This course utilizes an inquiry based approach to understanding sources of competitive advantages in companies and other organizations.
Module 2 Part 5
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From the course by University of New Mexico
Entrepreneurial Strategic Management
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From the lesson
Week 2
How does the business environment influence the success of a company?
Meet the Instructors
Doug E Thomas, Ph.D.Professor
International Management, Anderson School of Management
Another one of the Porter's Five Forces that's really important to understand
is the threat of substitute products.
Think about that for a minute.
If you are a company in the pizza industry or the airline industry,
do you want there to be substitute products for your core offering?
What do we mean by that?
When we say substitute product, we're talking about a product that's different.
It's not the same thing, but the customers receive similar value from.
So, for example, in the pizza industry, there are other substitutes.
You can eat pasta, for
example, that would substitute for many people for that product.
I mentioned in the previous part for the airline industry, you can drive.
And that is a substitute for flying.
It takes longer, it's not exactly the same, but
it's a competitive product offering.
The best case scenario for a business or an industry would be one
that is offering a product or service that has no substitute.
Think about what those industries might be like for a couple of seconds.
I already mentioned one.
The petroleum industry is a highly profitable one, in part,
because we haven't found in this world of ours an efficient,
cost-effective substitute that's commercially viable and
widely available to petroleum.
And until that happens, the petroleum industry will continue to be highly
profitable and will continue to be able to dictate things like prices and
quality to consumers like us.
If you've ever seen the movie Back to the Future, I don't know why I always
think of this movie when I talk about this particular force, but
there's a vehicle that's driven and then is a time machine,
and it's powered at one point by a banana because of a flux capacitor.
There is no flux capacitor in today's world.
There is no way to convert commercially viable, widely accepted,
to convert bananas into energy to, for example, power motor vehicles.
And so, you'd love to be in an industry like that one.
Here's another one that's a highly profitable industry
that's often criticized.
The pharmaceutical industry.
From this perspective, we can explain the success, the profitability of
the pharmaceutical industry, and there are lots of companies in that.
I understand that it's a very broad industry.
But there aren't very many substitutes for most of us in situations of life or death.
If a doctor prescribes us a medication even if it's more than we can afford,
usually we try to find a way to pay for that, even if it involves raising money or
asking for money from our family or friends.
That's not always the case that it's possible, tragically, but most of us,
given the scenario of within the realm of possibility of
affording a pharmaceutical product, will choose to try to find a way to pay it.
And so, you know, typically, there aren't very many substitutes for
that particular product offering.
And so, as a business, a successful one or a successful industry
is one in which there aren't very many substitute products.
Let's give the fourth of the five forces.
The threat of new entrance.
We often talk about the threat of new entrance with a companion phrase and
that is barriers to entry.
If you are a company in an industry, if you are already operating in the pizza
industry, do you want the threat of new entrants to be high or low?
I think you'd find if you thought about that for
a minute or two that you want the threat of new entrants to be very low.
If you're in the pizza industry,
you don't want new companies to be able to easily enter into the market.
And therefore, you want barriers to entry to be very high.
What are barriers to entry, and how do they impact company and therefore,
industry success?
Well, barriers to entry can be a lot of things.
For example, how hard is it to get into the petroleum industry?
Probably pretty difficult.
It probably involves a lot of startup capital, right?
Access to some key resource that gives you an advantage, whether it's location based,
you know, building a pipe line across a geographic area,
all of those involve significant startup cost,
they probably also involve government regulations and permissions.
And so, you would probably say that the petroleum industry is protected
by these almost natural barriers to entry, it's difficult for
new entrants to get in, so therefore, the threat of new entrants is very high.
You could probably say the same thing about the pharmaceutical industry,
it's very expensive to develop a successful new pharmaceutical product,
and that's a natural barrier to entry.
Think of Coca-Cola, which we mentioned earlier, what keeps most
of us, who are entrepreneurs, who think we come up with a great new idea for
a beverage out of that industry competing with Coke,
one this is probably the brand loyalty to Coke.
They have spent I would dare say billions of dollars to build up a brand and
a recipe that's very, very, very popular.
And it's very difficult to compete against that.
Its a natural barrier to entry and it keeps new entrants out.
So if you are a company, an entrepreneur out there, somewhere across the world,
who'd like to try to start a business that's successful, you probably want to
get into an industry where the threat of new entrants is low enough that you
can get in, where the barriers to entry are low enough that you can get in, but
once you're in, you want to throw those up very high and
make it so that competitors can't get in very easily.
Now, I'm not talking about doing this through illegal or unethical means, and
I'm also not talking about unproductive relationships with the government.
When I talk about, or when this model talks about threat of new entrants and
barriers to entry, we're talking about competitive factors,
things that exist because you're doing a great job.
It's not buying off the government leaders so
that there's, you know, it's illegal for new entrants to come in.
That you have a protective market in that way.
So that's the fourth force, and it's a very important one.
If you think about it, by the way, before we finish that particular force,
there are lots of industries that are very easy to get in.
It's very easy to, for example, relatively speaking, compare creating a brand
new drug that's successful, or a successful petroleum offering.
It's very easy to put up a website,
it only costs a few thousand dollars, offering some type of service.
It's relatively easy to start a small restaurant, or a food truck, right?
The barriers to entry are much lower, it costs much less,
there's usually much less regulation, there's some, but much less.
And so, when we talk about that,
you probably could think of a lot of businesses like that that have failed.
And that's partially because the threat of new entrants is very high,
it's very easy for anyone else to do the same thing.
And so, that shouldn't stop you from starting your own business, but
it is something to think about as you get started.
So in the next part, we'll talk about the fifth and final force,
which is the degree or level of competitive rivalry in the industry, and
all these other forces have been building up to that fifth and final force.
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