What does the term "substitute products" refer to in the context of Porter's Five Forces Model?

The term "substitute products" in the context of Porter's Five Forces Model refers to products that fulfill the same need as another product. This concept is integral to understanding competition within an industry because it highlights how consumers can choose alternatives that satisfy their requirements. When substitute products are readily available, they can limit the pricing power of existing companies and force them to enhance their offerings or lower their prices to retain customers.

For instance, in the beverage industry, for a company that sells soda, alternatives could include juice, bottled water, or even energy drinks, as these products can serve the same function of quenching thirst. This concept emphasizes the importance of recognizing potential competition that can arise from products outside of one's direct industry.