Six Forces Model
The Six Forces Model is an analytical tool used to help businesses better understand the competitive landscape in which their products and services are offered. It looks at six factors that impact the way companies compete, specifically: threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers, intensity of competitive rivalry, and finally, threat of substitute products or services. By analyzing a company’s operating environment through each of these “forces”, a business can more effectively devise an appropriate strategy to drive value in the marketplace.
Threat of New Entrants
The first force to consider is the threat of new entrants. This refers to the ease with which a new competitor can enter the industry in which a business operates. Factors that determine the importance of this force include the costs of getting into the market (e.g. entry barriers, capital requirements, etc.), the amount of competition already present, and the strength of any existing company brands. If entering a particular industry is relatively easy, then the threat of new entrants will be higher and businesses will need to focus more on differentiating themselves in order to survive.
Threat of Substitute Products or Services
The second force of the Six Forces Model is the threat of substitute products or services. This refers to the ease with which a customer can (or would prefer to) use a different product or service in the place of the one the business is offering. It includes the availability of similar products with the same or better features that a customer may find more attractive and cost effective. Once again, businesses must differentiate themselves from their competitors to win customers, which may mean offering products with more features or at lower prices.
Bargaining Power of Buyers
The third force to assess is the bargaining power of buyers. This refers to the customer’s ability to pressure the seller for better terms (e.g. discounts, service elements, etc.). Buyers with more bargaining power are able to name their own terms, whereas those with less bargaining power need to accept the terms set by the seller. Factors influencing the strength of this force include the size of the buyer relative to the seller, customer switch costs, customer concentration, and customer’s willingness to substitute.
Bargaining Power of Suppliers
The fourth force to consider is the bargaining power of suppliers. This refers to the amount of leverage a supplier has over the seller(s). It looks at the number of suppliers in the market, supplier concentration and switch costs, and supplier’s willingness to substitute. With more supplier power, sellers are often forced to accept the suppliers terms or face the threat of losing their source of supply.
Intensity of Competitive Rivalry
The fifth force of the Six Forces Model is the intensity of competitive rivalry. This looks at the level of competition in the marketplace and the extent to which each competitor may threaten the others. Factors influencing this force include the numbers of competitors, market growth and profitability, customer switching costs, and industry profitability. With a high level of competition, organizations must be able to differentiate themselves in order to survive and thrive.
Threat of Substitute Products or Services
The sixth and final force of the Six Forces Model is the threat of substitute products or services. This refers to products or services that can be used in place of the one the business is offering. Substitutes may include both direct and indirect competitors, i.e. those offering the same product, or another product that can serve the same purpose. It is important to assess a company’s ability to stand out from the competition and to devise a strategy to leverage any substitute products or services that may be available.
Conclusion
The Six Forces Model can be an invaluable analytical tool to better understand the competitive landscape in which a business operates. By assessing each of the six forces and their impact on the marketplace, businesses can devise a strategy best-suited for success. This includes analyzing the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, the intensity of competitive rivalry, and the threat of substitute products or services. Through utilizing the Six Forces Model, businesses can gain valuable insights on their positioning in the marketplace and make better informed decisions on how to develop their strategies.
