Fragmented industries: Formulating Strategy

Collecting the ideas that have been discussed earlier, we are in a position to outline a broad analytical framework for formulating competitive strategy in fragmented industries (see Figure 9-1). Step one is to conduct a full industry and competitor analysis to identify the sources of the competitive forces in the industry, the structure within the industry, and the positions of the significant competitors. With this analysis as background, step two is to identify the causes of fragmentation in the industry. It is essential that the list of causes be complete and that their relationship to the economics of the in-dustry be established. If there is no underlying economic basis for the fragmentation, this is an important conclusion, as has been dis-cussed.

Step three is to examine the causes of industry fragmentation one by one in the context of the industry and competitor analysis in step one. Can any of these sources of fragmentation be overcome through innovation or strategic change? Is the infusion of resources or a fresh perspective all that is necessary? Will any of the sources of fragmentation be altered directly or indirectly by industry trends?

Step four depends on a positive answer to one of the preceding questions. If fragmentation can be overcome, the firm must assess whether or not the implied future structure of the industry will yield attractive returns. To answer this question the firm must predict the new structural equilibrium in the industry once consolidation occurs and must then reapply structural analysis. If the consolidated indus-try does promise attractive returns, the final question is, What is the best, défendable position for the firm to adopt to take advantage of industry consolidation?

FIGURE 9-1     Steps for Formulating Competitive Strategy in Fragmented Industries

Step One                   What is the structure of the industry and the positions of competitors?

Step Two                   Why is the industry fragmented?

Step Three                Can fragmentation be overcome? How?

Step Four                  Is overcoming fragmentation profitable? Where should the firm be positioned to do so?

Step Five                   If fragmentation is inevitable, what is the best alterna-tive for coping with it?

If the chances of overcoming fragmentation analyzed in step three are unfavorable, step five is to select the best alternative for coping with the fragmented structure. This step will involve a con-sideration of the broad alternatives presented above, as well as others that may be appropriate to the particular industry, in light of the particular resources and skills of the firm.

Besides providing a series of analytical processes to go through periodically, these steps also direct attention to the key pieces of data in analyzing fragmented industries and in competing in them. The causes of fragmentation, predictions about the effects of innovation on these causes, and identification of industry trends that might alter the causes of fragmentation become essential requirements for envi-ronmental scanning and technological forecasting.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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