Almost every character in the Naruto series, from minor character to boss level character, uses this jutsu (Kawarimi no Jutsu).
Ever since I started watching the series, I wanted to know how this technique works. It may look like a Ninjutsu 101 technique in the early parts of the series, but in many of the serious fights later in the series, it seems to fool even the opponents who are well-versed in combat. Is this jutsu based on any real life technique?
According to this, it is indeed based on a real-life technique:
This technique is based on a real-life ninja art, kawarimi. It was an ancient ninja art revolving around misdirection and the split-second timing of a switch between a 'body' and a location, or between two or more bodies: A technique utilized by ninja in ancient Japan, involving the ninja and anything that can be mistaken for them, (such as a dummy or a mannequin).
As you mention, it is used by all levels of characters, because it is one of the basic techniques being taught in the Academy.
Now, for the "it seems to fool even the opponents who are well versed in combat" part. This is also similar to the real word. For example, all boxers use pretty much the same punches, yet some of them are much better than others, meaning they also use those punches better (stronger, faster, etc).
That is why a technique performed by a stronger shinobi would also have a stronger effect, so if the opponents are close in power, they can still use this jutsu to distract each other.
Prepare a log or a mannequin and a smoke bomb.
Position yourself where there are a lot of hiding spots or objects that block the enemy's sight.
Throw the smoke bomb, leave the log and start hiding REALLY FAST.
I'd like to weigh in on this question with some more info, because the question of how the technique works does not seem to be fully answered to me.
A substitution is actually shown in full in episode 403: Unwavering Gutsiness at around 16 minutes in. Unfortunately, it's not a log substitution, but an insect one. Still, I imagine it's the same for a log. Kiba and his teammates all move away at high speed while the insects take their place and transform into insect clones. Thus, it is as the Naruto wiki states:
The instant before they are to be struck by an attack, the user replaces themselves with a block of wood or something similar. Because the attack does hit something, opponents may briefly believe that they've successfully struck the user. But this is merely an optical illusion and opponents will quickly notice what's happened.
Substitutions are probably also shown at other points in the series or explained. But from this scene, we can see that they aren't using teleportation or summoning jutsu to do the substitution, but rather that they simply move away at high speed and hide, while leaving something to take their place. Using smoke and other sleight-of-hand distractions are helpful in creating the illusion, and we see the smoke a lot in the log substitutions in Naruto.
As stated in SingerOfTheFall's answer, ninja substitution is indeed part of the real world myths of ninjas in Japan, and appears a good deal in their fictional works. Another description of the technique can be found in A Certain Scientific Railgun volume 14, by one of the ninja in the 4-Koma at the end:
"When you sense an incoming attack... You dress a log in your clothing... And it takes the attack for you! The art of substitution! So secret and difficult it's never been seen in battle!"
"That's... Probably because if you're that fast, you have way less complicated options, dummy!"
In fact, all three of the 4-Koma at the end are about logs and substitution, and they kind of lampoon the popularity and ridiculousness of the technique, like the second one where the ninja characters lament the suggestion of just using a 3-D hologram:
["If we had city tech..."]
"I wouldn't need to carry a log around all the time, for starters."
"Or a change of clothes for the log."
"Um, what about... a handy 3-D projector?"
"But... B-But the look on your opponent's face when they realize they've struck a log, of all things!"
"But the log...!"
"The log..."
"Will you forget about the log for a second?!"
