What Happens When Sharks Swim Into Blue Oceans?

The blue ocean strategy is about non-disruptive innovation where growth comes, not by taking market share from anyone, but by finding new markets. Basically, the innovator is finding opportunities in uncontested markets which it is pioneering, and by default the category-king.

According to the Blue Ocean Strategy website, the book is based on a study of 150 strategic moves spanning more than 100 years and 30 industries. The authors argue that leading companies will succeed not by battling competitors, but by systematically creating “blue oceans” of uncontested market space ripe for growth.

The strategy represents the simultaneous pursuit of high product differentiation and low cost, thereby making competition irrelevant. The authors say it is successful because it attracts large numbers of customers while raising the cost of competition.

But what happens when other industry players have seen that the uncontested markets are awesome and profitable? Naturally, you would expect them to enter the waters. Just like that, there will be competition, in the previously uncontested market, and the power of full-monopoly will be gone. Now, the former pioneer has to find ways to overcome the sharks which have arrived to challenge its territories.

Two Cases

Viagra, the ED treatment drug, was a blue ocean when Pfizer accidentally created the drug. Viagra thrived and made a lot of money in the new sector. But over time, other players saw the massive opportunity in the sector, and joined the fray. Cialis became a competitor. But luckily for Viagra, it has remained the industry-king.
Contrast Viagra ability to hold its grounds with Etsy, an e-commerce company that pioneered handmade crafting of vintage items and supplies, at scale. Etsy created a new sector which was producing handmade crafts which were largely ignored by eBay and Amazon. It was a non-disruptive innovation as it did not directly compete with industrialized crafts. (I concede that Viagra is a better example of Blue Ocean as the industry never existed, even though the friction was there. In Etsy, there was the craft industry, though the company brought differentiation via handmade crafting.) From a Fortune Newsletter:

The New York Times spilled what used to be called a ton of ink Sunday on Etsy, whose new CEO, Josh Silverman, has the unenviable task of stabilizing a beloved if wobbly company. Etsy thrived for a time not so much because it deployed innovative technology but because it filled a niche ignored by eBay and Amazon . The latter, unsurprisingly, has come on strong in the crafts market, leaving Etsy a warm and cuddly but financially unstable company.

Etsy is feeling the heat, losing market share as Amazon has shown interests in the previous blue ocean which Etsy dominated. But unlike Viagra, Etsy seems to be losing grounds in the waters. The shark, Amazon, is pushing to take over the territory. Etsy is making many changes, including changing the class of its corporation, to give it more room to compete.

Lesson

The key lesson here is that there is nothing like making competition irrelevant, because sooner or later, competition will come to any sector. What happens is that you may enjoy a period of no competition. But as markets see that a new sector is promising, competition will come.

When Peter Thiel, an investor, wrote that “if you’re a startup, you want to get to a monopoly”, he was right. But of course, a startup must also learn to compete because very soon a lucrative sector will find competitors. This explains that no startup should expect to be a perpetual monopolist in a sector it pioneered: sure, other players can come, but the startup should work to win, despite the competition.

Yes, there is a first-mover advantage, but that does not guarantee success if the pioneer has not built moats around its business.

All Together

There is nothing in business that guarantees that discovering a blue ocean will mean that you will be the leader in the uncontested market, for long. For platform-based web companies, they build defenses by growing very rapidly to enjoy the benefits of network effects. But even with that, a new competitor can come with a new level of competition and disrupt the new market (think of Facebook and MySpace).

Generally, every day, a business must work to discover new customers and markets. And once done, must find ways to keep them happy, extrapolating Sun Tzu’s timeless classic The Art of War: you want to hold a territory after you have conquered it. That is one way to prepare for the arrival of the sharks: economies of scale can provide a huge advantage that reduces marginal cost, making it harder for new sharks to swim in the blue ocean.

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