Alex Smith Levels of Competition Framework

Last updated: 14 September 2026

Identify and execute a Level 3 'conditions play' that reshapes your industry's rules, making competitors structurally unable to follow you and creating demand that didn't previously exist.

// TL;DR

The Alex Smith Levels of Competition Framework is a strategic model for escaping commoditization by reshaping your industry's rules rather than competing harder within them. It defines three levels of competition: Level 1 (company/operations focus), Level 2 (customer/demand focus), and Level 3 (conditions focus, where you change the industry's assumptions). Use it when your business feels interchangeable with competitors despite doing everything 'right,' or when entering a saturated market and needing a fundamentally different angle. The goal is a 'conditions play' that competitors can't copy without dismantling their own business models, while unlocking demand that didn't previously exist.

Framework

// When should you use the Levels of Competition framework?

Use this skill when your business feels interchangeable with competitors despite doing 'the right things' — better positioning, tighter niches, improved content, lower prices — and nothing is buying you real separation. Also use it when entering a saturated market and needing a fundamentally different angle of attack.

// What do you need before applying the Levels of Competition framework?

Industry or categoryrequired
The specific market or sector the business operates in (e.g. law firms, fitness coaching, SaaS project management).
Current competitive movesrequired
What the business is currently doing to differentiate — positioning, niche, pricing, content strategy, product features.
List of industry conventionsrequired
The standard practices, pricing models, delivery channels, customer segments, and assumptions that every player in the category treats as fixed wallpaper.
Company's weak spots
The conventions or assets the business is least committed to or least good at — these are the easiest sacred cows to slaughter.
Emerging or dormant customer segments
Any groups who are not currently shopping in the category but who could be triggered into desire if the category changed.

// What are the core principles behind the Levels of Competition framework?

Clustering

When businesses compete by trying to beat each other, they end up matching each other step for step — innovations, prices, features — until they become interchangeable and sit on top of each other in the market. Trying harder at the same level accelerates clustering, it does not escape it.

Levels of Competition

There are three levels at which a business can compete, defined by where it focuses its search for advantage. Level 1 is inward company focus (capabilities, operations). Level 2 is outward customer focus (responding to observable demand). Level 3 is conditions focus (interrogating and reshaping the assumptions of the industry itself). Higher levels are more abstract, harder to copy, and generate durable separation.

The Choice-First Market

There are always two markets: the organic needs-driven market (need then choice), which is the saturated one everyone fights over, and the wider dormant market (choice then need), where customers who weren't shopping at all get triggered into desire by something new. Level 3 moves unlock the choice-first market, which is completely untapped by needs-focused competitors.

Making the Weather

Level 2 businesses suffer the weather — they react to observable customer demands and industry conditions. Level 3 businesses make the weather — they change the conditions so that everyone else, including competitors and customers, has to respond to them. The goal is to stop being a victim of your category and start being its author.

Selling Who You Aren't

Level 2 businesses hold a mirror up to the customer — 'We see you, we are you' — which is relatable but asks nothing of the customer and looks exactly like everything familiar. Great Level 3 brands hold up an ideal instead, selling customers a version of themselves they haven't yet become. There is far more money in who you aren't than in who you are.

Structural Lock-In

The deepest advantage of a conditions play is that competitors can't follow without dismantling themselves, because their entire business models — P&L, staffing, partnerships, pricing — are bets on the status quo continuing. To copy the Level 3 mover, they would have to destroy themselves first.

Industry then Customer then Company

The correct strategic order is: first, define how you want to change your industry's conditions; second, identify which customers that change creates new value for; third, determine how your company must change to deliver on it. Most businesses run this in exactly the opposite direction — company first, then customer, never reaching conditions at all.

Sacred Cows

Every industry is full of invisible rules that nobody questions — the pricing model everyone uses, the customer everyone chases, the channel everyone delivers through. These sacred cows are the raw material of Level 3 thinking. The job is to be the first to interrogate them and ask: does it have to be this way?

// How do you apply the Levels of Competition framework step by step?

