How to Explore Fragmented Markets for Competitive Intelligence
Fragmented markets are often dominated by smaller firms that serve local customers. They tend to change rapidly, so it’s important that your competitive intelligence stays on top of the latest trends in these markets.
Competition isn’t quite as stiff as in national and international markets, and profit margins are higher. Organizations that operate in fragmented markets often have to follow different rules for success than do their national and international counterparts. When you’re analyzing fragmented markets, keep the following points in mind:
Fragmented markets tend to be vulnerable. Because of the massive size of external (often global) competitors, you have to be constantly vigilant of competitor thrusts into those markets.
Fragmented markets are often subject to uniquely different issues than global markets are. For example, governmental regulations have changed various aspects and requirements for products in California. If you’re looking to expand operations into a specific location, get up to speed on any regional issues that may impact business.
Fragmented markets have different rules of the game and can be somewhat volatile in nature. CI’s ability to keep upper management informed about fragmented markets is a key to successfully competing in these markets.
When competing in fragmented markets, clarify your understanding of the market by answering the following questions:
Why is the market fragmented? The market may involve an outdated distribution system with wholesalers in the middle of the value chain. It also may be an area that requires some level of personalized service. Numerous other factors may be involved, and discovering those factors may reveal opportunities for your company.
What are the growth prospects for the market or sector? Compare the growth prospects for different market sectors and try to identify sectors with moderate- to high-growth prospects. Sectors with higher growth prospects are those in which your organization has the opportunity to gain the first-mover advantage and claim a bigger share of the market.
What are the future profit (profit margin) prospects for the market or sector? You always need to think about growth prospects in the light of future profit margins. Highly competitive markets are at a greater risk of diminished profit margins.
Look at the competitive index for the market or sector. If the index approaches or rises above 4, the increased level of competitive behavior is likely to drive down profits.
Does the market still offer some first-mover opportunities? The first companies to enter a market or sector usually profit the most. If your sector has been fished out, your best bet is to paddle out to areas with the biggest opportunities and the least competition. CI can be instrumental in helping your organization capture a series of next little things and next big things on a continual basis.
Usually only one company captures the first-mover advantage, and that’s usually where you want to be. However, sometimes you can actually gain an advantage by being a fast follower. Fast followers often take advantage of lower entry costs by allowing the leader of the pack to invest in the high cost of development and then simply following the trail.
What are the geographic considerations of the market? Sometimes regional markets exist due to high transportation costs or government regulations. Changes in any of those factors can change the attractiveness of the fragmented market. The factors you need to consider depend on whether you’re dealing with an existing or emerging market:
Existing market: Conduct additional research to identify the key drivers that led to fragmentation. When you understand what those drivers are, you’re ready to begin thinking about the potential value of the market.
Emerging market: Consider approaching emerging products with the same trepidation you have when considering the adoption of new technologies. You rarely want to be on the bleeding edge. Instead, try to use CI to place your organization on the leading edge, where you can gain first-mover advantage on a budget.
What’s the probability of market consolidation? Does an opportunity exist for a company to acquire a number of competitors for the purpose of becoming the dominant player in the market? Keep an eye on the following factors when looking for opportunities:
Changes in local laws, regulations, or attitudes
Trends toward vertical integration in the sector
Positive economic trends that may drive the market
Fragmented markets tend to get targeted by large national or international companies because they’re typically less competitive and offer higher profit margins. Vertical integration or disintermediation (dissolution of supply chains) is a sure sign that frame-breaking change is already occurring in a sector.
Do any technologies drive this market? If they do, how important is each technology from a competitive standpoint? Technology often triggers an unexpected tsunami in a market, particularly a fragmented one.
What’s the typical product life cycle — the amount of time from a product’s introduction to its modification or steep decline — in this market? Fragmented markets tend to be less competitive (lower competitor index), so product life cycles are typically much longer (and more profitable) than in markets subject to national or international competitors.
Larger national and international competitors typically spend the R&D dollars so that they can remain competitive by continually launching new products. In most cases, this doesn’t happen in fragmented markets until the larger competitors decide to try to capture increased global market share by attacking those markets.
Are any new players entering the market? New competitors can blindside you in any market or sector, even in fragmented markets. Apple demonstrated to the world that it’s possible to identify a high return opportunity and to acquire the resources and capabilities to radically impact a market.
Do any of the ten forces (economy, ideology, politics, media, regulations, and so on) impact the market? Regardless of the type of market in which you’re doing business, you need to keep an eye on the ten forces that are likely to impact the sector and your business. The best strategy in the world won’t avert the challenges of a tsunami.