What Is Fragmentation?
Fragmentation refers to a supply chain that has been divided into several sections. When businesses fragment, they distribute the production process across several suppliers and manufacturers. As a result, businesses utilize distinct suppliers and component manufacturers to make their products and services.
These entities are frequently located in different nations, particularly when labor is abundant and affordable. This enables enterprises to make their items at a lower cost. Globalization and advancements in technology enabled fragmentation.
What Is a Fragmented Industry?
A fragmented market (or fragmented industry) is a consumer market in which no single firm or group has sufficient power to steer the industry in a certain direction.
Typically, fragmented markets and industries are comprised of several firms and organizations that compete inside a certain industry, but none of these small and medium-sized businesses dominate the whole market within it.
In a fragmented market, there are several submarkets with varying consumer expectations, necessitating distinct marketing and promotion strategies for clients inside each fragment.
How does a fragmented market form?
Multiple reasons contribute to fragmented markets. However, expansion within a single market or industry is frequently the most significant factor in market fragmentation. When a market or business expands to accommodate a large number of clients, various submarkets begin to emerge.
These submarkets divide the primary market and typically develop into wholly distinct markets with distinct product and service offerings. Several more variables impact the formation of a fragmented market, including:
Differing market needs leading to market alternatives
When a market expands, client requirements become more diversified. However, without a single market-dominant organization, the market as a whole may not be able to meet the growing variety of market demand.
In this instance, the fluctuating and diverse nature of client demand may eventually lead to the fragmentation of the whole market. When a market divides, small and medium-sized firms and organizations can create solutions to meet demand in the emerging market segments.
Strong and equal market competition between organizations
Fragmented markets and sectors can also arise when no single organization dominates the market position of its competitors. If all companies in an industry are under equal competition, then no business will outperform the others.
This frequently leads to firms splintering off and becoming dominant in a new, smaller submarket. This causes companies to place themselves at the top of new submarkets within the whole industry, fragmenting the market.
Lower cost alternatives to market offerings
Customers may leave a market in search of lower-priced alternatives that provide the same level of product or service quality if the industry’s products are out of current.
This can lead to firms within an industry splintering into smaller pieces in order to satisfy the need of customers who first left the market. This allows organizations to obtain sufficient power to steer the fragment in a growth-oriented path.
How to identify a fragmented market
Certain features in huge industries such as hospitality and technology might indicate if a market is fragmented or will fragment in the near future. Use the following procedures to determine the characteristics of a fragmented market:
1. Determine if there are any barriers to entry
One of the most typical characteristics of a fragmented market is that it is simple for new companies to enter and establish a position. Since all firms in fragmented marketplaces compete equally, there should be no entry obstacles.
Barriers to entrance into a market might include high start-up costs, legal and regulatory requirements, and other impediments that hinder rivals from joining the business. However, there are little, if any, obstacles to entry in a fragmented market.
2. Identify where there’s product innovation
Highly competitive sectors are often comprised of a number of revenue-generating enterprises and organizations. This may be attributable to the firms’ capacity to consistently provide unique and novel items to the market.
However, in a fragmented market there is typically a lack of product variety, innovation, and even personalization. It is likely that a market is fragmented if the product offers of many firms within the market are comparable and there are no inventive techniques to developing new goods.
3. Lack of customization
Consider the market’s needs and how businesses within that market are meeting those demands. In a fragmented market, you will see that there are no distinctive products among the companies. This absence of customized or personalized products may signal a fragmented market or one that will fragment in the future.
4. Look at the economy of scale
The term economy of scale refers to the cost advantage that a company has due to the size of its commercial activities. For instance, huge firms with substantial economies of scale are able to sell their products at inexpensive prices due to the size of their operations.
Typically, a fragmented market has no major economies of scale since it comprises primarily of small and medium-sized businesses, which do not scale as effectively as large, competitive businesses.
Types of fragmented industries
Fragmented markets occur across many types of industries, including:
Software development is an outstanding illustration of a fragmented sector since no small or medium-sized business possesses a dominating market position. This might result in the emergence of new and rising enterprises with minimal restrictions or competition.
