Strategies for Fragmented (and Other Highly Competitive) Industries (250)

This week’s podcast is about fragmented industries. And other industry structures that are overly competitive. It summarizes a lot of Michael Porter's writing on this subject.

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Transcript

Episode 250 - Fragmented.1

Jeffrey Towson: [00:00:00] Welcome. Welcome everybody. My name is Jeff Towson, and this is the Tech Strategy podcast from TechMoat Consulting, and the topic for today's strategies for fragmented. And other difficult industries. Really hyper competitive, overly competitive industries and the structures and why they happen and, and sort of how you deal with them.

cause it's probably at least 50% of industries when you think about it, when you break it down, you know, fragmentation. Restaurants,, beauty salons. Lots of you know, most of business, eh, about 50 plus percent is small, fragmented type businesses making up the bulk of the industry. So how do you deal with that?

Not something I've actually talked about before. So that will be the topic for two today. Let's see. My standard disclaimer here, nothing [00:01:00] in this podcast or my writing or website is investment advice. The numbers and information from me and any guess may be incorrect. The views and opinions expressed may no longer be relevant or accurate.

Overall, investing is risky. This is not investment, legal or tax advice. Do your own research. And with that, let's get into the topic. So, the concept for today is fragmented industries, but it, it is kind of a larger bucket than that., difficult. Overly competitive,, industries, and I haven't talked about this much because honestly, it, it sort of runs counter to my main approach, which is let's look for competitive advantages.

Let's look for the ability to sort of protect yourself and maybe even to dominate a market. It can even be a regional market or a local market, but we're looking for dominance. We're looking for that sort of situation. Oligopolies, winner take all. Winner take most well. A prerequisite to all of that is you have to sort of have a concentrated industry.

You know, you have to have a [00:02:00] handful of firms, 2, 4, 5, maybe you know, 10, that have 50, 70% of the market. But you know, if you're talking about hundreds and hundreds of businesses, each with a half a percentage point with no player, more than, let's say three to 4%, you know, if you don't have concentration, it's really hard to talk about, you know, the idea of dominance or competitive advantage.

And you know that that's kind of why I haven't talked about it. I've always started at the other end, but it's sort of been,, a question that's been in the back of my mind for quite a while. Why do some businesses, why do some industries always stay fragmented? Like they just seem immune to the idea of a business can grow large in this industry and get larger and larger.

Well, in some industries fragmented, that seems to be not possible. There is no way to get beyond one to 2% market share. So why is that? [00:03:00] Fortunately, Michael Porter, the original competition guru, has written quite a bit about this., there's a book called Competitive Advantage, pretty big textbook. He talks about fragmented industries.

In there he talks about emerging industries,, to some degree international industries. You know, you can sort of put industry structure into various buckets, mature industries, declining industries.. You can put into that bucket and, and that links up nicely with how most investors think about analysis.

You know, they usually start with the question of what is the industry structure? What is the lay of the land?, for me, I, I sort of use nine questions to take up our businesses. That's question number two A for me. Question number one, I mean, this is my little approach. Question one is always understanding demand.

Who are the customers? What do they care about? How is it going to play out over time? Are there tailwinds? Are there headwinds? Things like that. Is it changing? [00:04:00] Question two is always, okay, let's start to look at the competitive dynamics. And two, A would be, let's look at the industry structure, and two B would look at B.

Let's look at firm specific characteristics like competitive advantage. So, most of my books actually sit in that area two B, you know, in or firm specific characteristics, structures, things like that. But yeah, industry structure is a big deal and you really can't separate those two things. And you can even broaden out the idea of industry structure more to talk about ecosystems.

If you're looking for how a retailer is doing, okay, you have to think about competition, but you also have to think about the city. You got to think about the infrastructure, the roads, the regulations, the competitors. I mean, all businesses sit within an industry and a larger ecosystem. So, you got to kind of put all that together.

So, there's industry structure, firm specific characteristics. Porter wrote a lot about these various types of industry [00:05:00] structures., mostly overwhelmingly physical, traditional businesses, not digital businesses. He didn't really cover that, you know, back in the 1980s. There wasn't a lot of it back then.