1
Diagnose which level you are currently competing at
Audit your current differentiation moves. If your strategy centres on features, positioning, niching, brand voice, content, or pricing — you are at Level 2 (customer focus). If it centres on operational excellence, headcount, or capabilities — you are at Level 1. Confirm the diagnosis honestly before proceeding. Do not skip this step; most businesses overestimate their level.
2
Map every sacred cow in your industry
List every convention, assumption, and fixed practice in your category that is treated as wallpaper — so obvious no one questions it. Target four dimensions: (a) the pricing or revenue model everyone uses, (b) the customer segment everyone pursues, (c) the delivery channel or format everyone uses, (d) the product or service features everyone includes. Aim for at least 8-12 items. The more 'obviously necessary' something feels, the more important it is to put it on the list.
3
Filter for the sacred cows competitors rely on most and you rely on least
Cross-reference your list against two criteria: (1) Which conventions are the biggest players' entire business models built upon? These are the ones that, if broken, create structural lock-in against them. (2) Which are you least committed to or worst at? These are your lowest-cost points of departure. The intersection of 'rivals depend on it heavily' and 'you could walk away from it' is your highest-leverage target.
4
Ask the Level 3 question for each high-priority sacred cow
For each shortlisted convention, ask: 'Does it have to be this way? What would the industry look like without this?' Sit with the discomfort — the first instinct will be 'yes, it has to be this way.' Push past that instinct. The question is not 'how do we do this better?' (Level 2) but 'what if this entire assumption were wrong or gone?' Generate at least one concrete alternative for each.
5
Evaluate each candidate Level 3 move against three tests
Test 1 — Does it create new demand rather than answer existing demand? Would it trigger the choice-first dormant market, or is it still just competing for the needs-driven organic market? Test 2 — Does it create structural lock-in? Would competitors have to dismantle their business model to follow? Test 3 — Does it sell who customers aren't, not just who they are — does it hold up an ideal rather than a mirror? Moves that pass all three tests are your strongest candidates.
6
Define your conditions play as a single declarative move
Articulate the Level 3 move in one or two sentences that name the sacred cow being broken and the new terms being set. It should be specific enough to be operational and bold enough to be genuinely uncomfortable. E.g. 'We abandon the billable-hour model entirely and become a fixed-fee firm — one price agreed upfront, unlimited access.' Vague repositioning language ('we're more human', 'we do it differently') is a signal you are still at Level 2.
7
Work backwards to identify the customer this creates value for
Now — and only now — bring the customer back in. Ask: what kinds of people would find this new set of conditions genuinely valuable? Who was previously locked out of or underserved by the old convention? Who exists in the dormant market that this move could trigger? This is post-rationalisation, not pre-rationalisation. You are discovering the customer the move implies, not designing the move around a pre-existing customer brief.
8
Identify what must change in your company to deliver the conditions play
Only at this final stage assess internal capability gaps. What does your team, operations, product, or pricing structure need to look like to actually execute this move? Note that some changes may be significant — this is expected. The goal is not to find a move that requires no internal change, but to find one worth making. Small players should note: the malleability of an industry is inversely proportional to the size of players within it — smaller players have more room to manoeuvre, not less.

// What are real examples of Level 3 conditions plays?

A mid-sized law firm competing in a crowded market where all firms position as 'trusted experts' or 'client-focused' and differentiation is minimal.

The sacred cow is the billable hour — universally used, universally resented, and structurally embedded in every large firm's partnership model and P&L. The Level 3 move: abolish billable hours entirely and become a fixed-fee firm — one agreed price upfront, call as much as you like. This creates new demand from clients who avoided legal help due to cost unpredictability (the dormant market). Large competitors cannot follow without dismantling their partnership compensation structure. It sells clients the version of themselves who is in control of costs, not at the mercy of a clock. Structural lock-in is near-total for legacy firms.

A budget airline entering a market where all carriers are competing to serve business travellers — fighting over lounges, schedules, routes, and upgrades.

The sacred cow is the business traveller as the target customer — everyone treats this segment as the prize. The Level 3 question: do we have to serve business travellers at all? The answer is no. Abandon business class, lounges, and premium routes entirely. Redirect all resources toward low-cost, high-frequency leisure routes. This creates the low-cost carrier category — an entirely new dormant market of people who never flew because they couldn't afford to. Competitors structured around business travel cannot follow without destroying their revenue model. The move doesn't ask anything of a pre-existing customer; it invents a new one.

