What does the 'threat of substitutes' refer to in competitive analysis?

The 'threat of substitutes' refers to the risk of customers switching to alternative products that fulfill the same need or function. This concept is a critical component of competitive analysis, as it indicates how easily consumers can find different solutions that can satisfy their requirements. A high threat of substitutes means that customers have various options, which can drive down prices and profit margins for existing businesses, as they must continually improve their offerings or adjust their pricing to retain customer loyalty.

Understanding this threat is essential for businesses as it allows them to identify market dynamics and innovate their products or strategies to stay competitive. For instance, if a company notices that customers are gravitating toward a newer technology that serves the same purpose, it may need to respond by enhancing its own products or finding new ways to emphasize its unique value to avoid losing market share.