market entry: fragmented vs. concentrated competitive landscape

market entry
New answer on May 07, 2021
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Anonymous A asked on May 06, 2021

Hi there,

somehow i am struggling with understanding whether, for a market entry, it is better to have a concentrated market or a fragmented market. I understand that fragmented markets are often more competitive and many companies might be competing on prices. however, for concentrated markets, it might be harder to steal customers from the incumbents in the market.

What criteria would you recommend to consider here?

I came across this question due to the following example from a casebook (Darden 2018) in which a company selling equipment/clothing for firemen is looking to grow into adjacent markets. Based on the followin exhibit, one should make a decision.

In the casebook solution they say that the higher the number of competitors, the more attractive the market from a competition stand point. Is this always true?

Thanks in advance! :)

(edited)

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Francesco
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replied on May 07, 2021
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Hi there,

Good question!

First of all, you should clarify the objective of the client

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: given the goal, the best market will be defined as the one where you can get the highest market share.

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 probably low
  3. It is easier to get market share from the weakest players (at least some of them should be worse 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.

Hope this helps,

Francesco

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Ian
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updated an answer on May 06, 2021
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Ah! Darden Fire Proof Inc. This is a good one :)

You are asking a fantastic question and the answer is it depends. Please don't let anyone oversimplify this and insist one is inherently better than the other.

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?

Some more info here as well: https://www.preplounge.com/en/consulting-forum/market-attractiveness-barriers-8768

(edited)

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Clara
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replied on May 07, 2021
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Hello!

+1 to Ian, very much agree with the fact that fragmented vs. not does not have to be very good or very bad, it depends, and it´s only one factor to take int consideration.

Furthermore, why are you focusing particularly on this KPI? In the slide I see many that I would like into before.

Hope it helps!

Cheers,

Clara

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Francesco gave the best answer

Francesco

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