Fragmented industries provide many comparative advantages, but each is relatively small.

As a result, as Im sure you are aware, they are often fragmented for one of five reasons (1). These are: 1. Low barriers to entry Essentially, the costs involved with entering the market are low enough that anyone with a simple bank loan and motivation can enter the market, and expect to make back their initial costs within a few years. 2. Highly specialized market Goods and services that require extreme specialization, to the exclusion of everything else. Most large companies are hesitant to enter into a market niche that requires extremely technical, focused skill into one area, when training employees in that area will not earn them back their initial investment, since that training has no application elsewhere within the company. Smaller firms, however, tend to rely on innate knowledge of that skill, and can expect to make back whatever other investment they have made into the area. 3. High transportation costs A company has little motivation to enter into a national market, when the cost of shipping their products from a central factory would exceed whatever profit they made off of the sale in the first place. 4. Lack of standardization, or lack of need for it Industries in which a wide range of firms competing with similar products. In man cases, there is no need for standardization, as large numbers of similar industries provide more consumer opportunities, and as such, there is little demand for consolidation. 5. Trust Local firms often inspire more trust in their consumers, by virtue of the fact that they are not faceless national corporations. This is a powerful in some cases, as an anti-consumerism vein now exists as a backlash to endless incorporation (e.g., against Starbucks assimilation) Keeping this in mind, heres a list I have compiled of fragmented industries (2), and the reasons why they are so fragmented. 1. Book publishing Lack of need for standardization. The existence of many publishing firms allows for authors to have many options when looking to publish. Were these to consolidate, many up-and-coming authors would have no recourse after being rejected from one of the main publishers. With this fragmentization, smaller presses publish smaller runs of books, allowing for more content to be made publicly available. 2. Hotels & motels Local motels are about as common as large chains, depending on your locale. These require relatively low operating costs, once the initial capital for the facility has been acquired, and do not lend themselves to standardization. Locally-run hotels are often no-frills, low-cost alternatives to more posh chain hotels, and as such appeal to a different demographic. This encourages competition, and provides an incentive for local start-ups.

Stalemate The stalemate competitive environment is characteristic of industries in the mature or declining stages of the life cycle (for example the European steel industry) with a commodity product and limited opportunities for differentiation. This type of competitive environment is characterized by a small number of very

large players which dominate their industry. There are few competitive advantages, so the focus is on large-scale production and improving productivity. Stalemate industries suffer from excess capacity, limited innovation and high barriers to entry. There are few examples of a stalemate industry in hospitality. Specialized or niche In a specialized or niche competitive environment, there are many ways of achieving competitive advantage. Companies focus on serving specific market segments and become specialized businesses. The marketing objective is to be best in class, and a price premium is charged. Image, quality and service are important factors in serving customers in a niche market. There are many examples in the hospitality industry Gleneagles Hotel in Scotland has a niche market in the luxury leisure golfing market. Volume The volume competitive environment is characterized by mass players serving mass markets. There is a limited number of ways to achieve competitive advantage, and control of costs is a key factor for success. Economies of scale, experience and technology are used to reduce the cost base. The marketing objective is to be the cost and volume leader. Examples of volume businesses in hospitality include brewing, contract catering and tour operators. In Norway, three companies (SAGA, Star Tours and Ving) dominate the travel industry.

Volume businesses benefit from large scale which helps them to lower production and service costs by spreading out a cost over a larger number of units. A great example is software initial costs are enormous to develop a software program but incremental costs for the next copy are tiny. In this environment average unit costs fall quickly as volume increases. Volume businesses also benefit from being able to spread their marketing and brand building costs over a large number of sales. this is the advantage that Coca-Cola has over Pepsi. It costs each the same to create advertisements and to buy the time on TV but because Coke has approximately double the market share, its unit costs are about half giving Coca-Cola the choice of taking the cost advantage or spending twice as much on promotion. Volume businesses thrive where customer needs are very similar and get into trouble as customer needs disperse across many different customer value attributes. Stalemate businesses where there are few competitive advantages and those that could exist are small are often trapped into thinking determined by standard industry recipes Thats the way this industry works, it always has done and always will do. As technology changes, these industries can be shaken up and the old approach made to look foolish. Think of Amazon versus music CD stores. The Fragmented and Specialised sections are where most small businesses should be positioned and they deserve their own special posts focusing on the opportunities. If you think that youre trapped in a stalemate industry, you need to listen to my mp3s on the 7 big questions of business success.

Why I Like The Competitive Advantage Matrix

I like the Competitive Advantage Matrix for several reasons:

First it shakes up the idea that big is better. It works in volume businesses but in other businesses, getting too big and expanding outside the niche damages the differentiation that creates success. .

Second, its not that well known. Ive seen it mentioned in a few books on strategy but they rarely go into much detail and instead prefer to trot out the traditional thinking from the Growth Share Matrix.