Threat Of Substitution – Porter’s Five Forces
If you’re out buying a slab of butter and realize you’re watching your cholesterol, you’ll probably turn to a healthier…
August 31, 2021 | 4 mins read
If you’re out buying a slab of butter and realize you’re watching your cholesterol, you’ll probably turn to a healthier alternative.
Every product in the market today has some kind of healthier, cheaper or better substitute. This is the threat of substitution as defined by Harvard professor Michael Porter. According to Porter, there are five competitive forces that affect a business in terms of profitability, popularity and position in the industry.
The threat of substitute products is one of five competitive forces along with the threat of new entrants, rival brands, buyer power and seller power.
Read on to learn more about the threat of substation and how it can impact your business.
You must have seen brands out-marketing each other on Twitter or Instagram. McDonald’s and Burger King are in a lifelong battle to outdo each other with advertisements. It’s like a game of tag! The purpose of these actions is to make sure they can keep their customers engaged. Why? It’s because each of these brands offer similar products that can be easily substituted.
The threat of substitution can affect your brand’s profitability. If it’s easy for customers to switch to the substitute, the threat is high and vice versa. But you can build a business strategy that takes this into account.
Let’s take a threat of substitutes example:
You may be someone who enjoys coffee. When your doctor tells you to lay off the caffeine, you may consider switching to flowering tea or something similar. This creates the threat of substitutes products or services you can encounter.
There are certain cases where the threat of substitution is higher. For instance, if you find a cheaper alternative to a product it may compel you to purchase it. In the same way, if you find a better quality alternative, you’ll likely switch to that.
The threat of substitution is a potent risk and threat to any industry especially in tandem with other forces. So, what can you do to prepare for the threat of substitutes? Let’s find out.
A SWOT analysis studies the strengths, weaknesses, opportunities and threats in the market. If you learn that one of your competitors is launching a substitute product, you should analyze just how much it can affect your brand. Study the costs, pricing and quality to get enough information before building your strategy. If needed, you can use that information to improve your own product quality. This will give you a head start over the competition.
Always keep an eye out for your competitors and what they’re doing. It can help you stay up to date with other industry rivals. You may need to revamp branding and marketing efforts to make room for a competitive advantage. For instance, if a substitute product has reduced prices during a festival like Diwali, then you may have to do the same. Offers and discounts can also be based on a substitute product.
One of the most effective ways to identify a threat of substitution is to build a network that’s informative. You can learn a lot about your competition or any new updates in your own and other industries if you have a strong network of professionals. If you can reach out to industry leaders and thinkers, you can get a lot of insight on trends and disruptions in the market. This can factor into your agenda and strategy to help you build a sound and actionable plan.
As long as you’re aware of what’s happening in your market, you can prepare yourself for any challenges. Substitutes can be a healthier alternative like sugar-free ketchup released by a lesser-known brand. Keeping an eye out for new trends and customer preferences is a good way to stay on top of things.
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Explore Harappa Diaries to learn more about topics such as What is Porter’s 5 Forces Model, Porter’s Five Forces Model Example, What is Porter’s Industry Analysis and Managing Conflict with Thomas Kilman Model to build strong professional networks.