Substitute products have grown in importance

Symptom: During a period of high profitability, the industry's market penetration declined as substitute products gained share.

Implications for the market:

The industry's past pricing behavior has broadened the nature of competition that players will face in the future.
- The industry competitors used their dominance to exert more control over prices than would normally be the case in a highly competitive market. The ability to raise prices when necessary helped protect the industry's profitability.
- By holding up a comfortable price umbrella, however, these competitors have encouraged the entrance of new competitors offering substitute products.
And these new competitors are positioned to continue taking share
- As the traditional markets for substitute products mature, the high prices and margins in this industry create an incentive for these producers to develop products that bring them into more direct competition with the industry.
- Over the long term, these substitutes can come to represent a significant strategic threat.

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

"Can We Raise Margins With A Price Increase?"
Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.
"Entering A Different Dimension"
Understanding key differences between hostile and non-hostile markets can help leaders make the transition between the two.
"The Grasshopper and the Ant"
Leaders of industries coming out of hostility would do well to remember the grasshopper and the ant. Hostility, like winter, always returns.
"The Myth of the Hockey Stick"
From the early stages of hostility, real improvement in price was a long time in coming.