Based on your analysis of the ease of entry into the pizza segment of the restaurant industry, your friends have decided to move forward with their plan to open a pizza parlor and delivery service within walking distance of your campus. Before they finalize the product mix for their restaurant, they have asked you to identify the competitive pressures stemming from the threat of substitutes for the pizza segment of the restaurant industry. What would your report to them include?
What will be an ideal response?
Companies in an industry or industry segment are vulnerable to competitive pressure from the actions of companies in a closely adjoining industry, at least whenever buyers view the products of the two industries or segments as close substitutes. Before assessing the competitive pressures coming from substitutes, however, company managers must first identify the substitutes, which is less easy than it sounds since it involves (1) determining where the industry boundaries lie and (2) figuring out which other products or services can address the same basic customer needs as those produced by industry members.
For instance, the purveyors of pizza face competitive pressures from other quick-service restaurants as well as from supermarkets offering prepared foods for take-out, as well as from do-it-yourselfers who make pizza at home. Three factors determine whether the competitive pressures from substitute products are strong or weak.
Competitive pressures are stronger when:
1. Good substitutes are readily available and attractively priced-moderate to strong in the pizza restaurant industry
2. Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes-moderate to high, for pizza
3. The costs that buyers incur in switching to the substitutes-low, for pizza.
Taken together, it is apparent that competitive pressures stemming from the threat of substitutes for pizza are moderate to strong.
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