So anyways, within all of that, the way I think about it is, okay. Are they good? Are they bad? Which are attractive, which are not? Well, there's a lot of reasons. Something could be unattractive, could be tremendous regulation. It could be a lot of corruption. I mean, I can think of an endless list of things of why an industry would be bad, but if we sort of push those aside and narrow it down to one reason that an industry might be unattractive, I will say it's over competition, hyper competition, such that.

You know, profits are very, very difficult. Margins are very, very difficult. Getting a return on invested capital is very, very difficult in those types of markets. So, for me, [00:06:00] you know, high degrees of competition, more players on the field, and also the ferocity of the players is more than normal. It's really those two factors I think about how many competitors are on the field.

Are there 10 companies that do this or are you in the restaurant business in Beijing and there's tens of thousands more players on the field. So, number of competitors. And then the second factor would be competitive ferocity. Some industries are more friendly than others., China is very ferocious.

Well, that impacts your margins. It impacts your pricing. It impacts everything other businesses. Not so much., you can look at certain oligopolies like Pop Coke and Pepsi. They're not really ferociously competing with each other. But then you look at Alibaba and Du o Duo and they absolutely are. So even with the oligopolies, even when it's a small number of competitors, you still [00:07:00] need to think about the level of ferocity.

And Charlie Munger once said, I wrote it down years ago, I haven't been able to find the quote since. He basically said, once that., they had looked at similar types of industries with the same number of players to try to determine why some of them, the competition was so ferocious and in others it was much more cooperative.

And, and he basically said we couldn't figure it out. It might just be management, it might be personality driven, it might be historical, but, that part is my explanation. But he basically said we couldn't figure out why do Coke and Pepsi get along. But other industries with, you know, a couple players are just, you know, doing price cuts and price war all day long.

I don't know, but it happens. So, number of players and ferocity, to me, that's what starts to determine an unattractive industry. Okay. Well, by definition, a fragmented [00:08:00] industry, a non-consolidated industry has more players. So, it kind of goes right into that bucket. You know, off the bat. So, Porter in his book, goes through quite a lot of factors that can sort of increase either the number of competitors in a firm or in an industry, or the ferocity within that industry.

Um, you know, there could be slow growth, okay? If you don't have a lot of growth, the competitive ferocity tends to be more. To get more. Every customer you get, you have to take from someone else. That's different when you're just going up with a rising tide., if you have a lack of differentiation in your products,, well, commodities don't have a lot of factors on which to compete, so you tend to compete on price that makes it a little bit more ferocious.

If you have a high fixed cost structure in a business, [00:09:00] that's problematic cause your margins are going to be small., and you are really dependent on keeping the volume of sales going when you have high fixed costs versus revenue. So, when you start to lose sales,, people get pretty desperate. They start to cut prices pretty aggressively because they got to keep the volume going because you don't want to dip below your fairly high fixed costs.

Um, there's a bunch of other factors. I won't go through all of them. I didn't really, I want to talk more about fragmented industries., one of the interesting things to think about is, okay, a lack of differentiation in products tends to be bad for competition. It makes it more ferocious. It's all about price.

However, a lack of differentiation in the competitor type tends to be good if you have very diverse [00:10:00] competitors., small businesses, SMEs, family-owned shops,, public companies, you know, businesses that are business units within a larger enterprise. When you have a more diverse set of competitors, you get a more diverse set of goals and strategies that they're employing that is generally bad for competition.

Um, you know, if you've ever, you know, been a standalone player. You know, let's say a standalone content creator, and that's your business and you're competing against an e-commerce company that also does content well. Their interests and goals within content are going to be different than yours, and they might be willing to do that at a loss because they make their money in e-commerce.

But this secondary business of content is linked to that. So, it generally makes. The situation more confused. It makes it more [00:11:00] complex and that tends to make the competition worse. You can, the way I think about competition is it's like there's two sides to this coin. There's competition and then there's cooperation.

Cooperation is like Coke and Pepsi. Yeah, they're competing, but they don't really get into price wars very much. They sort of compete on marketing and other factors, but they're not doing aggressive price cuts. That's what we would call a more cooperative relationship. Now, at a certain point, cooperation becomes illegal.

