A fragmented industry is related to an industry environment, quite different from the other three types of the industry environment.
Thus, it cannot be included in the ‘industry life cycle‘ that includes emerging, maturing, and declining industry environments.
Because of its uniqueness, we will discuss here the meaning of fragmented industry including its situational factors and then discussions will be devoted to the possible strategic options in a fragmented industry
Fragmented Industry Defined
A fragmented industry is one where the industrial or service units remain scattered all over the country or over a particular geographical region and none of the units has a substantial market share.
As Thompson and Strickland observed; “A number of industries are populated by hundreds, even thousands, of small and medium-sized companies, many privately held and none with a substantial share of total industry sales.”
The notable features of a fragmented industry include:
- Absence of market leaders;
- None of the units has a king-sized market share;
- No single unit has widespread buyer recognition.
Examples of the fragmented industry are many. Some of them are health clinics, restaurants, hotels, automobile repairing, furniture- making, garments, computer software development, boutiques, pottery, and real estate.
Strategy Options in a Fragmented Industry
The type of strategic options that a firm can employ would vary depending on the extent of competition.
Before finalizing on the options, a firm should take into consideration the basic characteristic features of a fragmented industry such as low-entry barriers, competition from substitutes, weak bargaining power of firms due to their relatively small size, and the like.
Such an industry environment may call for a niche strategy rather than a mass-market strategy.
Differentiation strategies may also be suitable for firms. We can summarize the strategy options of a firm in a fragmented industry as follows;
For a firm in a fragmented industry, niche strategy (to operate a business in a well-defined small segment of a big market), may be better suited. This is expected to offer a better competitive advantage.
A firm may either focus on one product category or it may focus on specific types of customers. The product-category-based niche strategy enables a firm to specialize by product type.
Thus, it can concentrate on the production or distribution of a specific product.
When a firm adopts a niche strategy based on customer type, the firm can specifically cater to the needs of specific types of customers who want products with unique need-satisfying features.
For example, a software firm may specialize in the development of only Accounting Information Systems or Retail Software. 5M InfoTech Limited is a firm of this type. It specializes in the production of hospital/clinic management and hotel management.
Similarly, a hotel may focus on only foreign tourists or low-cost-lover customers.
Focusing on Limited Geographical Area
A firm may concentrate its operation, within a particular geographical area. Supermarkets, convenience stores, or repair shops often undertake this strategy.
Many supermarkets and local stationery/ grocery stores adopt low-cost strategy very successfully. They charge low prices for their products and thus are able to attract customers. This strategy is better suited when price competition is high.
Operating Standardized Outlets
Some firms in a fragmented industry follow the strategy of operating standardized outlets in different locations.
However, these outlets (or operational shops/stores/sales centers) must be operated very efficiently. This strategy is successfully pursued by two international giant fast-food chains – Pizza Hut and Kentucky Fried Chicken (KFC).