A threat of substitutes is one of Porter’s forces and it is the availability of a product that consumers can purchase in the place of another product. The substitute product must offer similar benefits to the consumer as the other product. The threat of substitution affects the competition in any business. When a product is faced by many substitutes, consumers have a number of choices to choose from and thus none of the product has power over the other. This affects the profitability of a company in that the price of the product decreases. However, the availability of close substitutes can make an industry more competitive thus decreasing the profitability potential of the firms in the industry. Lack of substitutes creates a monopolistic power where one firm has a high profitability potential.

Several factors affect the threat of substitution of a product. If the switching cost is low, the consumer will switch to the substitute product making the threat of substitution high. In addition, if the substitute product has a lower price that the industry’s product, then the threat of substitute is also high. The threat of substitution is also high if the substitute product is also of high quality or similar quality to the industry’s product. On the other hand, when the substitute is of lower quality, expensive and its functionality is lower than the industry’s product, then the risk of substitution will be low. Not all these factors will apply in any industry all at once; rather each can apply in an industry thus affecting the substation power in that specific industry.

Response to Theresa Keith

Hi Theresa, great line of thought. The threat of substitution is in industries. In real life, people have choices to make between different similar products. Consider the beverage industry, there are not many firms in this industry, but the existing firms have many similar products that serves the same purpose of quenching thirst. The consumers have many choices and have to make a decision. Several factors affect the threat of substitution of a product. If the switching cost is low, the consumer will switch to the substitute product making the threat of substitution high. In addition, if the substitute product has a lower price that the industry’s product, then the threat of substitute is also high. The threat of substitution is also high if the substitute product is also of high quality or similar quality to the industry’s product. On the other hand, when the substitute is of lower quality, expensive and its functionality is lower than the industry’s product.

Response to Vincent Clark 

Hi Vincent, great work over there, the bargaining power is one of Porters five forces. In this century, with the development in technology and social structures, consumers are very much informed. This determines the intensity of an industry; informed buyers are very powerful and reduce the profit potential in an industry. Buyers increase competition in an industry by forcing firms to reduce prices and bargaining for improved services. Buyers also play competitors against each other in the market. All these result in reduced profits in the industry. If there are few buyers and many sellers, then, the buyer power is very high. In addition, when the cost of substitution is low, the buyers bargaining power is also very high. The bargaining power of buyers is also high when consumer is price sensitive, buyers purchases a large volume of standardized products or substitutes are available. The opposite of these factors leads to low buyer bargaining power.

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