When a procurement manager considers a substitution, the number and nature of additional func-tions that substitute provides should be taken into account carefully. Which of the following ratio could help the procurement manager to make the right decision?
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Explanation
One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.
In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently. The threat of substitution, then, is a function of three factors:
• The relative value/ price of a substitute compared to an industry’s product
• The cost of switching to the substitute
• The buyer’s propensity to switch
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278). Free Press. Kindle Edition.
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LO 2, AC 2.2
