Threat Of Substitutes
All firms in and industry compete with other industries offering substitute products or services. Steel producers are in competition with aluminum producers. Sugar producers are in competition with the firms which are introducing sugar-free products. The competitive force of closely-related substitute products impact sellers in several ways.
First, the presence of readily available and competitively priced substitutes places a ceiling on the prices companies in and industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position.
Another determinant of whether substitutes are a strong or weak competitive force is whether it is difficult or costly for customers to switch to substitutes to substitutes. Typical switching costs include, the cost of purchasing additional equipment, employees retraining costs, the time and costs to test the quality for technical help needed to make the changeover.
As a rule, the lower the price of substitutes and the higher the quality and performance of substitutes, the more intense are the competitive pressures posed by substitute products.