Investing in companies with a competitive edge. Part 3: The Threat of Substitutes
The threat of substitutes, or substitution risk, is when a customer either does something themselves, goes with a used rather than a new version of a product, or uses a product from another industry.
Even when a company faces little competition, substitution risk can still be high if customers are willing to trade down to cheaper, lower-quality goods.
In this episode of Harding Loevner's six-part Porter Forces video series, Co-Deputy Director of Research Tim Kubarych, CFA, discusses how the threat of substitutes can affect a company's profitability.
Key dimensions such as switching costs are highlighted for companies like Microsoft Excel and the relative price performance of substitutes is also examined.
In the next installment, Director of Research Yoko Sakai, CFA, breaks down the threat of new entrants concept.
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