Uploaded by shamimusabayana

Six forces model - Wikipedia

advertisement
Six forces model
The six forces model is an analysis
model used to give a holistic assessment
of any given industry and identify the
structural underlining drivers of
profitability and competition.[1][2] The
model is an extension of the Porter's five
forces model proposed by Michael Porter
in his 1979 article published in the
Harvard Business Review "How
Competitive Forces Shape Strategy". The
sixth force was proposed in the mid1990s.[3] The model provides a
framework of six key forces that should
be considered when defining corporate
strategy to determine the overall
attractiveness of an industry.
The forces are:
Competition – assessment of the
direct competitors in a given market
New Entrants – assessment in the
potential competitors and barriers to
entry in a given market
End Users/ Buyers – assessment
regarding the bargaining power of
buyers that includes considering the
cost of switching
Suppliers – assessment regarding the
bargaining power of suppliers
Substitutes – assessment regarding
the availability of alternatives
Complementary Products –
assessment of the impact of related
products and services within a given
market
Although there are a number of factors
that can impact profitability in the short
term – weather, the business cycle – an
assessment of the competitive forces in
a given market provides a framework for
anticipating and influencing
competitiveness and profitability in the
medium and long term.[4][5]
History
The model is an extension of Porter's five
forces model (1979). The extended
model including the sixth force,
complementary products, and was
proposed in the 1990s.[3]
Six forces
Competition
There are several dimensions that rivals
within an industry can compete on –
price discounting (cost leadership
strategy), introduction of new services/
products (innovation strategy),
improvement of service quality
(customer-orientation strategy) etc. High
competition between rivals can stifle an
industry's profitability.
Intensity of competition is highest if:
Competitors are equal in size and
power as poaching business is hard to
avoid
Industry growth is slow. This causes
competing organisations to fight for
market share
Exit barriers are high (e.g. highly
specialised assets and management
devotion). This can cause companies
making low or negative returns to stay
in the market leading to excess
capacity meaning that healthy
competitors' profitability will suffer.
Competitors are competing on price.
Price competition is particularly
destructive to profitability as it is easy
to identify price competition meaning
other competitors can retaliate. This
can lead to a vicious cycle of price
reductions, reducing profitability and
training customers to overlook
service/product quality in favour of the
cheapest option available to them
While non-price based competition can
sometimes escalate to a level at which it
starts to undermine industry profitability,
it is less likely to happen than price rivalry
and can also be valuable to a given
industry. Competing in areas such as
product features, customer support,
delivery time, and brand image isn't likely
to be as damaging to profits because it
will increase customer value in the
product or service and may help
establish customer loyalty. This in turn
can improve industry profitability through
increasing value relative to substitutes
and raising the barriers of entry for new
potential competitors.[4][5][6]
New entrants
New entrants put pressure on current
organisations within an industry through
their desire to gain market share. This in
turn puts pressure on prices, costs and
the rate of investment needed to sustain
a business within the industry. The threat
of new entrants is particularly intense if
they are diversifying from another market
as they can leverage existing expertise,
cash flow and brand identity as it puts a
strain on existing companies profitability.
Barriers to entry restrict the threat of new
entrants. If the barriers are high, the
threat of new entrants is reduced and
conversely if the barriers are low, the risk
of new companies venturing into a given
market is high. Barriers to entry are
advantages that existing, established
companies have over new entrants.[4][5][6]
According to Porter, there are 7 major
barriers:[4]
Supply-side economies of scale –
spreading the fixed costs over a larger
volume of units thus reducing the cost
per unit. This can discourage new
entrant because they either have to
start trading at a smaller volume of
unit and accept a price disadvantage
over larger companies or risk coming
into the market on a large scale in an
attempt to displace the existing market
leader.
Demand-side economies of scale –
this occurs when a buyers willingness
to purchase a particular product or
service increases with other people's
willingness to purchase it. Also known
as network effect, people tend to value
being in a 'network' with a larger
number of people who use the same
company.
Capital requirements – the amount of
capital needed to start up within an
industry can be a deterrent to new
entrants as they will have to self-fund
the venture or convince investors that
their business model is good enough
for an investment.
Incumbency advantages independent
of size – No matter the size of an
existing business within an industry
they always tend to have certain
advantages over new entrants. They
are more established so will tend to
have better access to raw materials,
established connections with
suppliers, brand identity, cumulative
experience about best working
practices etc.
Unequal access to distribution
channels – if there are a limited
number of distribution channels for a
certain product/ service new entrants
may struggle to find a retail or
wholesale channel to sell through as
existing competitors will have a claim
on them.
Restrictive government policies –
policies set out by the government can
help or hinder new entrants. Through
licensing requirements and restriction
on foreign investment the government
can regulate industries aiding or
preventing new entrant from gain
access to a particular market.[4][6]
