Competitive Intelligence Analysis with Porter’s Five Forces Part 5: Three Ways of Gauging the Danger Substitutes Will Spoil Your Party

The potential threat that your customers will turn away from your offering to a completely different substitute can be hard to predict. By way of example, we often say that the biggest threat to a TV show might not be a different TV show—it could be the game Garage Band. The point is that Porter’s Substitutes force is all about a company you don’t even recognize as a competitor having an unexpected impact on your business. As in previous posts, looking at the airline industry:

1. How significant is the cost of your offering? Because of the relatively high cost associated with air travel consumers and businesses are always looking for alternatives. If you see camping registration soar, it may bode poorly for the summer air travel season. When video conferencing emerged, you can bet that airlines monitored the situation. But how equipped is an airline to suddenly understand Cisco as a competitor?

2. How dependent are you on operations where substitution is most viable? If you’re very dependent on business travelers, and tele-whatever takes off, this could be more of an issue than if you cater to vacationers.

3. Are the switching costs toward substitutes prohibitive? Air travel customers can choose to travel by a different mode (or decide to skip a trip altogether) on a trip-by-trip basis, with no particular switching costs other than the potential for a cancellation fee if the tickets are already purchased, adding further risk to airlines.

By Sean Campbell
By Scott Swigart