Introduction
Competition analysis is one of the fundamental pillars of strategic management. However, many organizations still limit their understanding of competition to companies that offer identical products or services. This narrow view can lead to positioning errors and a gradual loss of market share.
The concept of competition is multifaceted. There are different types of competitors that vary in threat level, mode of operation, and potential impact on company performance. Identifying, understanding, and monitoring these profiles is an essential exercise for leaders who want to remain competitive in dynamic markets.
Among the most widely used models, four main types of competitors stand out: direct, indirect, potential, and substitute. This article details each of them, illustrating their roles and suggesting strategies to handle them effectively.
1. Direct Competitors: the core market battle
Direct competitors tackle the same problem with similar solutions aimed at the same target audience. In these cases, the consumer must choose between one company and another to satisfy their need.
Classic example: Coca-Cola and Pepsi in the beverage sector.
Healthcare example: Private high-complexity hospitals compete directly for the same patients, offering similar infrastructure, medical teams, and technology. The competition involves not only price but also reputation, care quality, and patient experience.
Food retail example: Domino’s vs. Pizza Hut.
Strategic implication: Direct competition is the most visible and demands continuous differentiation—through price, quality, customer experience, branding, or innovation.
Recommended management: Build strong competitive barriers (brand, community, long-term contracts, service ecosystems) and maintain constant vigilance over competitors’ pricing, marketing, and innovation movements.
2. Indirect Competitors: the side threats
Unlike direct competitors, indirect competitors address the same core customer problem, but in a different way. They may also have distinct audiences that overlap at certain moments.
Example: Traditional gyms vs. home workout apps like Freeletics or FitOn. Both address the need for physical activity but in different ways.
Energy example (Light): The electric utility faces indirect competition from residential solar energy solutions. Though not identical (public grid vs. distributed generation), both solve the energy supply problem.
Technology example (Inteliware): While providing website hosting with humanized support, many clients consider DIY website builders like Wix or Squarespace—indirect alternatives for digital presence.
Strategic implication: Although less explicit, indirect competition can gradually erode market share, especially during technological or behavioral shifts.
Recommended management: Track social and technological trends, understand how customer habits are evolving, and adjust your offerings to stay relevant.
3. Potential Competitors: those who could become a threat
Potential (or “peripheral”) competitors serve the same target audience but solve different problems. However, their close relationship with customers gives them the opportunity to move into the same competitive space.
Example: Amazon, originally an online bookstore, became a Netflix competitor by expanding into video streaming.
Healthcare example: Telemedicine companies, initially complementary partners, can evolve to compete directly in primary care, creating the risk of disintermediation for large hospitals.
Food retail example (Domino’s): Delivery platforms like iFood and Rappi, once strategic partners, have become potential competitors as they build their own kitchens and engage directly with customers.
Strategic implication: Underestimating potential competitors can be fatal, as innovation or portfolio diversification can quickly turn them into direct rivals.
Recommended management: Monitor strategic moves, watch for expansion signals, and strengthen entry barriers (intellectual property, community engagement, integrated ecosystems).
4. Substitute Competitors: alternative ways to meet the same need
Substitute competitors offer entirely different solutions that address the same underlying problem. They often target different audiences but may still be seen as viable alternatives by consumers.
Example: Public transport, bicycles, or scooters as substitutes for private cars.
Healthcare example: Alternative therapies, primary care plans, or low-cost health insurance as substitutes for high-complexity private hospitals.
Technology example (Inteliware): Free email and cloud services from major players (Google, Microsoft) act as substitutes for paid hosting and corporate email solutions. Though they lack the same customization or support, price-sensitive customers may choose them.
Strategic implication: The threat of substitutes is often overlooked, but cultural, social, or technological changes can accelerate their adoption (e.g., the rise of the sharing economy).
Recommended management: Constantly reinforce the added value of your solution compared to alternatives—emphasizing convenience, status, security, or efficiency.
Strategic Prioritization in Competitor Analysis
Not all competitors deserve equal attention. A prioritization matrix can be useful:
- Maximum focus on direct competitors — they represent immediate client loss.
- Continuous attention to indirect competitors — to prevent silent market erosion.
- Systematic monitoring of potential competitors — as they may soon become strong rivals.
- Periodic evaluation of substitutes — to avoid being surprised by shifts in consumer behavior.
Conclusion
Understanding competition in its entirety is more than a market analysis exercise — it is a competitive advantage. Companies that only monitor direct rivals tend to be caught off guard by new entrants, technological alternatives, or cultural shifts that reshape their industries.
By mapping and monitoring the four types of competitors — direct, indirect, potential, and substitute — business leaders gain clarity to make stronger strategic decisions, avoid unexpected threats, and identify new opportunities for differentiation.
In an increasingly dynamic world, the ability to see competition broadly is also the ability to anticipate the future.