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Strategy with a view of threats associated with substitutes

Business
Threats to any business that are associated with the availability of substitutes is equally precarious as with the pressures associated with new entrants.

Threats to any business that are associated with the availability of substitutes is equally precarious as with the pressures associated with new entrants.

By NYASHA CHIZU

The threats associated with new entrants prevail when barriers associated with government controls on the industry, or where availability of patents and proprietary knowledge, or when there is assets specificity that limit the variety from the output of machinery, or when internal economies of scale are low.

Although these factors and associated threats might apply to the element of the availability of close substitutes, their existence might not relate to those factors in the same way.

A substitute is a product from another industry that offers benefits to the customers that are similar to the products produced by the firm in another industry. They can also be defined as those products or services that meet consumer needs but available in another market.

An example in the telecommunications sector is the use of fixed telephones and mobile telephones. Within that industry there are various alternatives to the solutions. An example is on the provision of broadband that can be offered through digital subscriber line (DSL), fiber-optic, copper cable or satellite.

All these options are referred to as close substitutes for the provision of broadband although they offer different costs and benefits. Like new entrants, substitutes affect the competitive environment of the organisation in that industry.

They further influence the capacity of the organisation to achieve profitability. This arise from the fact that consumers can choose to purchase the substitute instead of the company product.

The same is true with services such as those used for local wireless networks for shorter distance coverage to provide internet access to homes and businesses.

In locations where it would be too costly to either install or lease cabled broadband, fixed wireless broadband often provides a cheaper alternative, for example, providing internet access for residents of a remote village or connecting multiple buildings with a wireless Local Area Network (LAN) infrastructure.

Fixed wireless network can support higher data rates while using the same power requirements as mobile or satellite systems.

Local companies that provide such technology include TelOne, Econet, ZOL, Africom, Powertel, Umax thereby increasing the availability of close substitutes to the availability of connectivity in addition to mobile broadband that provides high speed internet access over a mobile (cell) phone network (CDMA, GSM or 3G, 3,5G or 4G LTE).

Local companies that provide such services include Telecel, NetOne, Econet, Powertel and Africom.

This raised significant constraints to the ability of a provider to dictate the market price. Econet was the first to provide internet access to the public over the mobile and capitalised on high rates at that time due to the non-availability of substitutes.

With the availability of various options to access the internet, the competition is now cut-throat and competitors are no longer able to charge an arm and a leg as before, even when such costs could be driven by rising production costs.

This then calls for businesses to review their industries in total in search of products that may pose as substitutes with capacity to threaten your competitiveness.

Such an analysis is important in the development of a procurement strategy in that it assists in the review of both the up and down stream supply chain.

The more the substitutes are on offer in your market the more sensitive consumers are to any changes in price of the products and services.

Such situations are regarded as elastic in economic terms. The possibility of consumers to switch to substitute products is then very high.

The analysis of the market in relation to substitutes would need to consider whether the switching costs are low and if the substitute products are cheaper in the alternative market.

We recently noticed a switch of consumers from one mobile operator to the other due to the introduction of enhanced products such as One-Fusion by NetOne. The costs of switching is also very minimal as the price of a Sim-card is just a dollar with options to carry the same numbers on a different network.

The other determinant is that the substitute product quality must be equal or superior to the industry quality.

The same goes with the performance of that substitute product in relation to industry standards. Effective strategies will take into account the likely effect posed by substitutes in the industry.