Reasons for Supply-Side Fragmentation


1.   Any of several reasons can account for why the supply side of an industry is fragmented:

a.   Market demand is so extensive and so diverse that very larges numbers of firms can easily coexist trying to accommodate the range and variety of buyer preferences and requirements and to cover all the needed geographic locations

b.   Low entry barriers allow small firms to enter quickly and cheaply

c.   An absence of scale economies permits small companies to compete on an equal cost footing with larger firms

d.   Buyers require relatively small quantities of customized products

e.   The market for the industry’s product or service is becoming more global, putting companies in more and more countries in the same competitive market

f.    The technologies embodied in the industry’s value chain are exploding into so many new areas and along so many different paths that specialization is essential just to keep abreast in any one area of expertise

g.   The industry is young and crowded with aspiring contenders, with no firm having yet developed the resource base, competitive capabilities, and market recognition to command a significant market share

2.   Some fragmented industries consolidate over time as growth slows and the market matures.

3.   Competitive rivalry in fragmented industries can vary from moderately strong to fierce.

CORE CONCEPT: In fragmented industries competitors usually have wide enough strategic latitude (1) to either compete broadly or focus and (2) to pursue a low-cost, differentiation-based or best-cost competitive advantage.

4.   Competitive strategies based on either low cost or product differentiation are viable unless the industry’s product is highly standardized or a commodity.

5.   Focusing on a well-defined market niche or buyer segment usually offers more competitive advantage potential than striving for broader market appeal.

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