a16z: Porter's Five Forces Framework and Competitive Advantages in Web3
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a16z: Porter's Five Forces Framework and Competitive Advantages in Web3
The Five Forces framework depicts a tug-of-war, but Web3 looks more like a network model driven by collaboration.
Navigating Web3 tides with focused insightsAuthors: Scott Duke Kominers, Liang Wu
Translation: Luffy, Foresight News
Competitive strategy—the art of formulating and executing plans to gain an advantageous position in the market—is an essential component of any business, especially for platforms, as it determines their ability to achieve network effects and scale. But Web3 fundamentally alters the relationship between competition and collaboration, requiring businesses to rethink how they establish market positions, realize network effects, and capture value.
One of the most well-known frameworks for strategic thinking is the Five Forces Framework (Five Forces Framework), developed in 1979 by Harvard Business School professor Michael Porter to help map industry competitive dynamics and explain where a company’s defensible advantages lie.
How might these five forces differ in the context of Web3? Specifically, how might Web3 technologies and mechanisms change platform entrepreneurs’ views on competitive strategy?
In short: Competition in Web3 may be more intense across all dimensions reflected in the five forces. Yet the very factors that make Web3 competition challenging also create opportunities to expand the overall market size. A larger pie means that even if any single company captures a smaller share, it can still achieve greater market success than under traditional platform business models. This helps explain the underlying logic of Web3’s core ethos: working together to grow the pie for everyone.
Quick Guide to the Five Forces Framework
As the name suggests, Porter’s Five Forces Framework identifies five “forces” that shape industry competitive dynamics.
First, companies face threats from existing competitors:
Force #1: Intensity of rivalry—the competitive landscape among firms already in the market.
Additionally, companies face threats from new or potential entrants:
Force #2: Threat of new entrants—potential new companies entering the market and competing with your business.
Force #3: Threat of substitutes—products or services that could replace yours.
Finally, a company’s competitive position is also influenced by the relative market power of its suppliers and customers:
Force #4: Bargaining power of suppliers—the ability of suppliers to influence prices and supply terms.
Force #5: Bargaining power of buyers (or users)—the ability of customers to influence prices and sales conditions.
These five forces are typically illustrated with horizontal pressures from new entrants and substitutes representing industry-wide competition, and vertical pressures from suppliers and buyers reflecting competitive dynamics along the value chain.
Implications for Competitive Advantage
The five forces help us understand the defensibility of firms within a given market or industry—particularly, the extent to which a company might be able to capture value. If an industry is characterized by significant competitive threats across one or more of the five forces, companies in that industry may face challenges.
Tactically, the framework also helps us identify and reason about what Porter calls sources of competitive advantage: sustainable ways to differentiate relative to rivals. For example, a company might differentiate through specialized expertise offering quality or cost advantages, or through economies of scale giving it better terms from suppliers.
Crucially, competitive advantage is not absolute—it is relative to other firms in the industry. Therefore, changes in the five forces affect a firm’s competitive advantage and defensibility. For instance, the rise of e-commerce in apparel and retail (as both new entrants and substitute offerings—Forces #2 and #3) weakened brick-and-mortar retailers’ local market advantages. Similarly, the scale of social media platforms like Facebook enables them to lock in users through high switching costs, thereby reducing users’ overall bargaining power (in this case, users are the buyers, i.e., Force #5).
Revisiting the Five Forces in Web3
Web3 innovations through decentralized networks, open protocols, and shared ownership intensify competition across all aspects of the five forces, disrupting many traditional sources of competitive advantage.
Open development on public blockchains makes it easier for new companies to enter specific markets, increasing the threat of new entrants (Force #2). In Web2 platforms, control over underlying software and network data has historically been a source of competitive advantage. For example, X (formerly Twitter) keeps its product codebase and user data closed to competitors and has recently restricted API access even further. To build a fully competitive product, new entrants must recreate similar codebases and rebuild the platform’s social graph.
