The threat of substitution 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
Buyers with different circumstances and in different industries do not all have equal propensities to substitute when faced with a comparable economic motivation. Differences in their circumstances lead buyers to respond to a given relative value to price (RVP) and switching cost differently. While such differences might be treated as factors that modify RVP or switching costs, it is more helpful in practice to isolate them.
Resources. Substitution often involves up-front investments of capital and other resources. Access to such resources will differ from one buyer to another.
Risk Profile. Buyers often have very different risk profiles, the result of such things as their past history, age and income, ownership structure, background and orientation of management, and nature of competition in their industry. Buyers prone to risk taking are more likely to substitute than buyers that are risk-averse.
Technological Orientation. Buyers experienced with technological change may be less concerned with some kinds of substitution risks, while extremely aware of others that a less technologically sophisticated buyer would be oblivious to.
Previous Substitutions. The second substitution may be easier for a buyer than the first, unless the first substitution has been a failure. The buyer's uncertainties over undertaking a substitution may have diminished if a past substitution has been successful, or risen if a past substitution has led to difficulties. In the soft drink industry, this seems to have worked to the benefit of aspartame.
Intensity of Rivalry. Buyers under intense competitive pressure and searching for competitive ad-vantage will tend to substitute more quickly to gain a given advantage than those that are not.
Generic Strategy. The RVP of a substitute will have different significance depending on the com-petitive advantage that industrial, commercial, or institutional buyers are seeking or the value of time and particular performance needs of the household buyer. A substitute that offers a cost saving will tend to be of more interest to a cost leader than a differentiator, for example.
Many of these factors that shape the buyer's propensity to substitute will be a function of the particular decision maker who is involved in the purchase decision.
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278-289). Free Press. Kindle Edition.

In the scenario, the products have low value and high risk of supply. This group is known as bottleneck or critical in Kraljic's portfolio matrix. The objective for such items would be securing the supply. The company can achieve this goal by 'making' the products themselves, or finding an alternative option.
Diagram Description automatically generated

The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.
The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.

Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
1. Objectives
This part describes why you are doing the project. The business objective answers the following questions:
- What is your goal?
- What is needed to overcome the problem?
- How will the project support the business strategy?
2. Option identification and selection
Identify the potential solutions to the problem and describe them in enough detail for the reader to understand.
For instance, if the business case and proposed solution makes use of technology, make sure to explain how the technology is used and define the terms used in a glossary. Since most problems have multiple solutions an option appraisal is often needed. This will explore the potential solutions and recommend the best option.
When writing the initial business case the option appraisal is likely to contain a long list of options and will cover many possibilities. As the project continues a number of options will be rejected. The final business case may contain three to five options # the short list # that includes a do nothing or benchmark option.
3. Benefits and limitations
The benefits and limitations section describes the financial and non-financial benefits in turn. The purpose is to explain why you need a project.
For instance, to:
- Improve quality
- Save costs through efficiencies
- Reduce working capital
- Generate revenue
- Remain competitive
- Improve customer service
- Align to corporate strategy
The business case should also include any limitations since these present potential risk to the pro-ject.
4. Risk management
The risk assessment summarizes the significant project risks and opportunities and how they are managed.
The risks included should cover those that could arise from your project or the organiza-tion's ability to deliver change.
This section answers the following questions:
- What risks are involved?
- What are the consequences of a risk happening?
- What opportunities may emerge?
- What plans are in place to deal with the risks?
- Every project should include a risk log.
When writing a business case, make sure this is included as it explains how risk and opportunity are managed.
5. Implementation plan
The outline plan provides a summary of the main activities and overall timescale # project schedule # for the project.
Ideally, the project should be divided into stages with key decisions preceding each stage. Use this section to answer the following questions:
- What is required?
- How is it done?
- Who does what?
- When will things happen?
This outline plan lists the major deliverables and includes a brief project description plus accountabilities for each activity.
In the scenario, the CPO has set out objective, generated options, cost and benefit of each option and implementation plan. In order to make the business case more compelling, he should reinforce it with risk management.