Porter’s Five Forces

Threat of Substitutes

According to Wikipedia:

A substitute product uses a different technology to try to solve the same economic need. Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines, automobiles, trains, and ships; beer and wine; and so on.

Potential factors contributing to the threat of substitutes include:

  • Price-Performance of Substitute
  • Buyer’s Switching Costs

This Case Study provides a high-level overview of the workflow without detailed explanation. It assumes you are already somewhat familiar with KNIME and Market Simulation. If not, start by reviewing the Building Blocks and Community Nodes.

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Case Study

Substitute products use different means and technologies to try to solve the same economic need. Substitute products, therefore, have high degrees of Horizontal Differentiation.

To limit the Threat of Substitutes, companies can also increase their Horizontal Differentiation by offering new features or wider product accessibility.

The food distribution business is fragmented and competitive. In addition to having rival food distribution companies, substitute offerings are also available. Buyers can avoid distribution altogether by buying directly from the manufacturing supplier, or by using retail sources.

Sysco, the largest food-service distributor in North America, changed the market dynamics by adding Horizontal Differentiation to their product line. They emphasized value-added service options to buyers – such as credit, menu planning, and inventory management. These services shifted the competitive dynamics away from just the cheapest price.

Before: Price Competition

Originally Customers could choose between Sysco Distribution or the ‘No Distribution’ substitute and buy direct from the Supplier. Sysco’s distribution service offered positive value to some Customers. But Sysco’s Prices were higher and, as Sysco also buys from the same Suppliers, their Costs were no cheaper.

In this “Before” simulation, Customers make purchase decisions mostly on Price. Over 60% of Customers selected to save money by buying direct from the Supplier.

Sysco Value

Sysco offer the benefits of both “Food” and “Distribution”. The Supplier offers end-customers only the benefit of “Food”. Sysco’s distribution system adds value for some customers, but their prices are higher.

Distribution

On average, Sysco’s Distribution service adds no value to customers (Mean = 0.0). But the value perceived by individual customers varies by up to several $100 per delivery (Standard Deviation = 100).

Sales Results

Price Competition dominates this Market Simulation. As Sysco is the more expensive product, it only manages to capture less than 40% of the market.

After: New Options

Next, Sysco adds three Value Added Service options:

  1. Credit
  2. Menu Planning
  3. Inventory Management

These further increase Sysco’s prices, and most customers find these options unattractive. Nevertheless, Sysco grows their profitability and market share from the customers who do value these options.

Five Products

With Sysco’s three new Value Added Service options, plus their base Product and the Supplier Substitute, Customers now have 5 products to choose from.

Option Value

Almost all customers find one or more of Sysco’s options unattractive (value = 0). The Willingness To Pay (WTP) of Sysco’s core product is aggregated with the value customers place on Sysco’s Value Added Services.

New Results

Sysco’s new options increase their market share by almost 5%.

Conclusion

Sysco increased the Horizontal Differentiation of their product line by offering customers a set of Value Added Service options. This helped shift the competitive dynamics away from just price, and allowed Sysco to increase their market share.