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How to decide which market is better to enter - fragmented or concentrated?

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New answer on Jul 22, 2020
7 Answers
10.3 k Views
Anonymous A asked on Jul 18, 2020

Just based on the market information (market size and competitor shares), how can I decide which market is better for entry - the fragmented one or the concentrated one (monopoly/ monolpolistic)? If you think we need to have more information to decide that, what would those factors be?

(edited)

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Ian
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replied on Jul 19, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

It's a great question and something that too many candidates mix up!

Neither a fragmented nor a concentrated market is necessarily good nor bad to enter.

Fragmented

Pros:

  • Easy to enter (presumably)
  • No one player can dominate you or force you out (Amazon/Facebook/Amazon for example)
  • No one player has unfair advantage in the form of buyer/supplier power
  • You can product differentiate to win
  • You can possibly merge/acquire/grow to gain market share and eventually dominate

Cons:

  • Likely highly competitive
  • New (and possibly better) entrants may come in all the time
  • Margins will likely be tight
  • Price competition likely
  • You are not a market maker (i.e. you are bound by the laws of supply meeting demand)

Concentrated Market

Pros:

  • Once you're in, risk of new entrants/competition is low (high barriers to entry)
  • Once you win, you have monopoly power (high margins, market control, etc.)
  • The existing player(s) is/are likely very weak (high marginal cost structure, inefficiencies, slow to move)

Cons:

  • Will be extremely hard to enter
  • Will be extremely costly to enter
  • Once you're in, you will likely get bullied by the existing power
  • The existing power will have more buyer/seller power and a natural advantage over you

What information do I need to decide whether to enter? Well, not to be cheap/use a generic framework, but I need to know the three Cs (Company, Customer, Competition).

Fundamentally, if I enter, will I win?

  • Company - Who am I
  • Customer - Do I offer something people want
  • Competition - Can I do this better than everyone else?

So, to decide this, you need to solve a whole case ;)

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Francesco
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replied on Jul 19, 2020
#1 Coach for Sessions (4.500+) | 1.500+ 5-Star Reviews | Proven Success (➡ interviewoffers.com) | Ex BCG | 10Y+ Coaching

Hi there,

Which market is better depends on the objective.

A fragmented market offers the following plus:

  • Weaker reaction of competitors - think about the probability of starting a price war in a fragmented market vs concentrated
  • Higher likelihood of successful entry – barriers are usually lower
  • More space to get market share from weak players - which by definition are fewer in a concentrated market
  • Higher likelihood to find niches where you can expand – offering future growth opportunities

On the other hand, it could have the following minus:

  • Continuous competition due to the low barriers (eg restaurant industry)
  • Weak direct competition but strong substitutes (eg apartment owners vs hotels chains)

To sum up, you should assess which market helps to meet better your goal and choose accordingly.

Best,

Francesco

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Anonymous replied on Jul 18, 2020

Hi,

It highly depends on the constraints that your client has and goals.

Competitive market with numerous players would usually signal that the entry barriers are not high but it will be more difficult to reach a high market share.

Concentrated market would usually signal that there are high entry barriers but once you manage to overcome it you can get a higher share.

Conclusion: without understanding particular client situation any piece of advice is useless.

Best,

Anton

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Udayan
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updated an answer on Jul 18, 2020
Top rated Case & PEI coach/Multiple real offers/McKinsey EM in New York /12 years recruiting experience

Hi

The answer depends on the objective

- If you are looking for a market with high margins and high barriers to entry then one with few players and high costs for entry is a better option. Of course given these characteristics it is not easy to enter the market so you typically have to buy your way in through an expensive M&A deal or spend a lot of money on investments. An example of this is something like autonomous vehicles or even electric cars

- If what you want is a market where the costs of entry are lower (but so are the margins and profits to be made) then higher competition is a good sign. It indicates that the market is open to new entrants and that entering it requires limited investment. It also indicates that your profits are largely limited to how well you can market and brand your product as there is limited meaningful innovation - most of the innovation can be easily copied. An example of this is the beauty/skincare market which has exploded of late with many players

Best,

Udayan

(edited)

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Robert
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replied on Jul 19, 2020
McKinsey offers w/o final round interviews - 100% risk-free - 10+ years MBB coaching experience - Multiple book author

Hi Anonymous,

Ian gave an excellent answer on that content-side of the question.

I'll approach it from a different angle and say that's the idea of an interactive case interviewe with your interviewer. Based on the information given it's impossible to decide to go for the fragmented or concentrated one since neither the one nor the other is universally better - the idea is to find that out in a structured discussion with your interviewer, specifically for that situation of your client!

Hope that helps - if so, please be so kind to give it a thumbs-up with the green upvote button below!

Robert

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Anonymous replied on Jul 22, 2020

Dear A,

Fragmented competitive landscape is preferred over a concentrated, because there are more smaller players, the competition is mre fare and you could easily increase marketure in this segment compare to the concentrated one, where companies are in a sort of oligopoly. Therefore it's better to have fragmented competitive landscape.

Best,

André

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Clara
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Content Creator
replied on Jul 20, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

On add on top of what has been said already: DEPENDS. On the following:

  • Target
  • Specific client/product contratints
  • TImelines

Hope it helps!

Best,

Clara

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