In the ready to wear clothing industry as the buyers

In the ready-to-wear clothing industry, as the buyers (department stores and
clothing stores) have become more concentrated and control has passed to large
chains, the industry has come under increasing pressure and suffered falling
margins. The industry has been unable to differentiate its product or engender
switching costs that lock in its buyers enough to neutralize these trends.
Substitute products
By placing a ceiling on prices it can charge, substitute products or services limit the
potential of an industry. Unless it can upgrade the quality of the product or
differentiate it somehow (as via marketing), the industry will suffer in earnings and
possibly in growth.

Manifestly, the more attractive the price-performance trade-off offered by substitute
products, the firmer the lid placed on the industry’s profit potential. Sugar producers
confronted with the large-scale commercialization of high-fructose corn syrup, a
sugar substitute, are learning this lesson today.
Substitutes not only limit profits in normal times; they also reduce the bonanza an
industry can reap in boom times. In 1978 the producers of fiberglass insulation
enjoyed unprecedented demand as a result of high energy costs and severe winter
weather. But the industry’s ability to raise prices was tempered by the plethora of
insulation substitutes, including cellulose, rock wool, and styrofoam. These
substitutes are bound to become an even stronger force once the current round of
plant additions by fiberglass insulation producers has boosted capacity enough to
meet demand (and then some).
Substitute products that deserve the most attention strategically are those that (a)
are subject to trends improving their price-performance trade- off with the industry’s
product, or (b) are produced by industries earning high profits. Substitutes often
come rapidly into play if some development increases competition in their industries
and causes price reduction or performance improvement.
Jockeying for position
Rivalry among existing competitors takes the familiar form of jockeying for
position — using tactics like price competition, product introduction, and advertising
slugfests. Intense rivalry is related to the presence of a number of factors:
•
Competitors are numerous or are roughly equal in size and power. In many
U.S. industries in recent years foreign contenders, of course, have become part
of the competitive picture.
•
Industry growth is slow, precipitating fights for market share that involve
expansion-minded members.
•
The product or service lacks differentiation or switching costs, which lock in
buyers and protect one combatant from raids on its customers by another.
•
Fixed costs are high or the product is perishable, creating strong temptation to
cut prices. Many basic materials businesses, like paper and aluminum, suffer
from this problem when demand slackens.