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The hidden substitution threat

A picture of a magnifying glass on a 3D pie chartOrganisations constantly need to adapt to survive, and in today’s environment they often launch projects or products to seize opportunities or to respond to threats in their business environment.  A key question is “how can organisations establish which new projects, products, or opportunities they could consider focusing on?”


When faced with a dilemma like this, organisations often look towards their direct competitors.  What sort of innovations are going on in the marketplace?  How are any competitors behaving, and would it be best to follow suit or follow a different strategy?  Whether it’s an informal market analysis, desk-based Internet research or a thorough and formal analytic benchmarking exercise, the aim is the same: To understand your position against that of your direct competitors.


Whilst this is undoubtedly a useful activity, it exposes only part of the picture and understanding the customer is vital.  I was thinking about this as I sat at my local airport a few weeks ago.  I was waiting to take an internal flight between Southampton (in the South of the UK) and Manchester (in the North).    Since Southampton airport is relatively small, there is only one airline that flies this route, and on the surface this would seem like a monopoly.  After all, if you want to fly from Southampton to Manchester, you have to fly with them.  In that comfortable monopoly position, it might seem that the logical thing to do would be to invest in maximising capacity to meet demand. It might also seem logical to focus on providing premium services and finding ways to maximise passenger spending by offering additional in-flight meals and snacks.


Well, sort of.  As the famous quote (attributed to Havard Business School’s T. Levitt) reminds us:  “People who buy drills don’t need drills; they need holes.”   In my case, people who book air-travel don’t need air travel; they need to reach their destination in relative comfort in as short a length of time as possible.


This introduces an interesting and sometimes overlooked aspect of business: If you understand the value that your product is adding to the customer, you can start to understand what substitute products they might buy instead.  If I was a regional airline in the UK, I’d be paying close attention to the new high speed rail link that is being built.  When it is built, it is quite conceivable that passengers might choose to travel by rail rather than train.  There’s no “checking in”, no need to wait around at airports, and a train is likely to get you closer to a city centre location.   However, it doesn’t stop there: I’d also be paying attention to the growing acceptance of home-working and remote working.  Perhaps online conferencing software is yet another competitive pressure, particularly for those airlines that cover short-haul “arrive in the morning, back home by 6pm” routes.  These two substitutes are very different – if people continue to travel, but choose rail over air, an airline might console themselves with the fact that they are still travelling (so can be won back through marketing or by enhanced service).  In a world where online meetings became the norm, it might be much harder to win them back.   Michael Porter described these competitive substitute forces as the “Threat of substitute products or services” in his 5 forces model.


Understanding substitute products and services is important to organisations, whether mid-size or multinational, for two reasons:


1. You can adapt, develop or differentiate your product and adopt other strategies to encourage your customers not to switch

2. You might find new markets (as you might be able to market to customers who traditionally purchase the substitute product).


It’s important for organisations to scour the external landscape, understand how things are changing, and ensure that they are able to generate and use actionable data and insight in order to make the strategic decisions that will make them stand out from the crowd.  Understanding likely substitute products and services is an important part of this.


This post was written as part of the IBM for Midsize Business program, which provides midsize businesses with the tools, expertise and solutions they need to become engines of a smarter planet. I’ve been compensated to contribute to this program, but the opinions expressed in this post are my own and don’t necessarily represent IBM’s positions, strategies or opinions.

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