Are you a five-forces disciple or a blue-ocean enthusiast? I.e. Do you try to dominate existing markets or try to create new ones?
Basic economics models state that if an industry is profitable then new companies will enter the market and increase competition, thus driving down profits to marginal cost (where everyone more or less breaks even).
Researchers Andrew Burke, André van Stel, and Roy Thurik looked at entire industries to find out if an innovation strategy or a competitive strategy is best. In the blue ocean approach creating a new market would attract consumers over the long term, industry profits and the number of vendors would both steadily increase. If however, firm profitability went down as the number of firms went up you’d know companies focused on competition would outperform those setting their sights on blue oceans.
The study looked at profits and numbers of vendors for 41 shop types over a 19-year period (1982–2000) and found that evidence that blue-ocean strategy is sustainable. In more than half the shop types, average firm profits and the number of firms were positively related.
Although it would be foolish to dismiss competitive strategy altogether the study shows that competition eventually erodes the profits from innovation, but it is a slow process requiring 15 years or so, which suggests that it takes the better part of a generation for the blue-ocean approach to yield to competitive strategy.
This study suggests that businesses should consider a blend of the two approaches. For instance, by slowing down profit erosion with an effective competitive strategy for an existing market, they can increase the funds available for blue ocean investments and thus their chances of finding an untapped market with plenty of consumers.