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Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute
product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. According to Porter’s 5 forces, threat of substitutes shapes the competitive structure of an
industry. Threat of Substitutes – Determining FactorsSeveral factors
determine whether or not there is a threat of substitute products in an industry. First, 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. Second, 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. Third, if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high. And fourth, if
the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product. Any of these situations is a high threat of substitutes: porter’s 5 forces sees less
profit potential. [Threat of Substitutes – AnalysisWhen analyzing a given industry, all of the aforementioned factors regarding the threat of substitutes may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high threat of substitutes and some may indicate low threat of substitute products. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market. The Threat of Substitutes Porter places High risk on:• Substitute product is cheaper than industry product The Porter Threat of Substitutes Low Risk Situation:• Consumer switching costs are high Threat of Substitutes InterpretationA low threat of
substitute products makes an industry more attractive. In addition, it increases profit potential for the firms in the industry. Conversely, a high threat of substitute products makes an industry
less attractive. It also decreases profit potential for firms in the industry. The threat of substitute products is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Start creating a list of potential
substitutes that you evaluate as a threat in an external analysis. With this analysis, you’ll be better able to identify and react to any threat of substitutes. Download the free External Analysis whitepaper by clicking here or the image below. [box]Strategic CFO Lab Member Extra Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits. Click here to access your Execution Plan. Not a Lab Member? Click here to learn more about SCFO Labs[/box] When there are many substitutes available for a particular product consumers?When there are many substitutes available in the market for a particular product, consumers: Can easily switch from one product to another, making demand more elastic.
When consumers are satisfied with a product like the brand?Brand loyalty is the degree to which customers are satisfied, like the brand, and are committed to further purchases; brand awareness is how quickly a given brand name comes to mind when a product category is mentioned. What are the six steps in the new-product development process?
When a brand is linked to other favorable images this is known as?Business Class - Chapter 14. Which involves using an established brand name on goods or services that are not related to the core brand?What Is Brand Extension? A brand extension is when a company uses one of its established brand names on a new product or new product category. It's sometimes known as brand stretching. The strategy behind a brand extension is to use the company's already established brand equity to help it launch its newest product.
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