An edtech startup entering a language-learning market dominated by a premium boxed-software incumbent charging high one-time fees.

The sacred cows are the paid model and the classroom-style learning format. The Level 3 move: make language learning free and turn it into a game. This detonates the incumbent's pricing assumption — to respond, they would have to destroy their own revenue. It unlocks an enormous dormant market of people who would never have paid for language software but will engage daily with a free game. The incumbent is structurally locked out of following. The conditions of the category are permanently reset on the challenger's terms.

// What mistakes should you avoid with the Levels of Competition framework?

Mistaking Level 2 moves for Level 3 — relabelling better positioning, tighter niching, or improved branding as a 'conditions play' when it is still fundamentally a response to observable customer demand.
Starting with the customer and working backwards to the industry — this is the Level 2 reflex and it produces Level 2 answers. The correct order is industry conditions first, customer second, company third.
Letting yourself off the hook by claiming you are too small to change your industry — the malleability of industries is inversely proportional to the size of players within them. Small players have more room to reshape their category, not less.
Abandoning customer and company thinking entirely — the levels nest within each other. Conditions focus does not mean ignoring customers forever; it means addressing them second, not first.
Choosing sacred cows to break based on what sounds bold rather than what creates structural lock-in for competitors — the test is whether following your move would require rivals to dismantle themselves, not whether the move sounds disruptive.
Digging deeper at Level 2 when clustering gets worse — trying harder at the same level (better product, more content, even lower prices) accelerates clustering rather than escaping it. More effort at Level 2 is not a path to Level 3.
Settling for becoming 'interesting at Level 2' as the primary ambition — while the thinking from Level 3 focus will improve Level 2 performance even if the full conditions play is never executed, this should be the floor outcome, not the ceiling.

// What are the key terms in the Levels of Competition framework?

Clustering: The phenomenon where competing businesses, by trying to beat each other, end up matching each other step for step — innovations, prices, positioning — until they become interchangeable and sit on top of each other in the market. Competing harder accelerates clustering rather than resolving it.
Levels of Competition: A three-tier hierarchy defining where a business focuses its search for competitive advantage. Level 1 is company focus (inward, operational). Level 2 is customer focus (outward but reactive, responding to observable demand). Level 3 is conditions focus (interrogating and reshaping the assumptions of the industry itself). Higher levels are harder to reach but produce durable, uncopyable advantages.
Level 3 / Conditions Focus: The highest level of competition, where a business stops responding to customer expectations and instead fundamentally alters them by changing the conditions and conventions of its industry. The aim is to force competitors and customers alike to adjust to a new set of terms set by the Level 3 player.
Sacred Cows: The invisible rules, pricing models, customer segments, delivery formats, and fixed assumptions in an industry that nobody questions because 'that's just how it's always been done.' Sacred cows are the primary raw material for identifying Level 3 moves.
Making the Weather: Operating as the business that changes the conditions of its industry, forcing competitors and customers to respond to it — contrasted with 'suffering the weather,' which is the reactive Level 2 posture of responding to conditions set by others.
The Choice-First Market (Dormant Market): The wider market of people who are not currently shopping in a category but who can be triggered into desire by something fundamentally new. Contrasted with the organic needs-driven market (need then choice), which is the saturated market all Level 2 players fight over. Level 3 moves unlock the choice-first market.
Structural Lock-In: The condition created by a successful Level 3 move, where competitors cannot replicate the move without dismantling their own business models — because their operations, P&L, staffing, and partnerships are all built on the assumption the mover just invalidated.
Selling Who You Aren't: The identity offer made by Level 3 brands, which hold up an ideal version of the customer rather than a mirror. Contrasted with Level 2's 'selling who you are' — the relatable empathy play — which looks familiar and asks nothing of the customer. There is more money in who customers aren't because people are always trying to buy their way into an idealised version of themselves.
The Supply Era / Choice Era: Two historical phases of competition. The Supply Era (mid-20th century) was won through operational capability — providing goods that were scarce. The Choice Era followed when goods became plentiful and competition shifted to being the selected option from a sea of adequate alternatives. Level 2 thinking was the right tool for the Choice Era. The Choice Era's gaps are now exhausted, necessitating a move to Level 3.
Industry then Customer then Company: The correct strategic sequence for Level 3 thinking: first define how you want to change your industry's conditions, second identify which customers that change creates new value for, third determine how your company must change to deliver on it. Most businesses run this in the opposite direction.

