Threat of substitutes
Products meeting the same need in a different way, which cap the price an industry can charge. One of Porter's five forces, and easy to miss because substitutes come from outside the industry.
Where you will meet it
Threat of substitutes appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Analyse an industry through the five competitive forces
“Industry profitability is shaped by the threat of new entrants, which depends on barriers such as scale, capital requirements and regulation; the bargaining power of suppliers and of buyers, each stronger when concentrated or when switching is easy for them and hard for the other side; the threat of substitutes performing the same function differently; and the intensity of rivalry among existing competitors, which rises with fixed costs, slow growth and undifferentiated products.”
- Show how inflation and a firm's competitive standing shape sales and cost forecasts
“Porter's five forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and rivalry among existing competitors.”
- Analyse the outside forces acting on an industry with the PESTLE framework
“Porter's Five Forces explains profitability through competitive pressure: rivalry among existing firms, the threat of new entrants, the threat of substitutes, and the bargaining power of suppliers and of buyers.”
See also
Practise it
Practise threat of substitutes until it is automatic: questions that explain every wrong option.
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