How Does the Six Forces Model Help Businesses Assess a Market’s Competitiveness and Attractiveness?
Business is not as easy as it seems. The overall profit depends on multiple factors. Business owners go through several challenges, including market and finance. Business is always about making important changes. There are various factors of business changes that can affect the profitability of that particular business. In 1979, Michael Porter an American academic introduced the five forces of the business strategy framework to shape the business. Later, in the mid-90s, Porter added the sixth force to the existing fives. Therefore, let’s explore the six forces model in this blog.
But before exploring the sic forces model, let’s understand its meaning.
Meaning of the Six Forces Model
The six forces model is useful in recognizing and analyzing the competitive marketplace and how that impacts strategies. This business model covers the subtleties of the clients, the capacity of suppliers, the risk factor, the different existing competitors, the threat of a new entrant in the market, and complementary product forces. This is to understand the business’s strategic position in a competitive marketplace.
The Six Forces Model that Impacts Business
Business strategic position in the market is influenced by the following six forces model:
1# Existing Rivals
The first force in the model indicates the number of existing competitors of a particular business. It also refers to the competitor’s potential to destabilize a company. The increasing number of rivals and their equivalent products can lessen the potential of a company.
Suppliers and consumers try to find a rival company if they see they have the potential to offer better deal or less expensive deals. On the contrary, when competition is low, a company has more chances of being expensive, and they try to achieve more sales and profits.
2# Power of the Suppliers
The second force in the Porter model focuses on the ease of understanding the increase in input costs. However, the number of suppliers for a good or service affects the factor of the uniqueness of input and how much a supplier switch may cost a company. Simply put, the lesser number of suppliers leads to more chances of a company being dependent on a supplier.
This causes the supplier to be left with more power to raise the input cost. Conversely, if there are more suppliers or the switching cost is low, then a business can lower its input cost and increase its profit.
3# Power of Customers
The next force in the model makes the customer lower the price or the power. It depends on the number of buyers or customers of the company, the importance of each customer, and the expenses of a company to find new customers for an output.
A smaller and potentially strong customer base means that each customer has additional power to bargain for lower prices and better deals. For a company with several smaller customers, it is easier to quote high prices to make way for more profit.
Also read: Understanding Customer Journey
4# Potential Competitors
The force of potential competitors also affects a company’s capacity. A potentially stable company can have a weak position if a competitor enters the market with less time and money.
5# Threat of Substitution
Next in the model is the fifth force which is the threat of substitution. It can be threatening to use substitute goods or services in place of
the company’s goods and services. Products or services without potential substitutes have more companies that produce products or services without close alternatives. And will have more ability to increase the prices and enclose promising terms. The availability of substitutes enables the customers to go without buying a product from the company’s making the power of the company weaken over time.
6# Complementary Products
The sixth and the last force amended in the revised 1990s model refers to the compatible products or services with a certain industry. In simple terms, it refers to competition. The reliability of the compatible product for the goods and services determines the efficacy of the complementary goods of a business. The interdependence of the two increases the chances of their impact on the business.
This impact refers to the result in which one defines the positive or negative impact on profitability. The company’s profitability is positive when the complementary goods do well in the market. Conversely, the rather worse performance of the complementary goods, or there is a chance of increasing prices, would negatively affect the profitability.
Also Read: SOP for Business Management: Your Guide to Success
And It’s a Wrap
Industry structure is unpredictable. With time the power of buyers and suppliers will vary from more to less. The probability of a new entry or substitute can be affected by technological advancements. This is how these six forces are essential to have an impact on the business.
This understanding of Michael E Porter’s six forces model makes a company make adjustments to its business in order to generate higher earnings for its stakeholders. It is extremely helpful to foresee the industry’s structural change.
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