Threat of Substitutes

Firms in some industries face competition from those marketing substitute products. Substitutes limit the profit potential in an industry by placing a ceiling on the price firms in the industry can charge. For example, petrochemical based products as packing materials have restricted the growth of jute industry. Substitute products that deserve the most attention strategically are those that :

1. Are subject to improving their price preference tradeoffs with the industry’s product, or
2. Are produced by industries earning high profits.