Porters Five Forces: Substitutes
Phil Kenkel
Bill Fitzwater Cooperative Chair
The Porter’s Five Forces Model can help cooperative managers and directors think strategically.
The second force is the threat of substitutes. This is affected by the ability of your customers to find a different way of doing what you do. The threat of substitutes is greater for commodity products as opposed to brand name products. Other factors include the cost for customers to switch and customer loyalty to the brand or company. Agricultural cooperatives are intrinsically vulnerable to the threat of substitutes because they deal with commodities and typically provide basic services.
Substitutes can come in many shapes and sizes. The neighboring cooperative or independent applicator is obviously a substitute for your cooperatives application services. Multi-national firms can decide to move into a region and compete with the existing network of cooperative and independent firms. A larger producer purchasing his own application equipment is also a substitute for the cooperative’s services. . No till farming practices are a direct substitute for tillage and indirectly became a substitute for diesel fuel sales at cooperatives.
When conducting strategic planning, it is a good exercise to try and identify why members might consider switching to an alternative product or service, what barriers are present that limit switching and what are the advantages of the cooperative’s product or service relative to a potential substitute. Another planning tactic is to hold customer meetings with targeted groups of customers that are most able and likely to switch. You can then work to understand their needs. This might uncover the potential for a new service. It also provides a chance to communicate your present offerings and the cooperatives overall value package. The cooperative can also use this analysis to attract customers from alternative firms.
The threat of substitutes has not historically been the greatest force facing cooperative firms.
Nevertheless, a cooperative manager can reduce the threat of substitutes by staying closely in tune with customer preferences. Understanding changing customer needs helps the cooperative create a “bullseye match” between what the customer wants and what the cooperative offers. For example, if you can profitably offer variable rate fertilizer application to members that want it, those customers are unlikely to switch, Working to understand your member’s priorities helps to increase customer loyalty and differentiate your cooperative.
9-12-2012