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Porter's Five Forces Analysis: Threat of Substitutes

Strategies and resources for creating a Five Forces Analysis

What is the Threat of Substitution?

Companies are concerned that substitute products or services may displace their own. The threat of substitution is high when rivals, or companies outside the industry, offer more attractive and/or lower cost products. Buyers then have the opportunity to make a performance/price trade-off. The cost of switching is also a factor. If it is high, the threat of substitution is low.

Questions to ask include:

  • Is it easy for consumers to switch to another product/service?
  • What are the major substitute products?
  • What are the trends in market share of the product and its substitutes?
  • What are the growth rates?
  • What are the price/value characteristics?
  • Are consumer preferences or consumer demographics changing?

Identify Company Products & Brands

Companies describe their business and list their business segments, products and brands in Item 1 of Form 10-K which is filed annually with the Securities & Exchange Commission (SEC).

Form 10-K may be obtained through corporate websites by clicking on links such as "About Us" or "Investor Relations." The following databases are also authoritative sources for Form 10-K:

Market Share of Products and/or Brands

Consumer Preferences/Consumer Demographics

Demographic data provides information about basic human characteristics of a market or population. Demographic segmentation divides consumers into groups based on variables such as age, gender, income, occupation, stage in lifecycle, generation, nationality, race or ethnicity, religion, and social class.

Psychographics, also known as the IAO variable (interest, activities, and opinions), is not quantitative and does not use simple numbers and figures. It classifies the target market's feeling toward consumer goods (e.g., what they want & why, how they carry on their everyday lives, what they value, how they make choices when it comes to what they purchase, etc.) by groups of people based on attitudes or beliefs and is sometimes referred to as "lifestyles." This category builds on demographics which look at groups based on quantifiable things like race, age, income, etc.

DEMOGRAPHICS

CONSUMER SEGMENTATION SYSTEMS

Claritas MyBestSegments

  • Claritas lifestyle segmentation systems define every household in the U.S. by distinct lifestyle types, called "segments," to provide a comprehensive picture of who lives where and what they are like. Information on Claritas PRIZM Premier (shopping), Claritas P$YCLE (financial and technology preferences), and Claritas ConneXions (media habits). Case studies on using segmentations. FAQs. ZIP Code Look-up tool.

ESRI Tapestry Segmentation

  • Divides all U.S. residential neighborhoods into segments based upon socioeconomic & demographic characteristics which are then grouped in LifeMode Summary Groups describing lifestyle & lifestage, and Urbanization Summary Groups describing affluence & population density. An ESRI ZIP Code Look-up tool is available.

CONSUMER TRENDS

Trendwatching

  • Reports on global innovations

Springwise

  • Source for global innovation intelligence

Brand Equity News & Research

Search Google with the term "challenger brands" and a product/industry to find trends.

Innovation and New Product News