What is the threat of substitutes within Porter’s five forces model?

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This article is called what is the threat of substitutes within Porter’s five forces model? It explains the substitute threat, how to detect and analyse it within your industry.

Do you have a sustainable competitive advantage? An advantage which offers many years of profitability? What about your Threat of Substitutes?

Porter’s five forces model

  • Threat of entry
  • Bargaining power of suppliers
  • Bargaining power of bias
  • Intensity of rivalry
  • Threat of substitution

It is important that you are strategically positioned within your industry to defend yourself from these forces and then go on the attack by manipulating them to your advantage.

A key part of Porter’s five forces is what is he calls the threat of substitutes. He defines a substitute as an alternative product/service a customer can buy instead of your offering. Not from a direct competitor but a product/service that can do the same things your offering does but is from another industry.

Real word examples

  • Mobile phone is a substitute for a landline phone
  • social media substitute for newspapers.
  • Zoom conferencing is a substitute for a train ride
  • Bicycles and cars
  • Supermarket food or restaurant
  • Going out bowling or video games
  • Kicking the ball around at the park or FIFA21
  • Apple music or a live performance
  • Bottled water versus tap water
  • Hotels or Airbnb
  • Airline flights to staycations
  • DVD purchase or Netflix and other view streaming

Lower threat

The most dangerous substitutes that you should always be looking out for are those who are becoming cheaper compared to their performance and those that earn higher returns on capital than your industry.

These substitutes have the potential to drive prices down within your industry. They have other spillover effects that you need to consider when investing or expanding further into the sector yourself.

A customer chooses to purchase the substitute instead of your product

The threat of substitutes — Determining factors

  1. Are switching costs low, meaning there is little if anything is preventing your customer from purchasing the substitute product/service to the determent of your own offering.
  2. Is the alternative offering cheaper than your industry’s product or service? Does this place price ceiling to prevent you charging what you want to for your services?
  3. What about the quality of their offering? Is it as good or better than what you can offer? If so, the threat of substitutes is high.
  4. What if the attributes, functions, or performance of the substitute product are equal or superior to the industry’s product? You may have a high threat of substitutes to cope with, and your current profit potential is under danger.

More expensive alternative

Analysis

High and low threat

Summary

The aim of this article called what is the threat of substitutes within Porter’s five forces model was to enable you to better able to identify and react to any threat of substitutes. It explained the substitute threat, how to detect and analyse it within your industry.

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