End users/buyers
Powerful customers can play different
companies off against each other in
order to drive price down or demand a
high quality of service. Bargaining power
is high in a customer group if:
Limited number of buyers/one buyer
who buys in a large volume – large
volume buyers tend to be powerful
because they bring a lot of revenue
into the company
Products are not unique – if customers
feel that they can get the same product
elsewhere they have high bargaining
power and will tend to play one vendor
off against the other
Switching costs are low – if customers
do not lose anything by switching, they
are more likely to switch between
vendors[4][5][6]
Suppliers
Powerful suppliers (e.g. labour suppliers)
can influence profitability of an industry
though charging higher prices, limiting
service quality or by shifting costs to the
industry participants. A supplier group is
powerful if:
It is more concentrated than the
industry it is selling to
It doesn't heavily rely on the industry to
gain revenue
Switching costs are high for the
industry members
Suppliers produce unique products
that have no substitutes
Can legitimately threaten forward
integration – if the industry itself is
making a higher amount of money in
relation to the supplier, it may provoke
them to enter the market. This limits
the profitability of an industry as there
is not only the threat of a new entrant,
there is also the threat of losing the
supplier.[4][5][6]
Substitutes
A substitute product is something that
fulfils the same function or a similar
function to a given industry product e.g.
using Skype is a substitute to travelling
for a meeting. Substitutes are often
overlooked as they can appear to provide
something completely different but they
need to be considered when thinking
about overall competitiveness of a
company. When the threat of substitutes
is high, industry profitability suffers.[5][6]
The threat of substitutes is high if:
Switching costs are low – if customers
do not lose anything by switching then
the threat of substitution increases
Price-performance trade off – if the
substitute offers an attractive trade of
between price and performance in
relation to the industry product. The
better the relative value of the
substitute the stronger the negative
impact it will have on profitability [4][6]
Complementary products
This force was the sixth force, added in
the revised 1990s model. It refers to
products or services that are compatible
with what a particular industry sells. The
effect of complementary goods on an
industry's profitability generally depends
on how reliant the product or service is
on the compatible product. If one cannot
function without the other, the impact is
high. The impact of complementary
products can be good or bad for industry
profitability. If the complementary good
is doing well within its industry this can
have a positive effect on the profitability
of a given company. Adversely, if
performance is bad or prices rise within
the complementary product's market it
can negatively impact upon the level of
profit that the industry can obtain. For
example, when petrol costs rise the
public transport industry may suffer
reduced profits or be forced increase
prices which may cause customers to
look for alternatives, e.g. walking and car
sharing, again reducing overall
profitability of an industry.[7][8]
Usage
The model is used to identify a firm's
strategic position through looking
holistically at the forces that effect the
industry. It is a framework that helps
companies identify threats and evaluate
the best strategy to move forward with to
increase profitability and
competitiveness.[4][6]
Criticisms
The six force model was not as widely
adopted as its predecessor. The revised
framework has been challenged by
academics and strategists such as Kevin
P. Coyne and Somu Subramaniam who
have stated that three dubious
assumptions underlie the forces:
That buyers, competitors, and
suppliers are unrelated and do not
interact and collude
That the source of value is structural
advantage (creating barriers to entry)
That uncertainty is low, allowing
participants in a market to plan for and
respond to competitive behaviour.
Other criticisms include:
It places too much weight on the
macro-environment and doesn't
assess more specific areas of the
business that also impact
competitiveness and profitability[9]
It does not provide any actions to help
deal with high or low force threats
(e.g., what should management do if
there is a high threat of
substitution?)[9]
See also
Complementors
Context analysis
Porter five forces analysis
Porter's four corners model
SWOT analysis
References
1. "Tom Stewart interviewing Michael
Porter" . YouTube. Retrieved 12 October
2014.
2. "Corporate Strategy - Porter's Five
Forces Model" . Cleverism. Retrieved
27 December 2015.
3. "Six Forces Model Definition" .
Investopedia. Retrieved 10 October 2014.
4. "Forces that Shape Strategy" . Harvard
Business Review. Retrieved 12 October
2014.
5. Riley, Jim. "Porter's Five Forces
Model" . tutor2u. Retrieved 12 October
2014.
6. Rainer, R.Kelly; Cegielski, Casey.G (20
April 2012). Introduction to Information
Systems (4th Edition International Student
Version ed.). John Wiley & Sons. pp. 48–
50. ISBN 978-1118092309.
7. Kassera, Nicky. "Six Forces Critique" .
Scribd. Retrieved 12 October 2014.
8. Grant, Robert M. (2010). Contemporary
strategy analysis and cases : text & cases
(7th ed.). John Wiley and Sons. ISBN 9780470747094.
9. Grundy, Tom. "Rethinking and
Reinventing Porter's Five Forces Model"
(PDF). Wiley InterScience. Retrieved
15 October 2014.
Andrew S. Grove, Only the Paranoid
Survive: How to Exploit the Crisis Point
That Challenge Every Company and
Career, 1996
Nalebuff and Brandenburger, Coopetition, 1997
McAfee, R. Preston, Competitive
Solutions, Princeton University Press,
2002
Retrieved from
"https://en.wikipedia.org/w/index.php?
title=Six_forces_model&oldid=822794490"
Last edited 11 months ago by Mar…
Content is available under CC BY-SA 3.0 unless
otherwise noted.
Download
Random flashcards
Radiobiology

39 Cards

Radioactivity

30 Cards

Nomads

17 Cards

Create flashcards