Fragmented industries provide many comparative advantages, but each is
relatively small. As a result, as Im sure you are aware, they are
often fragmented for one of five reasons (1). These are:
1. Low barriers to entry
Essentially, the costs involved with entering the market are low
enough that anyone with a simple bank loan and motivation can enter
the market, and expect to make back their initial costs within a few
2. Highly specialized market
Goods and services that require extreme specialization, to the
exclusion of everything else. Most large companies are hesitant to
enter into a market niche that requires extremely technical, focused
skill into one area, when training employees in that area will not
earn them back their initial investment, since that training has no
application elsewhere within the company. Smaller firms, however,
tend to rely on innate knowledge of that skill, and can expect to make
back whatever other investment they have made into the area.
3. High transportation costs
A company has little motivation to enter into a national market, when
the cost of shipping their products from a central factory would
exceed whatever profit they made off of the sale in the first place.
4. Lack of standardization, or lack of need for it
Industries in which a wide range of firms competing with similar
products. In man cases, there is no need for standardization, as
large numbers of similar industries provide more consumer
opportunities, and as such, there is little demand for consolidation.
Local firms often inspire more trust in their consumers, by virtue of
the fact that they are not faceless national corporations. This is a
powerful in some cases, as an anti-consumerism vein now exists as a
backlash to endless incorporation (e.g., against Starbucks
Keeping this in mind, heres a list I have compiled of fragmented
industries (2), and the reasons why they are so fragmented.
1. Book publishing
Lack of need for standardization. The existence of many publishing
firms allows for authors to have many options when looking to publish.
Were these to consolidate, many up-and-coming authors would have no
recourse after being rejected from one of the main publishers. With
this fragmentization, smaller presses publish smaller runs of books,
allowing for more content to be made publicly available.
2. Landscaping & plant nurseries
Though there are national firms, these rarely enjoy the same patronage
as local firms. This may be a consequence of a feeling that local
firms will, by association, know the local soil, water, terrain, etc,
better than faceless national firms, or the low costs of entry: a
determined individual can start a landscaping company with minimal
investment in equipment, and a nursery requires only a small
greenhouse and a roadside stand.
3. Auto repair
Again, national firms do exist, but do not constitute a majority of
the market. People are more likely to trust local firms than they are
larger firms, and Mom & Pop auto repair garages build their clientele
by a repeated series of positive transactions, which are spread by
word of mouth.
4. Restaurant industry
By and large, there is no demand for standardization. Many prefer the
hamburgers of one fast-food establishment to those of another, and
locally-owned franchises or independent restaurants can advertise as
just that. The wide variety available from different types of
restaurants helps add to the popularity of this fragmented industry.
Aside from brand-loyalty, many consumers relish the fact that there
are a large number of similar manufacturers making similar garments
available. Once operating outside the realm of expensively-priced
brands, this leaves many alternatives that would not otherwise be
available (twelve varieties of red dresses, for instance).
6. Meat packing
Or, more appropriately, butchers. There are no national butchers,
since the industry doesnt present itself well to assimilation. Local
butchers, like auto repair garages, work by reputation, with subtle
differences between firms leading consumers to choose the appropriate
butcher for the appropriate occasion (e.g., He sells the best
round-eye steaks in the city, but dont go there for pork chops)
Once again, an industry based on reputation. Large national
conglomerates do exist, but most barbers are local, and barbers are
individuals with whom consumers form friendships, often going to the
same one for most of their lives. National chains cannot match this
sort of loyalty.
8. Hotels & motels
Local motels are about as common as large chains, depending on your
locale. These require relatively low operating costs, once the
initial capital for the facility has been acquired, and do not lend
themselves to standardization. Locally-run hotels are often
no-frills, low-cost alternatives to more posh chain hotels, and as
such appeal to a different demographic. This encourages competition,
and provides an incentive for local start-ups.
For much the same reason as clothing, furniture (outside the high-cost
national realm) is conducive to fragmentization. Local firms can
produce their own with relatively low startup costs, and sell
furniture that is slightly pricier than national form-made items, but
which are hand-made, and as such are more highly valued.
10. Cement/bulk building supplies
These are extremely expensive to ship nationally, and are not
difficult to manufacture locally. National chains might prosper, but
local firms lack the transportation problem endemic to larger
In addition to larger firms that often sell at supermarkets, local
firms enjoy great success in agriculture. This is based on
overwhelming consumer preference for fresh produce: tomatoes purchased
at a roadside stand are almost assuredly fresher from the vine than
are the California imports in supermarkets.
12. Computer components/hardware retail
The market for cheap computer parts is very large, and a number of
firms have sprung up across the country, each operating with
razor-thin profit margins, trying to undercut the sales of others.
Standardization would drive prices back up, and whenever firms do
coalesce into larger entities, they are forced to retain the same tiny
profits, since others threaten to undercut them.
It is nearly impossible to own a construction firm that services large
areas: the logistics of moving that much heavy equipment are a
nightmare, not to mention prohibitively expensive. Instead, local
firms service local areas, giving way to more competition that would
otherwise be available.
14. Tow trucks
Though AAA provides national reference service, tow-trucks are almost
always locally owned. A national company would be nonsensical: the
trucks are obviously limited in their range, and family-owned
businesses could easily acquire the capital to purchase a truck.
15. Limousine services
Much like tow trucks, family-owned limousine services allow for a
small amount of initial investment, and do not make a good deal of
sense to have a national company invest in.
16. Funeral homes
Again, national firms do exist, but individuals are more likely to
trust local funeral homes than faceless chains. Initial capital is
low (it can operate out of ones own home, if need be), and the
additional competition from several local firms keeps prices lower
than they might otherwise be.
17. Video stores
Locally-owned stores attract the same demographic that local auto
shops or barbers do: individuals who do not like unnecessary corporate
influence, and who see that the lower prices offered by local stores
make up for the (occasionally) lower selection available.
18. Health care
Hospitals, clinics, and local medical providers are almost never
nationally affiliated. Hospitals operate in local markets (frequently
overlapping each other), rather than coalesce into larger
organizations, since that would be reminiscent of the health care
systems in place in Canada, for instance.
Huge numbers of very similar products exist in the software market.
With a few notable exceptions (Microsoft included, of course), a
number of firms compete with similar products (there are multiple
types of word processors or spreadsheet programs, for instance, and
many sports simulators). These companies can arise very quickly, and
in an industry with such rapid movement, small businesses with
incredible talent can sometimes make a large impact.
20. Office supplies
In the absence of true "brand name" to turn to, most office suppliers
are considered equal, and as such draw roughly equal portions of the
market share. These industries have not combined simply because there
is no need for them to do so: most make enough profits off of the
goods they sell to maintain independence without monopolizing an
admittedly huge market.
Essentially, then, these industries are those in which competition is
manageable, or in which consumers thrive on that competition. Some of
these could probably coalesce into lager firms, but it would either
fail to serve their needs any better, or would hurt the consumers
place in the market too much to be acceptable.
If you need any clarification about any of the industries Ive
mentioned, or have any other information you need, please dont
hesitate to post a clarification request.
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