How the Availability of Substitutes Affects Business Strategy

In the contemporary society where every company is striving to strategically position itself in the market to harvest maximum gains, substitution threats negatively affect the competitive ability of the involved firms and the ability to being profitable (Rothaermel, 2016). Substitute’s availability is not favorable to profitability in any industry since consumers can opt for the substitutes especially when the prices are lower and the switching expenses are minimal (Rothaermel, 2016). The presence of close substitutes leads to a highly competitive industry and reduced revenue potential for companies in the business. On the other hand, the absence of substitutes leads to an industry becoming less competitive thus raising profit potential for the involved companies.

For instance, the airline industry is characterized by the high availability of substitutes since there are many travel alternatives such as train, bus and so on (Rothaermel, 2016). In this context, the switching cost is low and the substitute’s offers travel services at lowered prices thus making them favorable which is similar in the apparel and restaurant industries.  However, automobile or the gasoline industry is associated with the least number of substitutes because one has to use it unless they own an electric vehicle which is not so many. This means that the demand for gasoline remains high with less competition thus allowing the involved companies to maximize their profits and improve their competitive positioning in the industry. In other words, the switching cost in the category for getting into electric vehicles is quite high which deters the consumers from going for that option. The lack of close substitute enhances a company’s competitive strategy in the contemporary society by increasing its revenue and responsiveness (Rothaermel, 2016).

 

Reference

Frank T. Rothaermel. (2016). Strategic Management. McGraw Hill education.