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Note: Within the porter five forces
model you will find some apparent overlap between the five
forces. For example it can be hard to differentiate
between a competitor and a substitute as they both compete
against you. The difference is really how narrowly you
have defined your industry.
"Are their alternatives outside your
industry that might be more
attractive to your customers?"
Use the Porter five Forces Model to find out if you are at risk of substitute products eroding
the size of your industry
For example:
If you own a shop
that rents out DVD’s and you increase your prices eventually
customers will see that there is no cost difference between
cable TV and renting DVD’s. Customers will substitute cable TV
for DVD’s
Some Classic Examples:
The digital watch was a substitute
for the analogue watch and it quickly decimated the Swiss
watch manufacturing industry.
Surprisingly, the sales of water in
drinking bottles is a substitute product for fizzy drinks
Gardening services are a threat to the
lawn mower producers; if you have a gardener you don’t need a
mower of your own.
Mortgage Brokers are a substitute for
getting a loan from the bank.
Using the Porter Five Forces Model, to complete an
analysis of the threat of substitute products you will need to
consider the following factors, click on each for more details and ignore
those not relevant to your industry.
What makes a
good leader has provided strategic planning
templates for all five forces in the Porter Model.
The threat of substitute products or services
template is at the bottom of this page, take me there
The relative price performance of
substitutes
How cost effective are substitutes?
If we use the price of oil as an
example, Most people are happy to drive a
car that runs on
oil, however as the cost of oil increases
then alternatives become more price competitive.
The amount of time it takes to
recuperate the initial outlay on converting a car to run
on natural gas is
far quicker with higher oil prices. The same
applies to buying an electric car.
And
People are
more likely to take public transport.
So, Oil has three
possible substitutes whose relative price performance all improve
as oil goes up in price.
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Switching
Costs
Does your customer incur any costs to switch to a substitute
product?
These
costs could be legal review of new contracts,
change in spare parts and change in ordering systems. These maybe intangible costs such as
risk.
One Example: If you have ever bought a nail gun you
will know that to change the brand of nail you use, you will also
have to buy a new nail gun as nails and guns are not typically interchangeable
– the cost to switch brand of nails is the cost of a new nail
gun.
However, what is the cost to switching to glues? Which is a substitute to
nails.
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Index
Buyer propensity to substitute
How do
your customers react to substitutes, do they trial
them or are they loyal to your industry?
Quite often you
will find that price is not the only
factor that people consider when buying a product.
For example, do rich
people switch from driving to using public transport as
oil goes up in price? Probably not as
much as struggling families or retired people would.
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Porters Five Forces and
the Threat of Substitutes Template
The following free strategic
planning template can be
used to determine if each of the factors that affect the
threat of substitutes has a positive or negative impact on
the probability of your customer switching to a substitute.
You can then give an overall rating for this
force.
Porter Model
Templates from What Makes a Good
Leader
Back to Index
Porter
Model Links
The Threat of Substitutes
is one of the five forces in the
Porter five forces Model,
read up on each of the five forces and become a skilled
strategic leader.
Each of our porter five forces model
pages includes
a free strategic planning template for your use, listing the common factors
to consider.
The
Threat of New Entrants into your Industry
The
Bargaining Power of Suppliers
Threat of Substitute
Products
Industry
Rivalry
The Bargaining Power of Your
Customers
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