Leg Zero: Pressure from Substitutes: Porter´s Industry Analysis Model. Part III.
Have a beautiful weekend for tous:
Please remember, Porter´s industry competitive analysis has been a wonderful starting point. Do not dismiss Porter even though there are other strategy models around. If we don´t like Porter´s combative buzzword as “force”, “threat” or “rivalry”, we can use other synonyms such as “pressure”, “risk” or “competition”. I compare Porter´s industry competitive analysis as the Leg Zero Wrap Up section from the Volvo Ocean Race. “The Volvo Ocean Race is regarded as the toughest and most prestigious sporting competition of any kind in the world. No other event tests people and equipment more extremely or requires such a combination of individual skill, teamwork, engineering excellence, technological capability and sheer guts. This year new route will be the longest ever at over 45, 000 nautical miles, crossing four oceans and taking in 11 major cities on five continents”. The Volvo Ocean Race (formerly the Whitbread Round the World Race) is a yacht race around the world, held every three years. The race typically departs Europe in October, and in recent editions has had either 9 or 10 legs, with in-port races at many of the stopover or host cities. This year the Volvo Ocean Race will start in Alicante Spain, in 29 days from now, and will finish in The Hague, The Netherlands next June 2018. I hope to finish my strategy race by covering all relevant strategy experts models content by June next year too.
There are other relevant strategic models from Porter (Value Chain); from Mintzberg; and others from my professors at LBS, which I do hope to share with you during my 2017-2018 Strategy Race. As I mentioned previously, be sure we will visit the “Blue Ocean” Model and the new “Blue Ocean Shift” from INSEAD experts W. Chan Kim and Renée Mauborgn. I have a race schedule to share with you soon. Think of this blog journey as the Volvo Ocean Race 2017-2018. Remember I decided to start with Porter´s industry competitive analysis, and still, there is a long way to go only in this introductory training leg of Porter.
My strategy race will have 11 legs… be patient with me, please. We will arrive at each relevant sailing port someday soon. This strategy journey has 12 host cities. Each leg is one model from each academic guru, expert or practitioner and I will dedicate a lot of my life to sail and share around each of the models during this beautiful journey. At the end of this journey (after 11 legs, and 12 host cities as the Volvo Ocean Race 2017-2018), I will release my own model, but that will be just at the end of this sailing journey, by mid next year. I will dedicate a lot of my life to sail and share each of the models from them, during this beautiful journey. My own race.
Any strategy model has the right to be twisted or adjusted when applying from theory to reality. This is done in order to improve or tropicalize them to the company owners’ particular contexts, kind of a dynamic ecosystem, with cultural, social, technological, economic and financial particular aspects for each company.
Let´s go back to business model themes: We are developing the second force of Porter: Pressure From Substitutes. And there are at least 4 key determinant factors we have to define, understand and digest very well.
1. Propensity of buyers to substitute
This key determinant factor refers to your customer’s loyalty to your product or service. How do your customers react to substitutes? Do they trial them or are they loyal to your industry? The first question to ask ourselves: Are there close substitutes for the product or service we are offering? How willing are our customers to shift their purchases based on changes in relative prices? The two critical issues here are the willingness to substitute and our customer´s loyalty. Even though substitutes exist, customers may be unresponsive to changes in relative prices. For example, efforts by city planners to relieve traffic congestion either by charging more taxes to gasoline (for example) or by subsidizing public transport have been remarkably ineffective in encouraging car´s owners to forsake their cars for buses.
Another example: “The threat of substitute products in the toy industry is strong and high. Toys and games are goods used for entertainment purposes and a number of different ways people entertain themselves is abundant! Instead of buying Barbie dolls, Scene It, Uno, and Marvel action figures, consumers may choose forms of entertainment such as playing outdoors, playing sports, going to the movie theatre, and completing jigsaw puzzles. Due to the fact that there are so many outlets and varieties of entertainment, besides toys and games, the threat of substitutes in this industry is high”, and there is a propensity from the buyers to substitute.
Tomorrow I will talk about Toys´R Us case and what I believe has been it´s bankruptcy causes.
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