h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

It's not just the threat of substitutes that matter, but the image and acceptability of those substitutes. For the last forty years or so bicycles have not been an acceptable substitute for cars, because they are what economists call an inferior good. What this means is that whereas the sales of most products increase as people's income rises, inferior goods lose out because consumers see other products as more desirable. So as income increase, people buy cars instead of more bicycles.

What the smart cycle manufacturers realised was that the trick was not to present them as a means of transport to compete with cars, but as a luxury add-on. Hence the craze for mountain bikes and the increased risk of being mown down if you are foolish enough to walk on a country footpath at the weekend.

Overall, what Porter's analysis tells us is that if you insist on producing something that others are also making you're in for a pretty rough time. The big money will end up in the hands of those who thought up the really cool idea that caught competitors napping.