How do you identify a fragmented industry?

How do you identify a fragmented industry?
October 24, 2016 Zara_Merlo

How do you identify a fragmented industry?

One of the key factors to identify in establishing a successful online marketplace is a fragmented industry.

A fragmented industry is one in which many companies compete and there is no single or small group of companies which dominate the industry. The competitive structure of the industry means that no one company is in an overly strong or influential position in the industry.

Fragmented industries make ideal targets for companies looking to enter and potentially dominate a market. The nature of fragmented industries means they often provide fewer barriers to entry than more consolidated industries.

In the words of master investor Warren Buffett: “In business, I look for economic castles protected by unbreachable ‘moats’.”

Conversely, the so-called moat, or barrier, for entry into a fragmented industry is low. An investor like Buffett will be looking for a business with a highly defensible market position; while a company looking to establish an online marketplace will more often be looking for an industry in which the many competing businesses have spent their time and resources on fighting each other rather than building a moat to protect themselves from disruption.

This makes fragmented industries highly appealing for strategic disruptors. As Michael Porter states in his classic book Competitive Strategy: Techniques for Analyzing Industries and Competitors:

Overcoming fragmentation can be a very significant strategic opportunity. The payoff to consolidating a fragmented industry can be high because the costs of entry into it are by definition low, and there tend to be small and relatively weak competitors who offer little threat of retaliation.

One of the best strategies to use in disrupting a fragmented industry is to develop a multi-sided platform model which does a better job of meeting unmet demand or allocating resources more efficiently, either for the benefit of incumbents, consumers, or ideally both.

An excellent example of this process can be seen by looking at online cycling marketplace BikeExchange, a deep vertical, niche marketplace powered by Marketplacer’s enterprise marketplace platform.

When BikeExchange started in 2007, its founders identified a fragmented industry (bike sales and cycling retail) in an area of growing consumer demand. There were hundreds of cycling stores around Australia, some big enough of to be small chains, but none big enough to really dominate the sector. The online presence of these stores was also varied, ranging from non-existent for some stores to reasonably sophisticated e-commerce set-ups.

However, BikeExchange recognised that increasingly educated and selective consumers were encountering friction because they had to work very hard sometimes to find the bike or bike equipment they wanted, even from online stores.

On the other side of the equation, the relatively weak position of most of the retailers meant they were not reaching consumers who might have potentially been interested in purchasing from them. They had inventory sitting in their showrooms and warehouses that could have been of interest to the growing numbers of bike enthusiasts searching online.

This environment of a fragmented industry with unmet consumer demand and relatively poor resource allocation provided the perfect entry point for a platform like BikeExchange to enter the industry and reconfigure it. BikeExchange was able to attract enough participants from both sides of the market equation for the platform to scale and benefit from network effects.

E-commerce has given many businesses the chance to sell their goods and services online. Many of these businesses still compete in what could be classed as essentially fragmented industries, such as cycling retail, or else in markets that exhibit signs of poor resource allocation which could be improved by the application of a platform model, which is what has happened in personal transportation with Uber.

Opportunities in fragmented industries still abound for entrepreneurs willing to provide the right sort of platform.