Construction and labor
As a result of the ease with which small enterprises may enter the construction and labor industries, both markets are susceptible to fragmentation.
Finance and accounting
The financial and accounting services business is fragmented, since several submarkets supply comparable products. The sector is not dominated by a single small or medium-sized enterprise, although industry fragments might contain specialized financial services such as tax preparation or retirement planning.
Marketing and communications
Due to its scale and lack of a dominating marketing organization, the marketing business is comparable to the financial and accounting sectors. Numerous small and medium-sized businesses can enter the market with few to no obstacles.
In a retail market with a high degree of fragmentation, smaller competitors may all vie for market leadership. However, the lack of economies of scale that generally characterizes small and medium-sized shops might prevent any of them from dominating the market, resulting in fragmentation and separation from the parent sector.
The food and hospitality sector is a prime example of a fragmented market. Due to the predominance of huge restaurant chains, smaller restaurants have formed submarkets to meet varied market demands.
In a fragmented business, for instance, small, family-owned restaurants may compete with other small, family-owned restaurants by delivering distinctive menu items and dining experiences to achieve market influence.
Advantages of a fragmented market
Fragmented markets have several advantages for small- and medium-sized organizations, including:
No single company to compete with
Equal competition within a fragmented market implies that no firm has a larger consumer base than any other. When no single firm has sufficient power to alter the industry, it suggests that customers have not shown preference for any one enterprise. This level of competition and lack of client loyalty might be favorable to new enterprises entering the market.
Little to no challenge to enter the market
Small firms benefit from fragmented marketplaces since there are little barriers to entry. Cost is a significant entrance hurdle for many enterprises.
Typically, marketing expenses will be greater in industries that are highly competitive and dominated by multiple major corporations. In a fragmented market, however, local marketing and promotion strategies allow smaller firms to lower the cost of industry entry.
Opportunity to innovate and differentiate
Numerous small enterprises that flourish in fragmented marketplaces do so as a result of their innovative and distinctive offers. For example, a small landscaping company might separate itself from competitors by customizing the customer experience or by offering extra services to fulfill the unique demands of its customers.
Easier to reach target customers
Because fragmented markets are primarily comprised of small businesses, marketing and advertising are frequently conducted at the local level. This makes it easier and more consistent for small enterprises to contact their target clients, which supports their income generating.
Disadvantages of a fragmented market
Despite the fact that fragmented markets may be extremely favorable for smaller businesses, there are disadvantages to these sorts of sectors, including:
Redundancy in offerings
Due to the similarity of firms’ offerings in a fragmented market, products, services, and message to client markets can become redundant. When there are an excessive number of recurrent products, target markets seek alternate offerings.
Lack of economy of scale
Fragmented marketplaces can be difficult for small enterprises due to their limited operations. For instance, a small company that manufactures home décor may lack the scalability to manage big influxes of client orders, shipping needs, and supplier coordination.
Frequent strategy updates
In fragmented marketplaces, market requirements might fluctuate, thus regular examination is required to establish effective marketing tactics.
For example, technology such as social media makes it simpler for small firms to promote to target audiences; but, it can be difficult to determine which platforms these target markets utilize because these channels are always growing.
Ways to overcome challenges in a fragmented market
Businesses may overcome the problems of a fragmented market in a number of ways, including:
Reducing production costs
Small enterprises that can cut their total production costs have a greater chance of obtaining market share in a fragmented industry. For instance, a small clothing manufacturer may forego a third-party supplier in favor of making its own materials in-house, so minimizing its shipping costs.
Differentiating and specializing
With several comparable options in a fragmented market, small firms might overcome this difficulty by developing unique or specialized products and services for a specific clientele.
Facilitating local offerings
By focusing on meeting local demand, medium-sized firms in fragmented marketplaces may overcome the issue of vast target markets. For instance, a pet supply business that normally sells items online might overcome the difficulties associated with a large target market by delivering unique offerings to its local clients.
