Threat of substitute products or services
Substitutes, or alternative products that can perform the same function, impose limits on the price that an industry can charge for its products. The presence of substitutes is not obvious and may not be easily perceived by firms operating in an industry. Substitutes may even be preferred by customers and incumbent firms may only be noticed when it is too late to arrest their dominance.
An example which illustrates the rise of a substitute product is the current increasing proliferation of low-cost microcomputers coupled with low-cost easy-to-use business packages in areas such as accounting, database management and word processing. This ‘product’ has adversely affected the ‘industry’ of specialist programmers and specialist computer bureaux. The threat of substitutes depends on technical comparability of substitutes, the relative price of substitutes, the speed of technological development in ‘substitute’ industries and the cost of switching. Substitute products that deserve the most attention strategically are those that:
1 are subject to trends improving their price-performance trade-off with the industry’s product,