Porter's 5 Forces: Threat of Substitutes

Michael Porter identified the threat of substitutes as one of the 5 forces affecting the competitiveness (and thus profitability) of an industry. All firms in an industry compete not just with each other, but with substitute products or services from other industries. The more substitutes are available for your product or service, the less profitable your industry will be. If there are no substitutes for your product or service, your industry will have a higher profit potential.

Note that a substitute is any product or service that can perform the same function as your product or service. A tax preparer, for example, does not just compete with other tax preparers to get clients; a tax preparer also competes with tax software. This is because tax software can perform the same function (complete your taxes and offer tips) as a tax preparer.

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