What is the Six Forces Model?
The six forces model serves as a strategic business tool enabling businesses to assess market competitiveness and attractiveness. This model offers insight by analysing six key areas of business activity and the competitive forces influencing an industry. Its primary aim is to discern the industry’s framework, identifying both strengths and weaknesses, to facilitate the development of an effective corporate strategy.
How the Six Forces Model Works
The original Five Forces model, developed by Michael E. Porter from Harvard Business School, served as a fundamental framework for analysing a company’s competitiveness. However, the model had its limitations, particularly when it’s applied to dynamic modern markets compared to simpler, more static ones.
One notable drawback was its narrow focus solely within the market or industry, neglecting external factors and influences. With the evolution of business and the emergence of unconventional models that diverge from traditional business patterns, the model’s relevance became limited. As a response to these shifts, an enhancement was made by integrating complementary products as a component, thus expanding the model to encompass six forces.
Power of Buyers
The influence wielded by buyers significantly impacts the competitiveness within an industry, and there are various factors contributing to their power.
The industry competition correlates with the number of buyers present in the market. Markets with a limited customer base may experience pronounced effects from individual buyers, such as significant price fluctuations, shifts in preferences, or the implications of sensitive customer theory, as each buyer holds more substantial leverage compared to saturated markets.
The competitive landscape is also influenced by the scale of the users. Larger buyers possess more influence than smaller ones, given their representation of a considerable market share, ability to make large purchases, and greater resources to affect changes in their favour.
The power of buyers is also contingent on the nature of the product offered. For example, buyers tend to wield more bargaining power when suitable substitutes exist. However, in cases where products hold more importance, customers might lack negotiation power, limiting their ability to influence.
Power of Suppliers
The power of suppliers denotes the influence wielded by suppliers over an industry or market. This influence becomes pronounced when suppliers control inputs crucial to an industry’s operations. For instance, if a supplier specialises in producing a component necessary for a larger manufactured product, their significance in the production and development chain is increased.
Moreover, suppliers can exert more control over both the pricing and quality of these inputs by leveraging their position to their advantage. This leverage may restrict manufacturers from setting their own prices or profit margins, as suppliers may dictate the prices of raw materials. However, industries with lower power of suppliers might experience better profitability due to more favourable terms and conditions.
Risk of Substitutes
The risk of substitutes refers to the potential threat posed by alternative products or services that fulfil similar customer needs. While competitors might not operate in the exact industry or offer identical products, they can present goods or services similar enough to draw market share away from a particular product or industry.
When the risk of substitutes is high, customers have greater choices, potentially leading to decreased demand for products or services offered by companies within an industry. This can diminish the profitability and market share of those firms. For instance, consider two rival farmers, one specialising in apples and the other in oranges. If the apple farmer sets prices too high, consumers might opt for oranges due to their similarity.
There are factors that influence the risk of substitutes in an industry, with the availability and pricing of substitute products being one of the factors. If customers cannot access or afford a certain product, they might seek out alternatives.
Moreover, customer brand loyalty plays a significant role. For example, in the realm of mobile phones, although various options exist, many Apple users may not find a suitable substitute due to their allegiance to the brand.
Risk of New Entrants
The risk of new entrants encompasses the potential threat posed by fresh competitors entering an industry and disrupting its established competitive dynamics. When entry barriers are low, new players can readily enter the market, compete with existing firms, and steal market share. This often leads to lower prices for consumers and diminished profitability for firms as they engage in competition for market presence.
Although, when barriers to entry are high, it becomes more challenging for new competitors to establish themselves. This aids in protecting not just profits but also existing client relationships forged by established companies. Entities capable of entering the industry and sustaining their foothold are likely to reap long-term rewards due to the limited entry opportunities available to others.
Several factors influence the risk of new entrants in an industry. Financial hurdles often act as a primary obstacle, preventing new entrants from effortlessly establishing a new company.
Some industries may already have strong brand recognition, making it daunting for newcomers to compete — imagine launching a new beverage company to rival Coca-Cola. Moreover, certain industries face strict regulations that pose legislative challenges to entry or existence.
Rivalry within an industry signifies the level of competition among its players, which influences profitability and long-term sustainability. Competition also hinges on the presence of complementary products.
Companies are consistently exposed to risks stemming from their counterparts in the market. Factors such as stronger capabilities, superior relationships, strong brand recognition, or superior product offerings of other companies can profoundly affect a company’s ability to compete effectively and thrive within an industry.
Complementary products refer to items that are compatible with a specific product or service. Companies strategically create complementary products like accessories, add-ons, or services to enhance the overall experience of a core product. An example of complementary products is seen in the seamless interoperability and communication among various Apple devices such as the iPhone, iPad, and MacBook.
