Designing for superior business performance

A guide for technology, creative and startup leaders

Choice 2: Where we play - Threat of substitutes

In this chapter

Overview of what is the profitability threat from substitutes
Factors that elevate the threat from substitutes.
Protecting against substitutes
Tools that can help build and sustain your understanding

Introduction

A business can either create and realize opportunities from substitute products or be at risk of losing business to substitute products. In this section we will briefly examine the industry conditions that increase your potential to disrupt with substitutes or be disrupted by substitutes..

Consider for example high speed rail available in some countries, most particularly China. High speed rail is a substitute for travelling by passenger jets. High speed rail also offers some performance advantages over flying with an airline. Most particularly boarding times and hassle are shorter and lower. Finally, there are more, albeit brief stops, so it is easier to get to more locations.

Substitutes become a threat when:

factors which affect
the threat of substitutes
• Switching costs are low for customers i.e., it is easy for consumer to switch suppliers
• Substitutes have superior pricing relative to the current products
• Substitutes have better attributes or performance characteristics

Substitute threat is elevated when.

Switching costs are low for customers.
Substitutes have superior pricing relative to the current products.
Substitutes have better attributes or performance characteristics.

Review of substitute threat factors

Most of these elements are somewhat intuitive, so you can review these factors briefly here before we move on creating and overcome supplier power barriers.

Low switching costs

graph showing how unit costs are reduced as the quantity of product is increased

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers, or products. Switching costs can be monetary in nature, but also psychological, effort or time-based switching costs.

Many homes now no longer have a landline telephone connnection. Instead all formet fixed phone communications are transacted over individuals mobile handset or internet calls e.g. Facetime etc

Switching costs to eliminate the landline are advantageous for most people. Mobile phones offer convenience advantages, in that there is no need to get up and go to where the telephone is or walk around the house trying to find the cordless handset, with a flat battery.

Substitutes offer advantages

AirBnB introduced a substitute product in the lodging and travel industry. Without undermining the intelligent and hard work that went into AirBnB we can see the industry structure created the foundation for AirBnB’s success. AirBnB hosts offer superior pricing, frequently offer superior performance characteristics and customers in the hotel industry have minimum affinity for one supplier over another and therefore switching costs are low

Disrupting with substitutes

If rather than defending your business position in an industry, you are looking to introduce a substitute product or service into an industry. Then you will find it easier in an industry that is characterised by the attributes in Figure 34: Substitute threat factors. You will also likely have the pricing and performance factors somewhat in your control. So creating a substitute threat can provide superior pricing and or performance on attributes valued by customers, then these increase your threat potential to the industry.

Overcoming substitute threat

Overcoming the threats of from substitutes.

Advance product / service differentiation

Update your value proposition to be more competitive against the substitutes, to the extent that it is possible

This may mean introducing offerings that match in price or benefits.
Identify any value proposition synergy

Is there an additional value proposition available by partnering with the substitute.

Taxi cabs in many parts of the world can now be booked via the Uber app.
Disrupt the substitute market with your own market entry level substitute

Use the market disruption process defined in the where to play chapter to compete effectively against the substitutes

Continue with assessment of threat rivalry

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Rivalry assessment

Assess and adjust the attractiveness of your where to play choice in StrategyCAD™

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