By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry.Unless it can upgrade the quality of the product or differentiate it somehow, the industry will suffer in earnings and possibly in growth.Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times.Substitute products that deserve the most attention strategically are those that (a) are subject to trends improving their price-performance trade-off with the industry's product or (b) are produced by the industries earning high profits.Substitute often come rapidly into play if some development increases competition in their industries and cuases price reduction or performance improvement.
Definition