In the world of competitive strategy, companies are often laser-focused on their direct competitors. They track market share, pricing, and innovation trends, all in an effort to stay one step ahead. But while they’re busy battling familiar rivals, a hidden threat often goes unnoticed: substitutes.
Substitutes rarely announce themselves with fanfare. They appear quietly, from outside the traditional competitive set, and then rewrite the rules of the game. Blockbuster didn’t see Netflix as a threat until streaming had already become mainstream. Taxi companies dismissed ride-sharing platforms like Uber, thinking they were too niche to matter. These companies failed not because they lacked competitive strength but because they didn’t recognize substitutes for what they were: viable, innovative alternatives that customers increasingly preferred.
When substitutes enter the scene, they don’t play by the same rules as direct competitors. They bypass the usual battlegrounds of price, features, and promotions, instead offering entirely new ways to meet customer needs. For businesses that misjudge this threat, the consequences can be catastrophic.
What Makes Substitutes So Disruptive?
Substitutes thrive on their ability to address customer frustrations that traditional players often overlook. They innovate where incumbents stagnate, and they redefine markets by shifting how value is delivered. Netflix is a classic example. At a time when video rental was dominated by physical stores, late fees, and inconvenient return policies, Netflix reimagined the experience. By delivering DVDs by mail — and later, by introducing on-demand streaming — it solved problems Blockbuster wasn’t even focused on.
Customers gravitate to substitutes not because they’re cheaper or faster but because they’re fundamentally better at solving their pain points. Uber, for instance, didn’t compete with taxis by cutting fares; it offered convenience, reliability, and transparency through its app-based model. Suddenly, the frustrations of flagging down cabs or paying unpredictable fares became relics of the past. By the time traditional taxi companies responded, customers had already embraced the substitute.
Another key strength of substitutes is their ability to capitalize on changing consumer preferences. Shifts in technology, demographics, and cultural norms can make certain products or services obsolete almost overnight. Streaming platforms like Spotify succeeded not only because they delivered music digitally but also because they catered to a growing preference for access over ownership. People didn’t want to buy and store CDs anymore; they wanted to stream music seamlessly, on any device, for a single subscription fee.
How Substitutes Erode Market Share
Substitutes don’t just coexist with existing offerings; they actively reshape customer expectations and redefine markets. They introduce new value propositions that force incumbents to either adapt or lose relevance. In many cases, substitutes gain traction by solving problems incumbents didn’t even realize existed.
The disruption caused by substitutes can also accelerate as they lower the barriers to switching. Ride-sharing apps eliminated the friction of hailing a taxi, while streaming platforms eradicated the hassle of renting physical media. By making their solutions easy to adopt, substitutes lower the stakes for customers to try something new — and once customers make the switch, they rarely go back.
Moreover, substitutes can attract attention away from existing products by offering entirely new benefits. Airbnb, for instance, didn’t just compete with hotels on price; it offered unique, localized experiences that no hotel chain could replicate. For travelers seeking authenticity or novelty, Airbnb wasn’t just an alternative — it was the superior choice.
Why Companies Overlook Substitutes
The rise of substitutes often catches companies off guard, not because the threat is invisible but because it’s misinterpreted. Businesses are wired to focus on direct competition, viewing rivals in their own industry as the only players that matter. This narrow view creates blind spots that substitutes exploit.
A major reason companies overlook substitutes is their tendency to define markets too narrowly. Taxi companies, for example, considered themselves in the “transportation by taxicab” market, failing to see the broader “on-demand transportation” market that Uber was entering. Similarly, Kodak viewed its competitors as other film manufacturers, ignoring the fact that digital photography wasn’t just a competing product — it was a substitute for film itself.
Another common mistake is underestimating the pace of adoption. Substitutes often start small, appealing to early adopters or niche audiences, which can make them seem insignificant. But once they reach critical mass, their growth can be exponential, leaving incumbents scrambling to catch up. Print newspapers dismissed online media for years, assuming that readers would never abandon traditional formats. By the time they realized the depth of the shift, digital platforms had already achieved economies of scale, attracted big advertising dollars, and gained audience loyalty.
How to Combat Substitutes
To guard against substitutes, companies must rethink how they approach competitive strategy. Success begins with broadening their perspective. Instead of defining markets based on existing product categories, businesses should focus on the jobs their customers are trying to get done. Are customers looking for convenience, affordability, personalization, or flexibility? By identifying the core needs driving demand, companies can better anticipate how substitutes might meet those needs in new ways.
Scenario planning is another critical tool. Companies should regularly explore “what if” scenarios to identify potential substitutes and assess their likelihood of success. What happens if a new technology eliminates the need for your product? What if cultural shifts make your service less appealing? By proactively considering these possibilities, businesses can stay ahead of the curve.
Ultimately, the best way to combat substitutes is through continuous innovation. Companies that rest on their laurels are the easiest targets for disruption. Conversely, those that consistently improve their offerings, enhance the customer experience, and explore new business models are better positioned to withstand substitution threats.
The Streaming Wars: A Case Study in Substitution
The rise of streaming platforms is a textbook example of how substitutes can upend established industries. For decades, cable TV providers viewed their competition as other cable networks, focusing their strategies on bundling, premium content, and pricing wars. Meanwhile, streaming services like Netflix, Hulu, and Amazon Prime quietly redefined how people consumed entertainment.
Cable companies failed to see streaming as a legitimate substitute until it was too late. By the time they launched their own streaming platforms, millions of viewers had already “cut the cord”, leaving cable providers to compete in a market they no longer controlled.
The lesson from the streaming wars is clear: substitutes don’t just compete on features or price — they fundamentally reshape markets by offering a better way to meet customer needs.
The bottom line
In the race to outcompete rivals, it’s easy to lose sight of substitutes. But the businesses that survive and thrive are those that take a broader view of competition. By staying attuned to customer needs, as well as innovating relentlessly, companies can compete effectively against such hidden threats, and thereby stay ahead of disruption.
Casey Ma is an MBA and MPH student at Yale University, specializing in Healthcare Management. With a background in strategy consulting, marketing, and project management, her passion lies at the intersection of healthcare transformation and strategic problem-solving. She is an advocate for collaborative innovation and enjoys engaging with professionals who share her enthusiasm for the healthcare and marketing sectors.
Image: DALL-E
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