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Threat of substitute products and services

This threat can occur from established or new companies. The Internet is particularly good as a means of providing information-based services at a lower cost. The greatest threats are likely to occur where digital product and/or service fulfilment can occur over the Internet. These substitutes can involve the new online channel essentially replicating an existing service as is the case with online banking or e-books. But, often, online can involve adding to the proposition.

For example, compared to traditional music retailers, online legal music services such as Napster offer a much wider choice of products with different delivery modes (real-time streaming to a PC or the capability to burn onto a CD or download to a portable music device such as an MP3 player). In banking, new facilities have been developed to help customers manage their finances online by aggregating services from different providers into one central account. Such added value digital services can help lock customers into a particular supplier.

From this review of the competitive forces, it should be apparent that the extent of the threats will be dependent on the particular market a company operates in. Generally, the threats are greatest for companies that currently sell through retail distributors and have products that can be readily delivered to customers across the Internet or by parcel.

How businesses create value within their markets is fundamental to their success. Digital technologies have a significant role in changing the balance of value creation within a market, so the extent of this change and how well it has been implemented must be evaluated as part of environment analysis. Value delivered is dependent on the difference between the consumer benefit created by the business and the costs incurred in producing or delivering the value as suggested by Figure 2.4.

Lastly comment

You can see that arguably the biggest impact of the Internet is the capability to reduce costs through reducing intermediaries such as physical stores and also through changing the intangible benefits. Together, these combine to form the online value proposition, as explained in Chapter 4. To pass on the reduced costs of dealing direct it will be necessary for retailers, banks and other companies to change their structure and accounting practices to isolate online channels as a separate profit centre.

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