The threat of substitutes is one of the five forces identified by Michael E. Porter and used to evaluate the competitive environment of a particular business organization. The other forces include the threat of new entrants, the bargaining power of consumers, the bargaining power of suppliers, and the intensity of competitive rivalry. However, aside from its use in business analysis, it can also be used to understand consumer behavior. This paper discusses and highlights the impact of substitute products on both businesses and consumers.
Understanding the Threat of Substitutes: How Substitute Products Affect Businesses and Consumers
Substitute products are products from another product category that fulfill the same purpose or solve the same problem as another product from another product category. It is important to note that a particular substitute uses a different technology to solve the same economic need. It is a replacement product with differentiated product features and benefits
There are different examples of substitutes across different industries and sectors or markets. Smartphones have become substitutes for both feature phones and personal computers. Both tap water and bottled water are substitutes for products like Coke and Pepsi. Furthermore, in the energy sector, the substitutes for fossil fuels are nuclear power and solar power.
Nevertheless, based on the aforementioned definition and examples, the emergence and presence of substitute products threaten existing products they intend to replace. Some businesses consider this a serious problem. Others see this as an opportunity to expand their product strategy. The presence of substitutes strengthens competition and benefits the consumers.
Impact on Businesses
The increase in the sales of smartphones has resulted in a decline in the PC market. Furthermore, due to growing health awareness in some geographic markets, the sales of sweetened beverages such as Coke and Pepsi have been impacted by the popularity of healthier substitutes like bottled water or sugar-free flavored and natural fruit beverages.
Some businesses consider substitutes a serious problem. Others see this as an opportunity and a possible source of competitive advantage. The impact of substitute products on businesses depends on their respective strategic direction, the willingness and capabilities to adapt to market trends, and their access to financial resources and other resources.
Both video rental and cable TV businesses have suffered from the arrival of video streaming services from Amazon, Disney, and Netflix. The popularity of digital music affected the sales of physical records. It is also interesting to note that music streaming services such as Apple Music and Spotify have resulted in the decline of digital music downloads.
The emergence of a substitute product can affect the demand for an existing product. Furthermore, depending on the impact of factors such as propensity to substitute, the low switching cost, perceived level of product differentiation, the number of substitute products available, and ease of substation, substitutes can also be considered demand shifters.
However, in some instances, substitutes work in favor of several business organizations. Take note that Apple started as a computer technology company. It expanded its product line across different categories of consumer electronics and digital services. This is exemplified by the arrival of the iPod digital music player and the iTunes digital music store, the iPhone and the iPad, and other products such as Apple Music, Apple Arcade, and Apple TV.
The case of Apple exemplifies the positive impact of substitute products. Specifically, instead of focusing on personal computers and letting substitutes from other companies affect its profits, it developed its own range of substitute products for Mac computers. These products become product complements and are also part of its closed product ecosystem.
Impact on Consumers
Nevertheless, from the side of consumers, the impact of substitute products is mostly positive. The presence of these substitutes means that there are more options for them to choose from and that their purchasing decisions are not limited to certain products and product categories from a few companies. This demonstrates the benefits of competition.
The specific positive impacts of substitute products on consumers include regulated prices from increased competition, greater choice and variety, access to more innovative products, increased bargaining power, higher availability of market information, ease of switching from one product or brand to another, and enhanced overall value for money.
It is important to note that desktop and laptop personal computers were expensive before the advent of smartphones and tablets. Even the price of an entry-level desktop PC before 2007 was around USD 400.00. A laptop computer was more expensive starting at USD 500.00. The arrival of smart mobile devices has driven down the price of personal computers.
There are other examples of the positive impacts of substitutes. The arrival of fast-fashion brands such as Zara and Shein has provided a more affordable alternative to legacy brands. An electronic commerce platform or digital storefront has become a more convenient substitute for traditional or physical and brick-and-mortar retail shopping experience.
However, in several, the threat of substitutes also affects the consumers. The walled garden and closed product ecosystem of Apple has several criticisms and disadvantages. Some have noted that its product strategy has limited the options of its loyal consumers and is a prime example of anti-competitive practices that disadvantage even other businesses.
A lower entry barrier can flood a greater market with a multitude of product substitutes. This is not beneficial in cases in which lower prices supersede quality or when a bigger low-cost company drives smaller and local companies out of business. Hence, based on this, substitutes can leave consumers with fewer high-quality options and market information.
Conclusion and Takeaways: Understanding the Impact of Substitute Products on Businesses and Consumers
Substitutes can make and break a business organization. These are threats to most businesses because their arrival can affect the demand for existing products they intend to replace. However, in other cases, they provide an opportunity for businesses to diversify their product offerings and expand their markets. Substitute products are also beneficial to consumers by default. These benefits come from the advantages of competition. The presence of substitutes gives them more choices and empowers them to make informed choices. However, in some instances in which there is an influx of low-quality substitutes in the market or when a brand corners the market through a closed product ecosystem, product substitutes can work against the consumers.
