Management And Accounting Web

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press.

Chapter 9: Generic Industry Environments

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Porter's Competitive Strategy Main Page

Part II: Generic Industry Environments p. 189

The key dimensions of an industry's environment have various implications for developing competitive strategy. Part II includes five chapters that each deal with a separate dimension including: Chapter 9, fragmented industries, Chapter 10, emerging industries, Chapter 11, industries in the transition from growth to maturity, Chapter 12, declining industries, and Chapter 13, global industries.

Chapter 9: Competitive Strategy in Fragmented Industries p. 191

A fragmented industry is an industry with a large number of small or medium size firms where no firm has a significant market share or strong influence on the industry. Examples include industries related to services, retailing, distribution, wood and metal fabrication, agricultural products, and creative businesses. Porter provides a list of industries in Exhibit 9-1 (pp. 192-195) where the top four firms' market share is 40% or less, based on their two digit SIC codes. Some examples include, Frozen fruits and vegetables, Bread, cake and related products, Men's and boys neckwear, Women's and children's underwear, Curtains and draperies, Sawmills and planning mills, Boat building and repairing, etc. The purpose of this chapter is to examine the special problems related to developing competitive strategy in these fragmented industries.

What Makes and Industry Fragmented? p. 196

The main causes of industry fragmentation include the following:

Low overall entry barriers - Nearly all fragmented industries have low entry barriers, but fragmentation usually includes one or more other causes.

The absence of economies of scale or the benefits of an experience curve - e.g., situations where there are simple processes or assembly, straightforward warehousing, high personal service content etc.

High transportation costs - e.g., the transportation costs for cement, milk, and caustic chemicals.

High inventory costs or erratic sales - i.e., where small scale operations are more flexible.

No advantages of size when dealing with buyers or suppliers - e.g., where buyers intentionally spread their business to many suppliers or encourage entry.

Diseconomies of scale in some aspect - e.g., requirements for success in the industry include a quick response to rapid style changes, low overhead, heavy creative content, close local control, and personal service etc.

Diverse market needs - Where buyers are willing to pay a premium for special varieties, e.g. fire departments request unique fire engines.

High product differentiation - Where large size doesn't convey the desired image, e.g., the performing arts.

Exit barriers - Management goals are not necessarily profit, e.g., the fishing industry.

Local regulation - e.g., liquor retailing.

Government prohibition of concentration - e.g., electric power.

Newness - Where no firm has developed the necessary skill and resources to gain a large market share, e.g. solar heating.

Overcoming Fragmentation p. 200

There are significant advantages available to a firm that can overcome the cause of fragmentation in an industry. Porter uses the cattle industry as an example where feed lots were developed as a cheaper way to fatten cattle than the previous approach where  cattle were grazed on rangelands.

Common approaches to consolation

Some common approaches to overcoming fragmentation include:

Creating economies of scale or an experience curve - e.g., mechanization in the laboratory animals used for medical research industry, and climate controls and conveyers used in the mushroom farming industry.

Standardizing the diverse market needs - e.g., developing a new product, design change, or modularizing a product.

Neutralizing or splitting off the aspects that are most responsible - e.g., the need for tight local control was overcome in the campground, fast food, and real estate industries by franchising to owner-managers that became part of a national brand name organization with central purchasing and services.

Making acquisitions for a critical mass - Making many acquisitions of local companies can work if they can be integrated and managed.

Recognizing industry trends early - e.g., substitute products can trigger consolidation as they did with computer service bureaus when mini and microcomputers became available.

Industries that are Stuck

Industries can become stuck in a fragmented state for several reasons:

Existing firms lack the resources or skills to make the needed investments, e.g. the capital or expertise to develop large scale production facilities or distribution channels.

Existing firms are myopic or complacent - e.g., the U.S. wine industry until the 1960s.

Lack of attention by outside firms - industries that lack glamour, e.g. air and grease filters.

Coping with Fragmentation p. 206

There are a number of approaches to pursuing a low cost, focus or differentiated strategy in fragmented industries:

Tightly managed decentralization - The idea is to deliberately keep individual operations small and autonomous with tight control.

"Formula" facilities - Build efficient, low cost standard facilities at multiple locations.

Increased value added - In industries where products or services are like commodities, a firm can add value by providing additional service with the sale (e.g. cutting to size), or by forward integration into distribution or retailing.

Specialization by product type or product segment - A focused strategy of specializing in a tightly constrained group of products, e.g., Ethan Allen's focus on early American furniture in exclusive retail outlets.

Specialization by customer type - Place emphasis on a specific group of customers, e.g., the least price sensitive, or low volume purchasers.

Specialization by type of order - Focus on small orders, or orders with less price sensitivity.

A focused geographic area - Concentrating facilities, marketing, and sales activity in a specific geographic area to economize on sales force, advertising, and distribution, e.g., food stores.

Bare bones/no frills - Low cost strategy based on low overhead, low skilled employees, tight control, and attention to detail.

Backward integration - Selective backward integration to lower costs.

Potential Strategic Traps p. 210

Some common traps in fragmented industries include:

Seeking dominance - Trying to be all things to all customers in a fragmented industry increases the firm's vulnerability to competitive forces, e.g., leads to high overhead and fixed costs with no economies of scale and the resulting vulnerability to pricing wars with smaller firms.

Lack of strategic discipline - Success in a fragmented industry usually requires the discipline to stay focused on a specific strategic concept.

Overcentralizaion - Strategies in many fragmented industries emphasize local contracts, local control, and personal service. Centralization in such an environment is counterproductive.

Assumption that competitors have the same overhead and objectives - Small owner operated firms tend to have different objectives, use family labor, avoid regulatory costs and the need to offer employee benefits. Their objective may focus more on providing work for their employees rather than earning a return on investment.

Overreactions to new products - Early success with new products can lead to overinvestments that lead to higher costs when the products matures and profit margins decline.

Formulating Strategy p. 213

An outline of the framework for formulating strategy in fragmented industries is presented in the graphic below. The steps emphasize questions related to the causes of fragmentation, if and how fragmentation can be overcome, and the best position the firm can take based on the answers to the previous questions.

Formulating Strategy in Fragmented Industries

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Go to the next Chapter. Porter. 1980. Competitive Strategy. Chapter 10: Competitive Strategy in Emerging Industries. (Summary), or back to Porter's Competitive Strategy Summaries Main Page.

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