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Threat of substitute products
In order to evaluate the attractiveness and profitability of an industry, a fourth force we need to look at is the threat of subsitute products/services. Let’s consider Porter’s five forces model, well-explained in his article ‘The five competitive forces that shape strategy’ published by Harvard Business Review in 2008. The stronger this force is the more it erodes profitability in the sense that industry players may see their products out of the market and/or easily substituted. An example of substitute is video-conferencing for travelling or plastic versus aluminium, internet versus travel agents.
Moreover substitutes are easy to underestimate as they may be very different from the industry’s products/services. The threat of substitutes is high when:
Moreover substitutes are easy to underestimate as they may be very different from the industry’s products/services. The threat of substitutes is high when:
- it offers an attractive price-performance compromise to the industry’s product (e.g. telephone line versus skype, video-rental shops versus sky premium or online video-rental)
- the customers’ costs of switching to the substitute are low
All in all, managers should pay attention to changes in other industries which may produce attractive substitutes when before they were not as such!