Introducing vertical integration
Vertical integration aids smaller businesses by granting them greater control over their manufacturing processes. This improves the cooperation between smaller enterprises and their supply networks, resulting in cheaper manufacturing costs.
Characteristics of fragmented industries
A fragmented industry lacks a dominant participant. Frequently, the firm itself is modest, but the industry as a whole might be substantial. Examples include gardening businesses and barbers. There are plenty of them, but in the majority of marketplaces there is no dominant player.
Why are so many industries fragmented? Here are some characteristics of industries that are fragmented:
- Low entry obstacles
- Insufficient product innovation
- High requirement for trust, and small businesses generate more trust Absence of necessity for uniformity
- No genuine scale economies
So, if you are in one of these businesses, how can you remain competitive? A important component is differentiation. On lieu of offering the same services as everyone else, your hair business might specialize in African hair braiding.
As a result, the salon might add value to the transaction by providing a superior level of customer care. Examine the competitors in the area and provide something distinct or superior. Maintain a narrow focus and become an authority on the specific demands and needs of your region.
Strategy Options in a Fragmented Industry
A niche strategy (operating a business in a well-defined tiny section of a large market) may be more suitable for a company in a fragmented industry. This is anticipated to provide an improved competitive edge.
A company may either concentrate on a single product category or on certain consumer categories. The niche approach based on product category enables a company to specialize by product type.
Thus, it might specialize on the manufacture or distribution of a certain product.
When a company chooses a niche strategy based on client type, it may respond to the demands of certain sorts of customers who need items with distinct qualities.
For instance, a software company may solely specialize in the creation of Accounting Information Systems or Retail Software. This category describes 5M InfoTech Limited. Hospital/clinic management and hotel management are its area of expertise.
Similarly, a hotel may cater solely to international travelers or consumers who value affordability.
Focusing on Limited Geographical Area
A company may focus its operations in a certain geographical region. Typically, supermarkets, convenience stores, and repair businesses employ this method.
Numerous supermarkets and local stationery/grocery businesses effectively employ a low-cost strategy. They sell their items at affordable rates and are therefore able to attract clients. This method is more effective when there is intense price rivalry.
Operating Standardized Outlets
Some companies in a fragmented business employ the approach of running standard stores in multiple locations.
Nevertheless, these outlets (or actual shops/stores/sales centers) must be managed with great efficiency. Two multinational fast-food behemoths, Pizza Hut and Kentucky Fried Chicken, pursue this method with great success (KFC).
Other Types of Fragmentation
When a firm is split, some structural elements get separated. This comprises the leadership, operations, procedures, infrastructure, and location of the firm. Frequently, corporate dispersion may result in inefficiency and even losses.
This type of market fragmentation is also known as market segmentation. It occurs when market players are divided or segmented based on their demands, particularly consumers.
This enables businesses to discover and target specific trends based on how consumers consume goods and services, so enhancing their efficiency and revenues. Markets can be segmented according to behavior, demography, or location.
A fragmented industry is one in which there are several rivals, but no single company holds a significant enough market share to influence the business decisions of the others. Each participant is little in comparison to the size of the market.
This does not suggest that the sector is unprofitable or not growing; rather, it indicates that there are little barriers to entry and that the potential for profit is believed to be greater than in other endeavors.
A fragmented industry is one in which there are very many firms competing and, as a consequence, no ‘one’ player is big enough to influence the direction or growth of the industry. Restaurants, cab services, home-care services, auto dealership and the furniture business are some examples.
How to identify a fragmented market
- Determine if there are any barriers to entry. One of the most common traits of a fragmented market is that they are easy for organizations to enter and gain a position. …
- Identify where there’s product innovation. …
- Lack of customization. …
- Look at the economy of scale.
A fragmented industry is an industry with a large number of small and medium-sized companies with no significant market share or influence on the industry. There are different reasons that can make an industry fragmented, low entry barriers, exit barriers, newness, etc.
Consolidated industries where market is dominated by a few large firms, each of which contributes to make a difference in its products from the competition. Fragmented Industries: Low passage boundaries because of low financial deal No space for expansive…show more content…