Question

identify some businesses where sales have been adversely affected by substitute products. Why has this occurres?

Answer 1

Answer :

Threat Of Substitutes | Porter’s Five Forces Model:

A substitute product is one that may offer the same or similar benefits to a company as a product from another industry. The threat of a substitute is thelevel of risk that a company faces from replacement by its substitutes. For more generic, undifferentiated products the threat is always higher that from more unique products. A company that has several possible substitutes that can easily be switched to has little control over the prices it sets or how it chooses to sell the product.

Business, Strategy

Threat Of Substitutes | Porter’s Five Forces Model

August 27, 2014   |   Martin   | 2 Comments  

• 0

• 5

• 0

• 0

• 0

A substitute product is one that may offer the same or similar benefits to a company as a product from another industry. The threat of a substitute is thelevel of risk that a company faces from replacement by its substitutes. For more generic, undifferentiated products the threat is always higher that from more unique products. A company that has several possible substitutes that can easily be switched to has little control over the prices it sets or how it chooses to sell the product.

© Entrepreneurial Insights based on the concept of Porter’s 5 Forces

Porter defined this threat as one of the forces that affect competitive structure within an industry. It is an important factor because it affects company and industry profitability. A low threat from substitutes means that there will be less competition among the existing firms and there will be more potential to earn higher profits.

INTRODUCTION

The existence of substitute product offers customers different choices and allows them options within the industry and beyond it to products that may fulfill a similar need. In more generic products, there are often more than one ways to address a particular need. An example of this is the option to choose different modes of transportation when going from destination A to destination B. If an airline operates on that route, it must compete with all other airlines on that route as well as any possible ground routes such as car rentals, buses and trains.

Analyzing the threat of substitutes can be tricky because any items being compared are not exactly alike but vary either slightly or greatly in what they offer. A customer will often base their analysis on the value offered by an item and its price.

CONDITIONS THAT INCREASE THE RISK OF SUBSTITUTES:

There are many situations or conditions in which the threat of substitutes is stronger than usual. Some of these conditions are:

• Switching Costs: If there are little of no switching costs for a consumer, then there is more of a chance that they may explore and move over to a more attractive substitute. In the absence of other factors such as brand loyalty or differentiation, the choice to move will not be a difficult one. For example, if a consumer wants to replace cable subscriptions with online streaming site subscription, they may be able to do so easily unless there is some cost associated with discontinuing the cable service.

• Product Price: If substitutes are priced more reasonably, then there may be more risk of consumers switching products. In addition, this can act as a barrier to how much a company can raise the prices for its own product. Any move to price higher than substitutes may lead to consumer migration and loss profits.

• Product Quality: If the quality of substitute products is higher than that of any product, then it is more likely that consumers will want to make use of this difference and switch over.

• Product Performance: If a substitute products functions at the same level or at a better level than a product than there is a chance that consumers will want to switch over. For example, in travelling short distances, if an airline’s flights are always delayed, while a train or bus is on time, customers may choose to travel by road rather than wait endlessly for a plane to take off.

• Substitute Availability: All of the above factors can only come into play if there are actually substitutes available in the market. To identify potential threats, the company needs to be creative in its thought process and look beyond traditional competitors.

ANALYZING THREAT OF SUBSTITUTES

As mentioned previously, substitutes are not immediately recognizable since they are often from outside the industry a company operates within. This is why there needs to be special attention paid towards identifying the threat of substitutes and developing strategies to counter it in the long term. There is always the danger that a company may be too focused on handling its direct competitors and may miss the imminent threat of a substitute. This can even happen at an industry scale, where in the effort to compete with companies within the industry can overshadow threats from the outside.

MITIGATING THREAT OF SUBSTITUTES

Though not foolproof, there are steps to take in order to prevent customers from needing to explore alternates or substitutes. These include:

• Differentiation: Through creating a unique product offering, customers will be able to satisfy a need through only a specific product and will not be easily swayed by substitute products. There could be additional features or benefits that may not be available in a substitute product.

• Customer Value: Customers often look for the product that provides the best value for money. This means that maximum benefits are being gained by spending the least amount of money. If this value is created for a customer than they may not need to look at other products

• Brand Loyalty: Most companies strive to create and maintain a strongbrand loyalty among their customers. This helps prevent easy switchovers to other brands or substitute products.