Competitive Strategy in Fragmented Industries

Question 1

What is a Fragmented Industry?

Answer 1

An Industry wherein no Firm has a significant market share and can strongly influence Industry outcomes.

Porter, Competitive Strategy — P. 239.

Question 2

What is the Unique Competitive Challenge of Fragmented Industries?

Answer 2

Achieving consolidation.

Porter, Competitive Strategy — P. 239.

Question 3

Which conditions give rise to Industry Fragmentation?

Answer 3

• Antitrust.
• Industry youth.
• Low Entry Barriers.
• Low Scale Economies.
• Low Experience Curves.
• High Exit Barriers.
• High inventory cost.
• High sales fluctuations.
• High transportation cost.
• High Scale Diseconomies.
• High Product Differentiation.
• High demand for customization.
• High diversity in local regulation.
• High Buyer-Supplier bagaining power.
• Emphasis on low overheads.
• Emphasis on personal service.
• Emphasis on tight local control.
• Emphasis on significant creativity.
• Emphasis on establishing a local presence.

Porter, Competitive Strategy — P. 244-249.

It can take only one of these to block Industry consolidation.

Question 4

How can a Firm move a Fragmented Industry toward Consolidation?

Answer 4

Pursue tactics and strategies that:
* Increase market share;
* Increase Entry Barriers;
* Increase Scale Economies;
* Increase Mobility Barriers;
* Increase Experience Curves;
* Standardise market needs; or
* Decouple business components exposed to fragmentative conditions, e.g. franchising.

Porter, Competitive Strategy — P. 249-253.

Question 5

Why do certain Industries stay Fragmented?

Answer 5

Often, consolidation is structurally unachievable, but sometimes:
* Existing Firms lack the vision, drive, resources, or expertise to create and execute a consolidating strategy; and
* The Industry recieves little outside attention;

In which case, a lucrative strategic opportunity arises.

Porter, Competitive Strategy — P. 253-254.

Question 6

Where Fragmentation is a Structural Fixture, what are advisable Tactics and Strategies?

Answer 6

• Franchising.
• Value Added.
• Cost Leadership.
• Backward Integration.
• Specialisation (product, customer, order, or region).

Porter, Competitive Strategy — P. 255-258.

Question 7

Where Fragmentation is a Structural Fixture, what are common Strategic Pitfalls?

Answer 7

• Overcentralisation.
• Seeking dominance.
• Lack of strategic discipline.
• Overreaction to new products.
• Misunderstanding local Rivals’ objectives.

Porter, Competitive Strategy — P. 258-260.

Question 8

How should a Firm approach Strategy Formulation in a Fragmented Industry?

Answer 8

• Perform a Structural and Competitor Analysis.
• Identify the causes of fragmentation, if any.
• Evaluate whether the causes are surmountable:
  
  • If they are, identify how best to surmount them.
  • If they are not, identify how best to cope with them.

The latter two assume it is worthwhile to stay in the Industry.

Porter, Competitive Strategy — P. 260-263.