The competitive strength of the threat of potential substitute products refers to the potential entry of companies that sell substitute or alternative products to those of the industry, an example of substitute products would be soft drinks that could be substitutes or competition for mineral waters.
Rivalry among existing competitors and the entry of substitute products is considered a major threat to any industry because it puts a ceiling on the price that can be charged before consumers opt for a substitute product.
According to Estolano (2013), potential substitute products, perform in the same way or with similar functions to existing products in the industry, but by different means, these are always present, however, they are not easy to detect, the threat of substitutes is high if they offer a high performance-price ratio, while the cost change to the substitute is low.
For the authors (ob. cit.), rivalry among competitors has different expressions, from price decreases, introduction of new products, advertising campaigns and service improvements, high rivalry limits the profitability of an industry, which depends on the intensity with which it competes and the basis on which competition develops.
From the above perspective, the existence of high levels of rivalry among competitors can make the market difficult and unstable, therefore, only those with competitive advantages can remain positioned, which indicates that companies competing directly in the same industry are like mergers between companies in other countries offering the same type of product, the degree of rivalry among competitors will increase as the number of competitors increases, they become equal in size and capacity, the demand for products decreases, prices are reduced, etc.
In sectors that do not compete on price, they compete on advertising, innovation and product/service quality. Rivalry between competitors defines the profitability of a sector: the less competitive a sector is, the more profitable it will normally be and vice versa.