Uh, Sotheby's and Christie's got into trouble,, years ago because the degree of competition or cooperation was deemed,, too much. So, there's a thing there. Well, when you get a more complicated set of competitors, business units within a big firm, standalone business units, mom and pop shops, SMEs, it's much harder to cooperate.

cause everyone's got different interests. It's much harder to know what [00:12:00] everyone is doing when you have a lot of competitors on the field, a hundred competitors. Cooperation almost becomes impossible because you have no idea what everyone else is doing. But when it's five firms, six firms, yeah, you kind of know what people are doing.

And if you all have the same basic sort of,, business structure, we're a standalone business, it's easier to do that stuff. So anyways, diversity in product type is good for you in terms of competition. It makes it less ferocious. Diversity in. Competitor type, business type usually makes it more confusing.

Um, different goals, different strategies, and within that, you could say one special case within that is when strategic, there's basically high stakes involved. If for one company, they view the business as sort of a must win market. You know, when the strategic stakes are high, they're going to act very [00:13:00] differently than other businesses.

So again, that would be another type of goal. You see that all the time in Southeast Asia. We see that all the time right now because Chinese firms are moving into the region, let's say Huawei, Alibaba, and they view the region as a strategic must win. China's their home market, that's fine, but growth has been slowed.

Uh, the US is pretty much closed in many ways, or at least not reliable. Europe is the same but less. The rest of Asia is sort of regarded as the must have international market. So, they're coming into places like Thailand and Malaysia and you can get great deals on Temu. Right now,, Huawei is selling things that, you know, they have promotions going on right now.

A lot of good deals to be made actually. So anyways, the other factor, last factor to think about, and then I'll get onto fragmented industries.. Exit barriers. I don't really talk about [00:14:00] exit barriers very much, but it's actually kind of important. Always talk about entry barriers, high barriers to entry, that's a structural advantage.

Um, I put that in my sort of moats and marathons framework. You know, how difficult is it to enter a business? Determines how many new entrants you have. Well, if the barrier is very, very low, you're going to have a stream of new entrants all the time. That makes life pretty bad. The other part of that equation is the exit barriers.

If a business gets very unattractive, you want businesses to leave when they're losing money, you don't want them to stay. So really the number of new entrants. You should look at over time is new entrants, minus new exits every year. And you know, hopefully they should be pretty close. Yes, people are entering the market, but a same number or a similar number are leaving.

Well, if you have high exit barriers, they tend to [00:15:00] stay. We see this in businesses like,, content creation,, YouTubers, most YouTubers don't make any money. The economic decision that is rational is to exit. But they don't, because they have other sort of goals and satisfaction and maybe a little bit of pride.

Uh, they stay in long after the rational move would be to exit and do something more profitable, but they stay,, that, that's pretty common. So, exit barriers are a big factor in terms of determining the number of competitors on the field., and there's a whole lot of thinking on that. I, I did an article on this.

Yesterday, which I sent out to subscribers. I think that was actually pretty solid. It's a lot of Michael Porter’s thinking, but there's a lot of exit barrier factors to think of. I basically gave you a list,, that's, that's worth going through. Okay. So that's sort of my starting point for this, is [00:16:00] what does an unattractive industry structure mean?

And for, for me, the number one factor is. You know, how much competition are we dealing with? How many players on the field? How ferociously are they fighting? Bam. Now, a subset within that is what we'd call fragmented industries. And this one, this really sort of fascinates me as a topic. I've been thinking about it for a long time because it raises a question like the, the baseline strategy goal for every single business is get bigger.

Right, get bigger every year. What's your growth? That is like number one thing CEOs think about every single year or in the top two or three, you know, that's baseline. And why is that? Because it turns out when you get bigger, you generally get stronger, you have more resources, you're. A little more stable.

You have a more diverse customer base, so you're not as prone to swings and things like that. Instead of having [00:17:00] 10 people, you have a hundred people, you can get greater specialization, you generally get greater expertise., people who work at larger firms are generally a little more senior in terms of their abilities.

