Have a good day. Today we will start with the second force from Porter´s Industry Analysis Model. It is called Substitutes. Competition depends on the extent to which products in one industry are replaceable by ones from another. To show you what is the meaning of Substitutes and why Porter has included this force in his industry analysis, I will use the example of a product each of us knows and use very well in our quotidian lives: white refined sugar.
Second Porter´s Force: Pressure from Substitute Products
All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the profit potential of an industry by placing a price ceiling on the industry. The more attractive the pace‑performance tradeoff offered by substitutes, the tighter the lid on industry profits. In the eighties, sugar producers were confronted with the large‑scale commercialization of high fructose corn syrup, a sugar substitute. Since then the sugar industry has continuously been confronted by other substitutes, either natural or artificial. Let´s talk about these sugar substitutes in more detail.
Natural Sugar substitutes are those, which have not been altered chemically in comparison to artificial sweeteners, which are synthetic sugar substitutes (but may be derived from naturally occurring substances, including herbs or the same sugar itself). Artificial sweeteners are also known as intense sweeteners because they are many times sweeter than regular sugar. On the basis of type, the market is segmented into high-intensity sweeteners, low-intensity sweeteners, and high-fructose syrups. The white refined sugar extracted from cane has at least 23 Commercial Substitutes (natural and artificial) and this not only limits profits in normal times but also reduce the bonanza an industry can reap in “good” times.
I have prepared a summary of the main substitutes for white cane sugar from cane (natural and artificial):
The sugar industry, is currently being driven by the rising demand for sugar cane and different kinds of sugar substitute products in its different types: high-intensity sweeteners, low-intensity sweeteners, and high-fructose syrup which is used in multiple other industries such as food, beverage, and healthcare applications. Some of the top leading global sugar producers are Suedzucker, Cosan, Tereos International, ABSugar, Mitr Phol and others. These companies have made significant investments in the advancement of technologies and new product developments or adjacencies, to provide superior quality, innovative and even cost-effective sugar substitutes to customers. The largest sugar-producing region in the world is Latin America, primarily due to the large production volumes in Brazil. Brazil alone accounted for about 21.0% of total world production in 2017.
The sugar demand will continue to rise because of several reasons;
- The increase in population is the main driver for an increase in sugar demand.
- Rising global consumer income is expected to boost sugar consumption in the developing world.
- There is an expected increased consumption of sugar and its substitutes in China and India. During the next decade, China will become the major importer of sugar in the world.
More and more the sugar substitutes market is projected to grow due to some of the reasons mentioned above (with the sugar demand), but also because of other causes:
- The presence of growing emerging economies,
- The rise in health problems related to sugar consumption such as Diabetes and other sicknesses,
- The increasing awareness & preference for low-caloric food and low caloric beverage products,
- Increase in population and disposable income in developing Asian countries is driving the demand for sugar substitutes,
- The increasing incorporation of sugar substitutes in the health & personal care industries.
Identifying substitute products entails searching for any other products or by-products that can perform the same function as the product of the industry. Sometimes this can be a subtle task, one that takes a detailed analysis of related products, which seem so far away or removed from the industry in question.
Government regulations, subsidies and tax policies should also be considered in the search for substitutes. Many times, governments promote some industries, for example, using tax incentives, subsidies for exportation and research grants. Government Safety and pollution standards also affect relative cost and quality of substitutes.
Porter recommends performing a trend analysis in deciding whether the company strategy should be directed toward heading off a substitute strategically or accepting the substitute as a key competitive force.
Tomorrow I will continue refreshing some concepts which are very important to understand when we are doing an analysis of the demand and its relation to price.
Have a beautiful day.