Question

The threat of substitutes is the availability of other products that a customer could purchase from outside an industry. The competitive structure of an industry is threatened when there are substitute products available that offer a reasonably close benefits match at a competitive price.

Discuss threat of substitutes and give examples.

Answer 1

The possibility of replacement in an industry affects the businesses in that industry's competitive environment and impacts the capacity of those firms to attain profitability. The existence of a possibility of substitution affects an industry's competitiveness, as customers can choose to buy the replacement instead of the product of the company. The availability of near substitute goods will make an industry more competitive and lower the profit potential in the industry for the businesses. On the other hand, the lack of near substitutes makes an industry less competitive and decreases the profit potential in the market for the businesses.

Food and Healthcare- in the long run healthy food can be a substitute for healthcare. For example if a nation began to consume less sugar demand for diabetes treatment may drop

The threat of new airline industry entrants can be seen as low to medium. Starting an airline company (e.g. buying aircraft) needs quite a few up front investments. In addition, new entrants require licenses, insurance, distribution channels and other credentials that are not easy to obtain when you're new to the industry (e.g. flight route access). In addition, existing players can be expected to have built up a broad base of experience over the years in order to cut costs and raise service levels. A new entrant is likely not to have this sort of experience, thereby creating a competitive disadvantage from the outset.