Do we want the threat of substitutes to be high or do we want the threat of substitutes to be low? Threat of Substitutes –Strong. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. Companies are concerned about the threat of substitute products (or services) displacing their own. Porter's five forces include three forces from 'horizontal' competition – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from 'vertical' competition – the bargaining power of suppliers and the bargaining power of customers.
A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. The substitutes of meals of McDonald’s are meals of other slightly different fast food restaurants such as KFC and Pizza and also home cooked meals. The competitive structure of an industry is threatened when there are substitute products available that offer a reasonably close benefits match at a competitive price. The Threat of New Entrants exerts a significant influence on the ability of current companies to generate a profit Gross Profit Gross profit is the direct profit left over after deducting the cost of goods sold, or "cost of sales", from sales revenue. Most of these substitutes are competitive in terms of consumer satisfaction and quality. The threat of substitutes is high when rivals or even companies outside the industry offer more attractive and/or lower cost products. Threat of substitutes Intensity of competitive rivalry Porter defines an industry as “ a group of competitors producing products or services that compete directly with each other ”. Buyers then have the opportunity to make a price/performance trade-off. The threat of substitutes is the availability of other products that a customer could purchase from outside an industry. Well, we want the threat of substitutes to be low. Explaining the threat of substitute products Butter and margarine, beer and wine, coffee and tea are all classic examples of substitute products. For example, substitutes like ready-to-drink beverages, instant beverage powders and purees, and food and other beverages are readily available from various outlets, such as fast food and fine-dining restaurants, vending machines, supermarkets and grocery stores, and small convenience stores. Gross profit is calculated before operating profit or net … They are a threat to profitability because they put a cap on the prices that you are able to charge for your products and services. Now as with all of the five forces, we have to ask ourselves. What's desirable here? A close substitute product … Threat of Substitution.
It's used to calculate the gross profit margin and is the initial profit figure listed on a company's income statement.