Threat of substitute products or services

Posted on by Tim Richardson

After a day of shopping, I decided to create this post. While shopping I paid attention to my buying options during my trip. I could choose large a hypermarket store such as Target. I could also choose traditionally retail stores such as Safeway or Whole Foods. I decided to go to Target because I know my mind will wander from groceries to something else like electronics or clothing. Safeway and Whole Foods have better options of high quality food products, but for this trip I’m looking for a one stop shop type of place.

First, let’s start by addressing the topic of this post. The threat of substitute products or services directly impacts competition and an industry organization’s ability to make a profit, because the availability of substitute products or services is the driving force. The higher the availability the lesser the profit.

Let’s take a look at a few factors.

Factors that determine a high risk substitute threat

1 if the consumer’s switching costs are low, meaning there is little if anything stopping the consumer from purchasing the substitute instead of the industry’s product, then the threat of substitute products is high (Hines 2013).
2 if the substitute product is cheaper than the industry’s product – thereby placing a ceiling on the price of the industry’s product – then a threat of substitutes high risk is the case (Hines 2013)
3 if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high (Hines 2013).
4 if the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product (Hines 2013).

Low risk factors makes an industry attractive because there is a potential for high profits.

The chart below illustrates how substitute threats are analyzed.

Analysis Criteria Description
The relative price performance of substitutes
 Refers to the cost effectiveness of the substitute products, (Total supply chain costs) Alternative products that provide overall savings to your customers, without impacting the quality of your customer’s products or services are more likely to be viewed favorably for adoption.
Switching costs Refers to any cost incurred by your customers to switch to an alternative product. 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 may also be intangible costs such as risk.
Buyer propensity to substitute Refers to your customers loyalty to your product or service. How do your customers react to substitutes, do they trial them or are they loyal to your industry?It would also pay to identify the things that need to change for your customers to change their propensity to trial substitute products.

(www.whatmakesagoodleader.com 2013)

The Impact

Now, let’s take a took of how these factors cost a traditional store in Chicago to fall.

In October of 2012, Safeway Inc. announced that it will close all Dominick’s stores in the Chicago market. Dan Hyman President of Millennium properties stated that new grocers have created a cutthroat market. Dominick’s incurred losses before income taxes of $35.2 million in the first nine months of 2013. Dan Hyman, president of Millennium Properties, said the nflux of new grocers such as Target, Walmart and Trader Joe’s has created a cutthroat market. “In the past few years, Chicago all of a sudden became like a big battleground, and the battle is probably not over (DUDEK 2013).”

Preventing the Threat

The perceived level of product differentiation refers to how organizations exploit the differences between their products or services and their competitors in order to gain a competitive advantage. Differentiation is established through advertising, sponsorship and public relations, which directly impacts the perceived level or differentiation. Differentiation can also be established through the product itself. Organizations differentiate their products or services from competitors though design, performance, features, manufacturing and slogans. “Design- Attractive, unique product design is a very effective way to differentiate. Apple is constantly pursuing this strategy which reflects in the entire assortment, from iPods to MacBooks. (Michael 2013)”. A high perceived level of differentiation has a low level threat risk and vice versus.

The number of substitute products in a given market can aso impact the level of threat for substitute products. The greater the number of substitute products that are available in a given market the higher the threat level. A high number of substitute also affects the price determination for a product or service, causing a lesser price value. A lesser price value reduces the potential amount of profit for an organization. “In addition, quality depreciation is the key when fighting towards substitute products and services, since the high quality of products and services within the partnership companies has always been the way of doing business. (MindTools.com 2011; QuickMBA.com 2010).”

Ease of substitution

Information-based products are more prone to substitution, as online product can easily replace material product. Information-based products are digital products such as eBooks, podcast, mp3’s and videos. These products are more prone to be substituted, because they lack the ability to be differentiated and there’s a high number of these products available on the market that are easily accessible giving consumers a variety of choices. “Information based products come in different forms — eBooks, videos, MP3s, podcasts, phone and computer applications, software, and the like. People are not just buying the latest song from the most popular bands and songstresses, or the latest movie released in digital form. In fact, people check out a variety of information based products online, because most of their needs for work or play can be answered by these products (Hewitt 2011).”

Substandard Products

Substandard products are products that intentionally deceive consumers on the differentiation between products. These products are threats to the owners of the product that is being sub standardized, because they have a lesser cost, poor quality and they usually do not follow standards within the industry. These products take away potential profits from quality organizations and they can give quality products a bad reputation. Director General, Standards Organisation of Nigeria, Mr. Joseph Odumodu talks about his battle with substandard products in an article in allAfrica.com. “Odumodu, who said the level of substandard goods in the market was above 80 per cent in 2011, which was one of the worst in the world, expressed delight at the level of reduction. He said: “Fake and substandard products chased away good products, which led to factories being closed down and hundreds of thousands, millions becoming jobless (AKINSUYI 2013).”

Reflect

Now step back and think about the smartphone market and let’s focus in on the Android market. Google’s Android OS gave manufacturers the ability to differentiate their smartphone products, by licensing the Android OS from Google. According to the data provided by OpenSignal there are approximately 18,000 android devices available on the market. So just between Samsung, Motorola, HTC and LG, if compare devices from these manufacturers. We can determine the substitute risk threat and understand why some devices are selling better than others. We’ll also know which of these products are substitutes and substandard.

References

 

 

 

One thought on “Threat of substitute products or services”

  1. Pingback: Pressure from Substitutes: Porter´s Industry Analysis Model. Part IV. – Eleonora Escalante MBA-MEng Strategic Corporate Advisory

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