One industry that exemplifies the characteristics and competitive dynamics of fragmentation is the independent restaurant industry. These vary from market segments that require specialized businesses and products to the historical evolution of the industry. Using Porter’s work, low barriers to entry and lack of a power advantage over buyers and/or suppliers may account for the historical development of fragmentation of this industry. Porter also highlights regional issues, such as high transportation costs, as a reason for industry fragmentation. Another potential reason for industry fragmentation may simply be the personalities of the firm owners, who want to run their businesses.
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Clearly communicate what differentiates your product or service from competitors to attract customers within your niche. This specialization can help you build a loyal customer base and increase your market share. Small business is the norm for a fragmented industry, which often caters to the most common consumer needs.
- Cultural issues can be further subdivided into both regional and industrial differences.
- Outsourcing the production and manufacturing process takes jobs away from domestic workers, which means an increase in unemployment in the company’s home nation.
- A concentrated market also makes it easier for an existing player to dominate and increase their profits.
- Many consumers find it reassuring to deal directly with a local supplier than with the representative of a faraway corporation.
- Going abroad to produce goods can also lead to this problem since laws and regulations vary in different countries.
Transportation costs are high in such industries as cement, fluid milk, and highly caustic chemicals. They are effectively high in many service industries because the service is “produced” at the customer’s premises or the customer must come to where the service is produced. Each bank has a different strategy for their customers and the products that they offer. But since most banks are local, it is very difficult to know whether or not those services will be available in the distant future. This means that banks need to be very flexible and innovative in order to maintain a competitive edge.
Second, and possibly most important, will stiff competitive resistance force a consolidator to pay high premiums for acquisitions? This is certainly less preferred than consolidating an industry where businesses are more eager to sell. Quite simply, the higher the premium the consolidator is forced to pay, the harder it will be to eventually succeed in the industry. We certainly recognize that success for a consolidation play relies significantly on implementation. Our 5 C’s may suggest that an industry is ripe for a consolidation play only to have the consolidator fail during implementation.
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It is typically less expensive to produce them locally than to transport them over a long distance. A fragmented industry is encouraged where the competitors enter and exit the market with the increase and decline of local construction projects. Operating in a fragmented industry comes with different challenges but also opens exciting opportunities.
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Retail is an example of a fragmented market, with numerous small and medium-sized enterprises competing for clients. Huizenga was able to leverage management by gobbling up mom-and-pop video stores and immediately converting them to the Blockbuster format with national management. Despite current analyst concerns for the companies, Huizenga’s consolidation plays were viewed as highly successful. Whether through an actual set of guidelines or just strong intuition, Huizenga has been able to identify potential industries where a consolidation play will work.
- The independent restaurant industry encompasses a diverse array of dining establishments, ranging from neighborhood cafes and bistros to fine-dining restaurants and ethnic eateries.
- In some industries, there may ultimately be some advantages to holding a significant share, but it is extremely difficult to build a share incrementally because of the causes of fragmentation.
- Starting a restaurant business requires the purchase of kitchen equipment, seating and decor, among other things.
- An honest appraisal of the feasibility of consolidation among business cultures and across regions is essential.
Companies that have started out in a fragmented industry have already created a product with benefits that they do not want to disclose. This can be related to the use of private data or private information from users. A fragmented industry is related to an industry environment, quite different from the other three types of the industry environment. Market fragmentation is based on the premise that each market has diverse customer needs, groups, and marketing responses. One of the best examples of market fragmentation can be seen in the hospitality industry. Therefore, it stands to reason that markets with existing barriers to entry are not likely to be fragmented.
While on the other hand, concentration allows companies to establish a strong foothold in the market. A concentrated market also makes it easier for an existing player to dominate and increase their profits. This causes further fragmentation as these organizations seek to dominate progressively smaller or niche markets.
Strategies to overcome the challenges of a fragmented market
However, although a prerequisite to fragmentation, low entry barriers are usually insufficient to explain it. Fragmentation is nearly always accompanied by one or more of the other causes discussed below. At some point, the industry is said to be fragmented if there are so many small forex trading demo account companies that no one company can dominate. This is known as the competitive intensity or competition intensity of the market. In this case, it becomes more difficult for one single player (also named market leader) to gain profit.
But if the firm can develop a threshold share, it can begin to reap any significant advantages of scale. Companies can be successful, provided the acquisitions can be integrated and managed. If there are exit barriers, marginal firms will tend to stay in the industry and thereby hold back consolidation. Aside from economic exit barriers, managerial exit barriers appear to be common in fragmented industries. Where a local image and local contacts often are keys to the business the large firm can be at a disadvantage. In some industries like aluminium fabricating, building supply, and many distribution businesses, a local presence is essential to success.
In Waste Management’s trash and recycling services, he gained scale to enable cheaper management and maintenance of a trash hauler fleet. A prime regulatory environment for consolidation may occur if there is no natural avatrade review monopoly already and/or if there is one specific body that regulates the industry. In such a case, a consolidator can be assured that the likelihood of major change catalysts altering the industry is low.
Companies seeking to penetrate and eventually conquer a market would find fragmented markets to be perfect targets. Because of the existence of decentralized industries, they frequently have lower entry barriers than more concentrated industries. When a firm adopts a niche strategy based on customer type, the firm can specifically cater to the needs of specific types of customers who want products with unique need-satisfying features. Industries where economies of scale are limited may discourage consolidation among companies. Small firms can operate efficiently without achieving large-scale production or distribution efficiencies. A fragmented industry is one in which many companies compete and there is no single or small group of companies which dominate the industry.
For instance, the USMCA and its predecessor, NAFTA, set this up between the U.S., Canada, and Mexico. If you are a seller, Marketplacer can help you connect to great retailers and marketplace sales channels around the world.
You can also examine the amount of innovation and R&D in a market to determine whether it is fragmented. Fragmented markets are here to stay, so enterprises entering them should understand them. Fast food is dominated by a handful of restaurant chains, forcing many smaller establishments to differentiate themselves in sub-markets. Fragmentation is both the result of market growth and an avenue for growth for any business looking for a new opportunity. As the market expands, it becomes economically feasible at some point to develop and sell products to each group.
Many agents have attempted consolidation over the past century of U.S. business. The new rise in attempted consolidation points to an even greater need for a systematic approach to developing consolidation strategies. There are several other examples of industries where consolidation has failed due to cultural and regional issues. Rather, the strategy is to neutralize the parts of the business subject to fragmentation to allow advantages of sharing in other aspects to come into play. Certain businesses may have a romantic appeal or excitement that attracts competitors who want to be in the industry despite low or even nonexistent profitability. This factor lessons in corporate finance seems to be common in such industries as fishing and talent agencies.