By contrast, in Web3’s open-source world, new entrants can leverage established user and content networks, as well as existing protocols and codebases. New entrants or existing competitors can use on-chain data to identify and recruit top users from a platform—a tactic colloquially known as a “vampire attack.” This amplifies the threat of new entrants (Force #2) and intensifies competition among existing firms (Force #1).
Likewise, composability and the possibility of protocol forking increase the threat of substitutes (Force #3). Entrepreneurs can take another platform’s open-source code and build a new product with additional features or mechanisms that may better meet user needs than the original.
At the same time, in Web3 applications, users and other stakeholders (e.g., content creators) are often granted direct ownership of their data and digital assets, which are typically portable and interoperable across platforms—greatly enhancing the bargaining power of users and stakeholders (Forces #5 and #4 respectively). For example, on Web2 multi-sided platforms like Fiverr, users and ecosystem participants (such as creators) are often subject to lock-in effects, meaning they must accept the platform’s policies or risk losing their data, reputation, and history. In contrast, in Web3, dissatisfied users or creators can easily transfer their data and reputation to competing platforms.
Competitive Advantage and Opportunity in Web3
The preceding analysis may seem to paint a bleak picture for building sustainable competitive advantage in Web3. Compared to Web2, competition in Web3 may be more intense across the board. Customers and suppliers can switch platforms more easily, and both existing competitors and new entrants can leverage on-chain data to bootstrap protocols and networks to quality levels comparable to incumbents. This puts immense pressure on platforms to deliver value and may make value capture more difficult.
But the situation isn’t as dire as it first appears. The same factors that make Web3 competition difficult also provide opportunities to expand value creation by incentivizing user contributions. At least in principle, this leads to a larger pie. Thus, capturing a smaller share can still yield greater returns than under traditional models.
While competition across all five forces intensifies, Web3 also offers alternative sources of competitive advantage aligned with the openness and decentralization of the technology: composability and community cohesion. These aren’t entirely new forces, but they are more pronounced in Web3.
Composability
In Web3, almost everything is composable. Like classic open-source software frameworks, companies can embed their protocols or assets into many other systems and business processes to build competitive advantage. The more a protocol becomes an established standard, the greater its contribution to network value, and the harder it becomes for competitors to fork or bypass it.
Think of it this way: if you invent a “Lego block” that many others want to build upon, its widespread adoption can itself become a competitive advantage and enable value capture. Layered embedding even carries a sense of momentum reminiscent of blockchain security—the longer the chain, the more secure it becomes. If Protocol A is used as a component of Protocol B, and B is later used in Protocol C, then A’s position in the network strengthens, because if C wants to eliminate dependence on A, it must also eliminate dependence on B. The same applies to digital assets. Once a given token becomes associated with a range of different applications, it becomes hard for newcomers to displace it.
Community Cohesion
Web3 also fosters deeper personal engagement of users in a company’s ecosystem. Blockchain-enabled digital ownership can incentivize users to form lasting relationships with a particular brand or platform, and the strength of this effect can become a powerful source of competitive advantage. When users prefer a specific platform and have a vested interest in contributing to its success, they may choose to stay even when switching is easy. Conversely, with strong community cohesion, users often actively contribute to the platform’s ecosystem, enhancing its value proposition relative to competitors.
Conclusion
The key components of Porter’s Five Forces Framework remain unchanged in Web3, just as they do in Web2 and offline worlds. In fact, competition along these dimensions may be even fiercer. However, the path to value creation in Web3 is not zero-sum.
In Web2, platforms consolidate their position at the expense of others—a zero-sum game. In contrast, Web3 presents a different competitive landscape centered on collaborative building. Composability and community cohesion create a seemingly paradoxical dynamic—at least for those accustomed to seeking sustainable competitive advantage in other environments. The path to value creation becomes more positive-sum. A Web3 project can only become composable by creating something useful, and by definition, community cohesion only arises when users want to contribute to the underlying project and platform.
The spirit of Web3—despite its fierce competition—must be to work together to grow the pie for everyone. While the five forces depict a tug-of-war, Web3 looks more like a network model driven by collaboration.
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