The risk associated with complementary products emerges when a competitor offers a similar core product but with a stronger array of complementary goods. These additional products, particularly when they elevate the quality and usability of the main product, can make it more appealing. Pricing elasticity considerations also come into play when comparing one product over another.
For instance, think of all the potential accessories tied to a smartphone — earbuds, chargers, cases, and more. Offering these complementary products can help a company’s profitability and expand its market share within an industry. However, companies that opt not to embrace these complementary products might find themselves at a disadvantage, relying solely on a single primary product for sale compared to their competitors.
Six Forces vs. Five Forces
There are several reasons for a company to opt for the six forces model instead of the traditional five forces model. The inclusion of the sixth force, complementary products, enables companies to diversify revenue streams while maintaining profitability in one area as others evolve.
Technology further reinforces the relevance of considering complementary products. For instance, when mobile phones were first introduced, smartwatches were nonexistent. Today, the synchronisation between a mobile phone and a watch is prevalent. The conventional Porter’s Five Forces model might overlook how technological advancements create opportunities for product pairings.
Moreover, the six forces model offers the advantage of more relevant variables. In evaluating strategies, companies must weigh all competitive elements and risks. Integrating an additional force can significantly impact the evaluation of long-term product implications. In certain cases, additional models may specifically incorporate more forces, such as risks associated with government regulations or technology-specific risks.
Advantages of the Six Forces Model
The advantages of the six forces model closely align with those of Porter’s Five Forces model. One key takeaway is that the six-force model effectively identifies potential areas of competition within an industry. Structured to enable comprehensive analysis, it allows companies to assess the competitive landscape across buyers, suppliers, and other market dynamics. Such in-depth analysis assists in pinpointing competitive arenas and opportunities for differentiation.
Moreover, the six-force model fosters strategic thinking among companies regarding their industry, competitors, and customer base. However, leveraging this model necessitates the acquisition of relevant and precise data. Yet, the insights from this framework can significantly enhance decision-making, guiding a more targeted business approach. It also aids in refining the allocation of capital to optimal areas.
Ultimately, the primary aim of this model is to provide a framework for analysing the factors influencing an industry’s competitiveness. This structured approach fortifies a company’s governance and establishes guidelines for its operational strategies. The absence of such a framework makes it considerably more challenging to assess external factors that might pose monitoring challenges.
Disadvantages of the Six Forces Model
Similar to Porter’s Five Forces model, the six forces model also possesses certain limitations. It primarily focuses on the external environment and overlooks internal factors, such as a company’s strengths and weaknesses. However, a company might hold a strong market position while remaining unaware of critical weaknesses, like an ineffective talent or workforce.
This model tends to oversimplify intricate scenarios, a common trait among various risk frameworks. It assumes a stable competitive environment and easily defined industry structures, which seldom align with reality.
Furthermore, the model requires continual refinement in constantly evolving industries, making it susceptible to becoming outdated as change and new risks emerge. It often fails to consider industry-specific factors that significantly impact competitiveness.
Moreover, the six forces model heavily relies on management input and assumptions. There are instances where management may be unaware of existing risks or may choose to overlook them. The strength of the six forces model is contingent on the quality of insights contributed to the framework. Therefore, its value largely depends on how effectively management engages with and contributes to it.
An Example of the Six Forces Model
In 2011, Apple Inc. revolutionised the tech landscape with the introduction of iCloud, a pioneering cloud service. This service seamlessly allowed iPhone, iPad, iPod touch, Mac, and PC users to effortlessly store and synchronise content across their devices. The convenience of this innovation has made it an integral part of modern usage patterns.
Owning one device within the Apple product ecosystem can significantly incentivise the adoption of complementary products. For instance, if an individual already possesses a MacBook and seeks a new smartphone, exploring other Apple devices might offer substantial advantages due to the seamless integration across the product line.
This strategic approach to product line expansion has become a benchmark in the tech industry. By April 2023, Google’s Pixel line expanded to encompass mobile phones, premium earbuds, smartwatches, and tablets. This expansion mirrors the success of Apple’s strategy, aiming to create an interconnected ecosystem of devices.
When examining this approach through the lens of the six forces model, companies must acknowledge that once a customer invests in a particular product line, it becomes challenging to persuade them to switch to an alternative line. This loyalty and integration within a specific ecosystem fosters a barrier to entry for competitors and heightens the challenge of enticing customers away from an established product ecosystem.
The Six Forces model extends Porter’s Five Forces framework by identifying additional external factors impacting industries. This model introduces the concept of complementary products as a distinct force. While the Six Forces model aids in assessing risks and improving long-term strategic planning, its drawback lies in its requirement for continual updates to remain pertinent and its limited adaptability as a dynamic tool.
DISCLAIMER: This article is for informational purposes only and is the opinion of the author.