Threat of Substitutes
Substitutes can be defined as those products or services that meet a particular consumer need but are available in another market. A substitute product is a product from another industry that offers benefits to the consumer similar to those of the product produced by the firms within the industry.
The threat of substitution affects the competitive environment for the organizations in that industry and influences their ability to achieve profitability because consumers can choose to purchase the substitute instead of the industry's product.
This can be a significant issue as it constrains the ability of suppliers to raise prices, even though this may be in all of their interests. For example, the price of newspapers is constrained by the existence of online news and TV news channels. The availability of these (more or less) free services has meant that the newspaper industry has been unable to increase its prices in line with rising costs even though almost all newspaper publishers would like to do so.
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As part of your analysis using Porters Five Forces model, you need to look outside of your own industry and think about those substitutes that pose a threat to your market. If for example, you are a traditional book publisher selling novels through bookstores, you would need to consider other ways in which the consumer's need (to enjoy a novel) could be met.
These might include:
Purchasing books in a supermarket
Purchasing books from an online supplier
Purchasing eBooks directly from the author
Purchasing an audio recording or video
This example reminds users of Porter's framework that defining your market is important, as it assumes that high street booksellers and online retailers are not in the same 'industry' despite both having books as one of their products. The more substitutes that are on offer in your market the more sensitive or 'elastic' consumers will be to changes in your product's price because of the number of alternatives.
The threat of substitutes is high when:
Consumer switching costs are low
Substitute product is cheaper than industry product
Substitute product quality is equal or superior to industry product quality
Substitute performance is equal or superior to industry product performance
The threat of substitutes is low when:
Consumer switching costs are high
Substitute product is more expensive than industry product
Substitute product quality is inferior to industry product quality
Substitute performance is inferior to industry product performance
No substitute product is available
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You may also be interested in: Introduction to Porter's Five Forces Analysis, Competitive Rivalry, Threat of New Entrants, Threat of Substitutes, Bargaining Power of Suppliers, Bargaining Power of Customers and Advantages and Disadvantages of Porter's Five Forces Analysis.
