Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.
Threat of substitutes (from Porter’s five forces analysis) occurs when companies within one industry are forced to compete with industries producing substitute products or services.
Threat of substitutes is one of the five forces that determine the intensity of competition in an industry. The others are
Substitutes limit an industry’s potential returns by placing a ceiling on the prices that firms within that industry can charge to make a profit. As the price-performance alternative offered by substitutes becomes more attractive, it becomes even more difficult for those firms to make a profit. Demand for substitutes can also reduce the demand for industry products and services. Substitutes can create intense competition during normal economic times, and reduce potential profit increases during positive economic times.
Identifying substitutes involves searching for other products or services that can perform the same function as the industry’s product or service. Positioning an industry’s products or services against the substitutes may take place via collective industry actions (for example, sustained advertising by industry participants).
Substitute products that deserve the most attention include those:
Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 25-26.