Threat of Substitutes (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Supplier Power
Buyer Bargaining Power
Intensity of Rivalry
Complementors (Sixth Force)

Threat of Substitutes Definition

Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. According to Porter’s 5 forces, threat of substitutes shapes the competitive structure of an industry.

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The threat of substitution in an industry affects the competitive environment for the firms in that industry and influences those firms’ ability to achieve profitability. The availability of a substitution threat effects the profitability of an industry because consumers can choose to purchase the substitute instead of the industry’s product. The availability of close substitute products can make an industry more competitive and decrease profit potential for the firms in the industry. On the other hand, the lack of close substitute products makes an industry less competitive and increases profit potential for the firms in the industry. A threat of substitutes example is the beverage industry due to a market with many competitors.

Threat of Substitutes – Determining Factors

Several factors determine whether or not there is a threat of substitute products in an industry. First, if the consumer’s switching costs are low, meaning there is little if anything stopping the consumer from purchasing the substitute instead of the industry’s product, then the threat of substitute products is high. Second, if the substitute product is cheaper than the industry’s product – thereby placing a ceiling on the price of the industry’s product – then a threat of substitutes high risk is the case. Third, if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high. And fourth, if the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product. Any of these situations is a high threat of substitutes: porter’s 5 forces sees less profit potential.

On the other hand, if the substitute is more expensive, of lower quality, its functionality does not compare with the industry’s product, and the consumer’s switching costs are high, then a low threat of substitutes occurs. And of course, if there is no close substitute for the industry’s product, then the threat of substitutes is low.

Threat of Substitutes – Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat of substitutes may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high threat of substitutes and some may indicate low threat of substitute products. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

The Threat of Substitutes Porter places High risk on:

• Substitute product is cheaper than industry product
• Consumer switching costs are low
• Substitute product quality is equal or superior to industry product quality
• Substitute performance is equal or superior to industry product performance

The Porter Threat of Substitutes Low Risk Situation:

• Consumer switching costs are high
• Substitute product is more expensive than industry product
• Consumer switching costs are high
• Substitute product quality is inferior to industry product quality
• Substitute performance is inferior to industry product performance
• No substitute product is available

Threat of Substitutes Interpretation

A low threat of substitute products makes an industry more attractive. In addition, it increases profit potential for the firms in the industry. Conversely, a high threat of substitute products makes an industry less attractive. It also decreases profit potential for firms in the industry. The threat of substitute products is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Start creating a list of potential substitutes that you evaluate as a threat in an external analysis. With this analysis, you’ll be better able to identify and react to any threat of substitutes. Download the free External Analysis whitepaper by clicking here or the image below.

threat of substitutes

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12 Responses to Threat of Substitutes (one of Porter’s Five Forces)

  1. Zaijun Lai December 3, 2015 at 2:20 pm #

    Citing this on my bachelor assignment. Thanks. =)

    • Xhig Fzranerds April 29, 2018 at 2:37 pm #

      How did that work out for you

  2. MIchael December 22, 2016 at 3:41 pm #

    how to citing this in my assignment, help please

  3. yusuf muse March 7, 2017 at 8:38 am #

    give me examples 0f substitute products

    • Anzagra Matthew March 15, 2017 at 4:19 am #

      Tea can be substituted with caffee, likewise wheat can also be substituted with rice and so many other products which gives the same/similar satisfaction

    • Derek T April 14, 2017 at 2:38 pm #

      Coffee/tea is not applicable as coffee would be deemed addictive. Pepsi for coke (or water these days) if you are thinking beverages,

  4. Derek T April 14, 2017 at 2:37 pm #

    Coffee/tea is not applicable as coffee would be deemed addictive. Pepsi for coke (or water these days) if you are thinking beverages,

    • Ishrat June 6, 2017 at 10:53 pm #

      Coke and Pepsi are competitors not substitutes.

      • Ann June 9, 2017 at 12:28 pm #

        Competitors are substitutes most of the time.
        But, since Coke and Pepsi are manufactured by the same company, they are not competitors because both their profits will be earned by the same organization. But they are substitutes since when you’re thirsty you can consume Pepsi if Coke is not available. They give somewhat the same satisfaction.

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  6. Sebeo Mphaka October 16, 2017 at 1:41 am #

    Actually yes,Coke can be substituted by Pepsi eventhough they are manufactured by the same company.But can we really say one is a threat to the other yet somebody mentiined that the profits are still going to be earned by the same company?

  7. Olawale November 14, 2017 at 12:14 pm #

    Substitutes are alternative product that consumers can purchase instead of products in the industry. In other words, threat of substitutes affect all the players in that industry. Pepsi and Coca Cola are NOT substitutes rather Competitors in the same industry. However, tea can be classified a substitute cos it affects the entire industry where Coca Cola and Pepsi belongs to.

    Another example is the threat of Inter City Rail Industry to the Airlines. Note that the effect of such threat will not be limited to one Airline but all. Now that is substitute that needs to be analyzed with other forces while carving out your strategy. for an Airline company.

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