to offer a similar good that steals market share from a different product.

When the risk of substitutes is high, customers have more options to choose from, which can lead to decreased demand for the products or services offered by firms within an industry. This can result in reduced profitability and market share for firms within the industry. Consider two competing farmers, one which grows apples and the other that grows oranges. Should the apple farmer price his goods too high, consumers may consider buying🐻 oranges instead because they are a similar type good.

There are several factors that can impact the risk of substitutes in an industry. One of the primary factors is the availability and price of substitute products. If a customer simply can't access or afford one type of good, they may seek out a comparable. In addition, customers may or may not be loyal to a specific brand. Imagine how many different types of cell phones there are; for many Apple users, there is no suitable substitute.

Rivalry/Competition

The force of rivalry refers to the intensity of competition among existing players in the industry. Depending on how intense the competition is, 🧸certain industries may experience mor🔯e narrow profitability or long-term potential sustainability.

Rivalry and competition are all defined by the factors discussed above; this force is also defined by the risk of complementary products below. In general, companies face risk based on other market participants. Whether its companies with stronger strengths, better relationships, more recognizable brand awareness, or superior products, the nature of other companies impact a company's ability to compete effectively and succeed in an industry.

Risk of Complimentary Products

Complimentary products are those that are used in conjunction with a particul𝓡ar product or service. Companies strategically devise complimentary products such as accessories, add-ons, or services that enhance the experience of a different product. A classic example of complimentary products is the interoperability and communication between Apple products such as an iPhone, iPad, and MacBook.

The risk of complementary products arises when a competitor has a comparable good but has a stronger set of complementary goods. These complementary goods, especially when they enhance the quality and usability of the primary product, may make the primary product more desirable. There are also 澳洲幸运5官方开奖结果体彩网:pricing elasticity con♏siderations when comparing𝔍 how one good may be compared to another.

In another example, consider all of the potential accessories related to a smartphone such as earbuds, chargers, or cases. Should a company decide to embrace these complementary goods, the company may be able to increase profitability and market share by having more related products in a given industry. If competitors were to choose to not embrace these complementary goods, these companies may be at a disadvantage by only hav♌ing one primary product to sell.

Six Forces Model vs. Five Forces Model

There are a few reasons why a company would want to choose the six forces model over the traditional five forces model. It may be more strategic to consider the added force of complementary 🅰goods if the industry in question is highly volatile or changes rapidly. This sixth force allows companies to consider multiple revenue streams where the company can still collect profit 🍸in one line as others evolve.

As technology advances, it may continue to become easier and more natural for complementary products to exist. When cell phones were invented, smartwatches did not exist. Today, it's incredibly prevalent to sync a cell phone with a watch. As new products evolve and capabilities expand, the Porter's Five Force model may fail to consider how technological advancements may influence the ways companies can pair products.

Last, the six forces model holds the advantage of simply consider more relevant variables. Companies must consider all risks and elements of competition when evaluating strategy, and adding one additional force may make all the difference when evaluating long-term product implications. In some cases, additional models specifically add even more forces such as risks of government regulations or risks specific to techn💟ology.

Advant⛄ages and Disadvantages of the Six Forces Model

Pros of the Six Forces Model

The advantages of the six forces model are very similar to that of Porter's Five Force model. The key takeaway is that the six force model helps to identify potential areas of competition. The model is structured in a way where a company can analyze the competitive environment of an industry ranging from the buyers, suppliers, and other market forces. This level of analysis can help companies identify areas of potential competition and opportunities for differentiation.

The six force model can also help companies think more strategically about their industry, competitors, and customers. Though the company must be armed with relevant and appropriate data, the conclusions drawn from the six forces model may lead to better decision-making and a more focused approach to business. It may also lead to a more refined, appropriate delegation of where to deploy capital.

Last, the primary goal of the model is to provide a framework for analyzing the key factors that influence the competitiveness of an industry. This structure enhanc𝄹es the governance of a company and sets some rules on how the company should be considering running its business. Without this framework, it is much more difficult to contꦚemplate the external factors that may be more challenging to monitor.

Cons of the Six Forces Model

Also like the Porter's Five Forces model, there are some drawbacks to the six forces model. The six forces model focuses primarily on the external environment and does not account for internal factors such as a company's own strengths and weaknesses. A company may have excellent positioning in the market but may lack oversight into severe weaknesses such as not have the appropriate level or talent of staff needed to succeed.

The six forces model can oversimplify complex situations, as is the case with many other risk frameworks. The model assumes that the competitive environment is relatively stable and that the industry structure is easily defined, which is usually never the case. In addition, the model requires constant refinement in industries that are continually evolving, making this framework at risk 𓆏to be outdated as the industry changes and new risks arise. The six forces model may also not take into account industry-specific factors that can affect competitiveness.

Last, the six forces model relies on management input and assumptions. In some cases, management may simply not know risks exist. In other cases, poor management may simple fail to recognize risks or choose not to address them. The six forces model is only as strong as the op꧃inions contributed to the framework, so it is up to management on how valuable the six forces model can be.

Example of the Six Forces Model

In June 2011, 澳洲幸运5官方开奖结果体彩网:Apple Inc. introduced a breakthrough technology of cloud services called iCloud. Used extensively today, the service allowed applications on one's iPhone, iPad, iPod to🎃uch, Mac, or PC to automatically and wireless store content to be pushed across all devices. In this situation, owning one product across this product line lends itself to potentially buying complementary goods. For example, if you already own a MacBook and need a new phone, there may be substantial benefits to buying across the Apple line.

This strategic approach to building out a product line is now being emulated across the technology industry. As of April 2023, consider how Google's Pixel line now contain or will contain cell phones, premium earbuds, smartwatches, and tablets. Regarding the six forces model, companies must consider how once a customer has committed to one of these product lines, it may become very difficult to sway them to invest in a new product line.

The Bottom Line

The six forces model is an extension of Porter's Five Forces model which identifies various external forces that influence how an industry operates. The model adds one more force to consider the risk of complementary goods. The six forces model can be helpful to assess risks and enhance long-term strategic planning, though it does have the downside of needing constant refinement to be relevant and not being a more dynamic tool.