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Procurement for Porter’s 5 Forces: Part 5: Threat of Substitute Products

Demand for X instead of Y
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For every company, what it makes is very dear to it.  But it may not always be so to its customers.  Customers are always looking for cheaper, easier, better or newer products!  As such, they can make traders and manufacturers quite insecure. Just like they say, there are many paths to one goal; there could be many paths to a consumer’s satisfaction for the same thing.  So let us see how procurement professionals can prepare their companies for this innocent consumer indifference.

Analyze the Cost-Model of a Substitute Product

Are your company’s competitors (those selling substitute products) really well placed to last a long time in the market?  You might get interesting insights from say a financial report or from digging deeper into the components of what their company sells.  Have a look at the comparative future-cost-forecasts of the prices and make some fact-based predictions if you can, about who is well placed to deal with the challenges of the up-coming price conditions in the market.

Analyzing the profit-margin will also similarly tell you if your company needs to worry sometime soon enough about cutting its costs to sustain in a price driven product substitution by your customers.  You could prepare yourself for leaner manufacturing once this possible future threat is validated in your discussion with other decision makers.

Analyze the Supply Risks of a Substitute Product Maker

The absence of your products at the place of buying, could lead a customer to get the first taste of a substitute product out of sheer need.  Look for supply chain vulnerability in the procurement model of a substitute product and match it up against yours.  The more there are loop-holes in a supply-chain, the higher is the probability that the company will be less well-placed to counter loss of profit due to unexpected circumstances.

Remember, that for every company that is a competitor to your company, there is a procurement department that is a competitor to you!

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