The threat of substitute products or services in Porter's Five Forces Analysis impacts industry profitability by meeting the same basic need in a different way. When a new product or service is introduced that can fulfill the same need as an existing product or service but in a different manner, it can lead to a decrease in the profitability of the industry. This is because customers may switch to the substitute product or service if it offers a better value proposition, such as lower price or improved functionality. This can lead to a decrease in demand for the existing product or service, thereby reducing the profitability of the industry.
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Competition management is at the core of strategy formulation and an understanding of the underlying sources of competitive pressure provides the grou...
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Threat of New Entrants implies that the threat of new entrants into an industry can force current players to keep prices down. Entry brings new capacity and puts a cap on the profit potential of the industry. Threat of Substitute Products or Services implies that when a new product or service meets the same basic need in a different way industry profitability suffers. (Email is a substitute for express mail). Bargaining Power of Buyers implies that powerful customers can use their clout to force prices down or demand more services at prices that are already set, capturing more value for themselves. Bargaining Power of Suppliers implies that suppliers can use their negotiating leverage to charge higher prices or demand more favorable terms from industry competitors and lower profitability. Rivalry Among Existing Competitors implies that if the rivalry is intense, it drives down prices or dissipates profits by raising the costs of competing. Companies compete away the value they create.
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