You have an idea for a business: how should it identify substitutes?

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Porter’s analysis still requires thinking about two elements of the market – buyers and substitutes that may threaten your business. I already wrote about buyers a few posts ago. I’ll remind you that it’s about market segmentation, that is, isolating who will be the buyers of your company’s products or services.

If at this stage of business planning you have already specified a group of key customers. You can further characterize them by three characteristics: their number, the degree of dependence on the garments you sell and the possibility of backward integration. The more customers, the better. Even if a few abandon our entrepreneur’s suits, there will remain others who will allow the company to function. On the other hand, the lower the degree of dependence of customers on the suits sold in his store – because they don’t differ much from those of competitors’ stores – the worse.

It would be quite bad if each customer bought a sewing machine and started sewing his own clothes, or if each of them started his own suit store. Backward integration would then take place – connecting customers to their supplier, the wool manufacturer, or in the second case to the garment factory.

Any of your existing or future competitors might offer exactly the same products as your company. In that case, they are close substitutes. A further substitute will be a different garment, but one that performs a similar function as a suit – the person wearing it is supposed to look festive usually to get something special done or to make a good impression on someone. You can still think about a potential substitute. It will be neither a suit nor a tailcoat or frock coat. The potential substitute will satisfy the same need as the last two products – it will allow you to arrange something special or improve your image. It could be, for example, a person hired by a customer of your store for this very purpose.

Porter’s analysis is a look at the company’s environment. You can influence this environment with marketing-mix tools and slowly change it according to your needs. The conclusions of Porter’s analysis will give you a sense that you will not be alone in the market.