Analysing competition when determining market attractiveness

Case Interview competition Framework Market analysis market entry
New answer on Dec 14, 2020
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Anonymous A asked on Dec 12, 2020

Hi,

I'm a little confused when understanding how attractive a market is to enter and analysing the barriers to entry or level of competition. It seems that a market with a few consolidated players with high market shares is attractive to be in, but difficult to enter and capture initial market share. Conversely, a fragmented market with several small players is likely easier to enter but less attractive to be in. So, which of these is desirable, and what use does it serve in an analysis of whether to enter or not?

Thanks!

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Ian
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replied on Dec 13, 2020
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Hi there,

You're absolutely right! One is not necessarily more attractive than the other!

The best thing to look at, in realitty is expected margins and expected market share. That's what really matters. That said, there are a few pros/cons with each...

CONSOLIDATED MARKET

Cons:

  • Presumably very high barriers to entry
  • When entering you will have low buyer + seller power compared to the dominant players
  • Prone to "bullying" by incumbents

Pros:

  • Incumbents are likely "weak". I.e. they're not operating as effeciently as possible (High Costs)
  • Incumbents are prime for disruption (Missing out on Revenues)
  • If you win, you dominate

FRAGMENTED MARKET

Cons:

  • Unlikely to "win" outright
  • Expensive to win/stay in the market
  • Constant competition...if you reach the top, you may not stay there
  • Low margins likely

Pros:

  • Low barriers to entry
  • Huge opportunity to dominate via market size gain...either through aggressive organic growth or M&A
  • Market is likely in the growth phase, representing opportunity for strong future profits
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Francesco
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replied on Dec 13, 2020
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Hi there,

Very good question!

I agree with Udayan that you should first clarify the objective.

Once you have done so, you can analyze which market would help you to achieve that particular goal.

Say for example that your goal is revenues. This would be given by:

  • Market size
  • Market share you can get

Say market size is equivalent, the best market will be defined as the one where you can get the highest market share in this case.

A fragmented market may be good (and a concentrated bad) in terms of market share because:

  1. Barriers to entry are low (you could enter – unlike a concentrated one where that may be impossible – so at least get some market share)
  2. The reaction of competitors is low
  3. It is easier to get market share from the weakest players (at least some of them should be worst than you)

But a fragmented market may also be bad (and a concentrated one good) in terms of market share because:

  1. Competitors will continue to enter the market in the future
  2. It may be difficult to grow (which is why the market is fragmented in the first place), unless you have a disruptive product or service

So overall, you should consider both the plus and minus of the fragmented market, and evaluate accordingly if it is the best.

Best,

Francesco

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Vlad
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replied on Dec 13, 2020
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Hi,

Here is the logic:

  1. In most of the markets, players are competing on price
  2. Those who have lower costs can compete on price better and lower the price further
  3. If the players are big, they'll have lower costs due to: economies of scale, supplier power, brand power, etc
  4. Thus it's hard to compete with big players when you are small

Here are the implications:

  • Consolidated markets are hard to enter from a scratch (organically)
  • Consolidated markets are great if you want to acquire someone big (non-organically)
  • Consolidated markets OK if you have investments and a business in the other country that you can replicate quickly

Best

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Udayan
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replied on Dec 12, 2020
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The answer depends on the objective and the nature of the market.

Broadly speaking - a market can be fragmented for 2 reasons

1. It is a highly commoditized market like coffee or cheap electronics etc.- which is less appealing as anyone can enter it and the growth largely comes for marketing and not innovation. Entering here is easy but profits are low and expected to get lower and this is a market best avoided.

2. It is a new space where companies are still targeting various niches/growth opportunities - for example ecommerce in 2000. The growth potential was very high but many companies started and failed until Amazon figured out a way to deliver products in 2 days for free. Here growth is based on true innovation which allows you to capture the market in the future once there is a behavioral change that takes place. This is a market you do want to be in.

In general you want to be in a market which is not easily accessible as your profitability is highest there (peaking theoretically in a monopoly)

Best,

Udayan

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Clara
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replied on Dec 14, 2020
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Hello!

Classical 5Ps of Porter :)

It depends on the position of the player you are anlyzing.

In case of a market entry in which you are consulting the player who is considering entering, indeed a consolidated market with few players is a very difficult scenario -to enter-.

Hope it helps!

Cheers,

Clara

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Ian gave the best answer

Ian

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