Substitutes: A Bigger threat than competitors

Posted in Marketing & Strategy Articles, Total Reads: 4706 , Published on 31 October 2010

Porter's five force model is pivotal in any industry and must be analysed appropriately and extensively to find out a company's strengths and weaknesses. The five force model has 5 elements, namely threat of competitors, bargaining power of suppliers, bargaining power of customers, inter-organisational rivalry and, a very important danger i.e. threat of substitutes. Of all the above elements, threat of substitutes is deadly for an organisation as it is the most unexpected and it might take up the market by storm, thereby posing a potential danger to companies. Thus, it is extremely important that companies make breakthrough products and, creative and innovative efforts to tackle the possible hacking by substitute products and services.

From the early 80's to the end of the millenium, telephone booths, STD-PCO booths had a stronghold over the telecommunication market. The PCO business was spread from metropolitan cities to remotest of villages, which showed tremendous potential of further growth as the world was becoming a smaller place. However in the late 90's, the cellphone technology arrived and by the beginning of the century it took the market by a storm and completely destroyed the STD PCO market in the cities. It is still growing and threathens to kill the PCO booth business in the ever growing rural areas as well, due to better,  easier and cheaper connectivity. Thus, the arrival of an innovative substitute lead to the downfall of the telephone booth market.



Another example of substitute services affecting an entire industry is that of low cost airline carriers eating up of share of the railway industry. Earlier, airline travel was considered to be a luxury as only a priveleged few could afford to travel by air, while most people prefered travelling by AC trains, which was a lot cheaper. However, with the arrival of low cost carriers in the market like Deccan, Spicejet, Indigo etc, the customers had an option which was better than travelling by train. Not only were the airlines price competitive as compared to the railways, but it also reduced the time travel with better facilities for travellers at airport terminals compared to railways stations. Thus, customers prefered travelling by low cost airlines, which lead to a decline in the number of premium railway passengers travelling by AC trains. Therefore, innovation in services is also essential so as to act against threat of substitutes, and retaining market share against cheaper or better substitutes.

Similarly, another simple yet effective example of substitutes proving better than products is the threat of matchsticks for gas-lighters. A gas-lighter is very expensive as compared to an entire match box, which solves the same purpose of burning the gas stove, and thereby threatens the market share of the gas-lighter business.

Fighting competitors should be the priority for organisations in this competitive world because they crawl and eat into their business. But companies should be on the vigil and look out for products and services which can be a potential threat as it can substitute the existing product, and demolish its existence from the market.



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