// FREQUENTLY ASKED QUESTIONS

What is the Levels of Competition framework?

The Levels of Competition framework is Alex Smith's strategic model defining three tiers where businesses seek advantage: Level 1 (inward company/operations focus), Level 2 (outward customer/demand focus), and Level 3 (conditions focus, reshaping the industry's own assumptions). Higher levels are harder to copy and produce durable separation. The framework's core insight is that competing harder at the same level as rivals accelerates clustering rather than escaping it.

What is a Level 3 conditions play?

A Level 3 conditions play is a strategic move that changes the fixed assumptions of your industry rather than responding to existing customer demand. Instead of competing on features, price, or positioning, you break a 'sacred cow' — an unquestioned convention like a pricing model or target customer — creating demand that didn't exist and locking competitors out structurally, since they'd have to dismantle their own business models to follow.

How do I know if I'm competing at Level 2 instead of Level 3?

You're at Level 2 if your differentiation centers on features, positioning, niching, brand voice, content, or pricing — all responses to observable customer demand. You're at Level 3 only when you're interrogating and reshaping the industry's fixed conventions themselves. A quick test: if your strategy answers existing demand rather than creating new demand, and rivals could copy it without destroying themselves, it's Level 2.

How do I find a Level 3 move for my business?

Map every 'sacred cow' in your industry — the pricing model, target customer, delivery channel, and features everyone treats as fixed. Then filter for conventions that competitors depend on heavily but you rely on least. Ask 'Does it have to be this way?' for each, generate concrete alternatives, and test them against three criteria: does it create new demand, create structural lock-in, and sell an ideal rather than a mirror?

How does the Levels of Competition framework compare to traditional positioning?

Traditional positioning operates at Level 2 — it responds to observable customer demand by carving a differentiated space within existing category rules. The Levels of Competition framework goes further to Level 3, rewriting the category's rules entirely. Positioning makes you a better option among familiar choices; a Level 3 conditions play makes competitors structurally unable to follow and unlocks a dormant market that positioning never touches.

When should I use the Levels of Competition framework?

Use it when your business feels interchangeable with competitors despite doing everything 'right' — better positioning, tighter niches, improved content, lower prices — and nothing buys real separation. It's also ideal when entering a saturated market and needing a fundamentally different angle of attack. If more effort at Level 2 keeps making clustering worse, that's your signal to move to Level 3 conditions thinking.

What results can I expect from executing a Level 3 conditions play?

A successful conditions play creates structural lock-in — competitors can't follow without dismantling their P&L, staffing, and partnerships — plus access to the choice-first dormant market of customers who weren't shopping at all. Even if you never fully execute the play, Level 3 thinking sharpens your Level 2 performance. Expect durable, uncopyable separation rather than the temporary edge that features or pricing provide.

Can small businesses use the Levels of Competition framework?

Yes — and small businesses have more room to reshape their industry, not less. Alex Smith's principle is that the malleability of an industry is inversely proportional to the size of players within it. Large incumbents are locked into their business models, while smaller players can walk away from conventions cheaply. Claiming you're 'too small to change the industry' is a common excuse the framework explicitly rejects.

What is a sacred cow in competitive strategy?

A sacred cow is an invisible rule in your industry that nobody questions because 'that's just how it's always been done' — the pricing model everyone uses, the customer everyone chases, the channel everyone delivers through, or the features everyone includes. Sacred cows are the raw material of Level 3 thinking. The job is to be first to ask: does it actually have to be this way?

What is the choice-first or dormant market?

The choice-first market is the wide pool of people who aren't currently shopping in your category but can be triggered into desire by something fundamentally new. It contrasts with the organic needs-driven market (need then choice) that all Level 2 competitors fight over. Level 3 moves unlock this untapped dormant market — for example, budget airlines created flyers who never flew before because they couldn't afford to.

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