Michael Porter’s Five Forces framework has long been a cornerstone for analyzing competitive strategy. This model helps businesses map their competitive landscape and identify sources of defensible advantages. However, the advent of web3 technologies has fundamentally altered the nature of competition and collaboration in the digital realm, necessitating a reevaluation of how firms establish market positions, achieve network effects, and capture value.
Web3, the next iteration of the internet, is revolutionizing traditional market structures by decentralizing control and emphasizing community participation. In “Porter’s Five Forces and competitive advantage in web3”, Scott Duke Kominers, Professor at Harvard Business School and Principal Investigator of D^3’s Crypto, Fintech, & Web3 Lab, and Liang Wu, a Senior Researcher at D^3’s Crypto, Fintech, & Web3 Lab, reapply the Five Forces framework to web3, showing how competitive dynamics shift in a decentralized ecosystem. As businesses adapt to these changes, understanding the forces at play becomes critical to maintaining a competitive edge.
Key Insight: Redefining Barriers to Entry
“In the open source world of web3… a new entrant can leverage established user and content networks, as well as existing protocols and codebases. New entrants or existing competitors can use onchain data to identify and recruit a platform’s top customers.” [1]
The decentralization of web3 is lowering traditional barriers to market entry. Unlike traditional industries, where entering a market requires significant capital investment and infrastructure, web3 allows developers to build directly on existing protocols. This opens the door to innovation from small startups and individuals who can bypass traditional gatekeepers. With reduced entry costs, competition intensifies as new entrants challenge incumbents. As a result, companies in the web3 space need to continuously differentiate themselves to stay ahead.
Key Insight: The Threat of Substitutes and Composability
“Composability and the possibility of protocol forks both strengthen the threat of substitutes (force #3). An entrepreneur can take the open source code of another platform and then compose on top of it by adding additional features and mechanics to create an entirely new product that might serve users’ needs better than the original.” [2]
Composability in web3 presents a unique challenge: protocols and applications can be easily combined to create new, innovative solutions. This characteristic of web3 means that substitutes can arise rapidly, displacing established products with minimal friction. Developers can integrate existing protocols to create customized solutions, allowing for rapid adaptation to market demands. This ease of integration and adaptation drastically shortens the innovation cycle, pushing companies to stay on the cutting edge to avoid being outpaced by competitors.
Key Insight: Competitive Rivalry and Community Embeddedness
“When users have a preference for using a given platform — as well as a vested incentive to contribute to its success — users may choose to stick with that platform even when it’s possible to switch. And conversely, with a strongly cohesive community, users will often actively contribute to a platform’s ecosystem in a way that grows its value proposition relative to competitors.” [3]
Unlike traditional industries, web3 introduces a new form of rivalry that stems from entire communities. Companies in web3 are often deeply embedded in the communities that support their protocols, and competitive advantage is increasingly tied to community engagement and loyalty. This makes competition more about the strength and cohesiveness of a community rather than product differentiation alone. To build a lasting competitive edge in web3, companies must invest in community development.
Why This Matters
For business professionals and executives, the shift to web3 represents both a challenge and an opportunity. The decentralized nature of web3 disrupts traditional competitive forces, requiring firms to rethink their strategies. Success in this new environment will depend on a company’s ability to build strong communities, foster collaboration, and maintain a relentless focus on innovation. As Scott Duke Kominers and Liang Wu argue, businesses must align with these new dynamics, recognizing that value creation is now a collective effort. Companies that can adapt to these changes will position themselves to thrive in a rapidly evolving digital economy.
References
[1] Scott Duke Kominers and Liang Wu, “Porter’s Five Forces and competitive advantage in web3”, a16zcrypto (May 5th, 2024) https://a16zcrypto.com/posts/article/porters-five-forces-and-competitive-advantage-in-web3/.
[2] Kominers and Wu, “Porter’s Five Forces and competitive advantage in web3”.
[3] Kominers and Wu, “Porter’s Five Forces and competitive advantage in web3”
Meet the Authors
Scott Duke Kominers is a Professor of Business Administration in the Entrepreneurial Management Unit; as well as a Faculty Affiliate of the Harvard Department of Economics and the Harvard Center of Mathematical Sciences and Applications; Co-Principal Investigator of D^3’s Crypto, Fintech, & Web3 Lab, and an a16z crypto Research Partner. He teaches the MBA elective courses “Making Markets” (M2) and “Building Web 3 Businesses” (BW3B), along with a doctoral course on market design. He is an Editor of the Review of Economics and Statistics and serves on the Board of Editors of the Journal of Economic Literature. His first book is The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create.
Liang Wu is a Senior Researcher at D^3 Institute’s Crypto, Fintech, and Web3 Lab at Harvard Business School. As a researcher, he writes case studies on leading Web3 and AI companies for the Building Web3 Businesses course in the HBS MBA program.