Threat of Substitution
- On a free market, buyers have the choice if there is a viable
alternative.
- Substitute source. The exactly same product is sourced by two
or more distributors.
- Full substitute products are products from different manufacturers
that fulfill the exact same purpose. For example Kellog's corn
flakes and generic brand corn flakes.
- Partial substitues are products that only partially substitute
each other. A holiday in Venice is not exactly the same as a holiday
in Amsterdam, even though they are both cities and they both feature
channels.
Protecting against substitution
- Distributors may try to protect themselves against substitution
with exclusive distribution agreements. Buyers circumvent them
with so called grey market imports.
- Producers may try to protect their products with strong branding,
trade marks, patents and other psychological and legal barriers
against substitutes.
- Another way to protect from substitution is to make the products
incompatible with competing products. An example are the different
lens systems for SLR cameras.
- In general, protectionism against substitutes is bad for the
consumer/buyer and good for the seller.
|
Examples
Products/services facing a strong threat of substitution:
- Washing powder. A dozen of brands sitting on the shelves and
waiting for consumers to pick them up. Consumer will often pick
up the one that is on special on shopping day.
- Retail Outlets. Don't like Wal*Mart? Shop at Carrefour.
Products/services facing a weak threat of substitution:
- Oil. Although alternative forms of energy are being studied
and introduced, most engines today run on gasoline. Gasoline can
not be replaced that quickly on a large scale.
- Pharmaceuticals in the short term, because they are protected
by patents. In the long term, generics can dent their market share
and profits.
|
