The six forces model, also known as Porter's Five Forces, is a framework developed by economist Michael Porter to analyze the competitive forces in a market and determine the attractiveness of an industry. The model identifies six key forces that influence the competitive environment and ultimately the profitability of a business:
Threat of new entrants: The ease with which new competitors can enter the market and begin operating. High barriers to entry, such as strong brand recognition or patented technologies, can protect incumbent firms from new entrants.
Threat of substitutes: The availability of substitute products or services that can be used instead of the product or service being offered. If there are many substitutes available, this can put downward pressure on prices and profitability.
Bargaining power of buyers: The ability of buyers to negotiate lower prices or demand higher quality from sellers. Strong bargaining power can be a result of buyers being numerous or well-informed, or if they are an important part of the seller's business.
Bargaining power of suppliers: The ability of suppliers to negotiate higher prices or demand more favorable terms from buyers. Suppliers may have strong bargaining power if they are few in number or if the product they are supplying is essential to the buyer's business.
Intensity of rivalry among competitors: The level of competition within the industry, including the number and size of competitors, the level of differentiation among products or services, and the intensity of marketing efforts. A highly competitive industry can lead to price wars and other aggressive tactics that can erode profitability.
Threat of government intervention: The potential for government regulation or intervention to affect the industry, such as through tariffs or antitrust laws. Government intervention can create barriers to entry or disrupt the competitive landscape in other ways.
An example of the six forces model in action is the fast food industry. In this industry, the threat of new entrants is relatively low due to the high start-up costs and strong brand recognition of established players. There are also many substitutes available, such as home cooking or dining at sit-down restaurants, which puts downward pressure on prices. However, buyers (consumers) have relatively low bargaining power due to the low price point of fast food and the abundance of options available. On the other hand, suppliers (e.g. food distributors) have relatively high bargaining power due to the importance of their products to the fast food industry. The intensity of rivalry among competitors is high, with major players engaging in frequent marketing campaigns and promotions to attract customers. Finally, there is some threat of government intervention in the fast food industry, particularly with regard to health and safety regulations.
Overall, the six forces model provides a useful tool for analyzing the competitive environment of an industry and determining the potential profitability of a business. By understanding the forces at play, businesses can make informed decisions about how to position themselves in the market and how to respond to changes in the competitive landscape.