Generally speaking, that's true. And then even further, you can start to get competitive advantages like, you know, economies of scale. And, you know, Munger talked about this forever, which is like, look, getting bigger has a tremendous number of advantages., he called it the, the scale advantage cascade that one scale advantage could tee up and set off other advantages.

When you get bigger and you sell more, that lets you invest more in technology. You can sort of get economies of scale in places like r and d. That's very helpful. That's another type of advantage. So, your scale and production helps you get to scale advantage in r and d, you can also spend more on marketing.

[00:18:00] That's another type of advantage. As you spend more in marketing over time, you get a greater awareness in customer's minds. You get sort of a legacy brand share of the consumer mind. That's another type of a scale advantage. So, it's like one scale advantage begets another, begets another. The scale advantage cascade.

Okay, fine. That doesn't seem to work in fragmented markets. Like it's very confusing. Why can't you get bigger, let alone have more and more advantage? But everything I just said. Why doesn't that happen in fragmented markets? Why does the largest player in the market stay at 2% market share forever? It's like every rule, every foundational rule of business appears to be not working.

So, I have a list I call the digital superpowers, right? Things that are powerful in, in digital and scale is a big one. Obviously. This to me [00:19:00] is like the, like the digital. This is like. Business kryptonite. For some reason, something is happening in fragmented industries that seems to negate all the normal powers.

We think about like, okay, I'm in this business, but growth isn't possible and it doesn't work. That's very weird. Anyway, so that's fragmented industries. So, the, the analyst investor, Michael Mauboussin, who is, you know, writes very, very good. I., articles. He used to be with Credit Suisse. He wrote Measuring the Moat, how to measure ROYC.

I mean, these are very well-known papers. You look up Michael Malus and they'll bounce up. He has very good frameworks, including, you know, lay of the land industry structure. He talks about that and within that, one of the things he brings up is how consolidated is an industry. Right, which is the degree of fragmentation or the [00:20:00] inverse.

And he points to, this is in the paper measuring the moat and he talks about the HHI, the, I can't say it's right, her Andal Hershman index, which is basically a measurement of market concentration. And therefore consolidation. And it is used by people like the US Department of Justice as a sort of marker for the degree of competitiveness in a business.

So, the more concentrated a business is, the less the competition is. That's kind of the assumption that's baked into their calculations, which is, you know, kind of what I've been saying. If you're curious, you can look it up. Just look up HHI. The basic calculation is. You take every competitor's market share, 10%, 1%,, you square it and then you add it up.

So, if you've got a monopoly, you've got one company with a [00:21:00] hundred percent market share. So, a hundred, you, you forget the percentage. A hundred squared, 10,000, right? So, the HHI for a monopoly would be 10,000. Similarly, if everyone has basically got zero market share, you know, fractional beyond the whatever, you square it.

Let's say you've got 0.25, so le less than 1% 0.25, well you square that, it's going to be smaller. You're basically going to add all those up. And you're going to get a very, very, you know, small, small number. So, a big number 10,000 would be no competition. A very, very small number would be more competition. And the way, so, you know, as far as I've read, the way the Department of Justice uses it is if you have an HHI of less than, you know, 1500, that's a relatively competitive [00:22:00] marketplace.

Uh, if you look at 1500 to 2,500, that would be a moderately concentrated marketplace, and 25 and above would be a highly concentrated marketplace. So, if they're looking to approve mergers and acquisitions in something like that, they might look, how does this change the HHI of an industry? Now? That's what I've read.

I don't actually know how they do that behind closed doors. But anyways, the point is the same. Okay, the number of players on the field in their market. Share gives you a, it gives you an assessment of the degree of competition., a fragmented industry is going to have a very low HHI. Okay, so my key question, why does this happen?

Like why do only about half of industries, why do about half stay fragmented? Why don't they consolidate over time? Why can't the players involve growth?, what's going on? And the answer from Michael Porter, which I'm [00:23:00] paraphrasing, is it's because of two things. One of two things may be both. Number one, it's just the industry structure.

It has to do with how customers buy things in this market and what they expect. And I'll give you some examples of that. The basic structure of the industry, who the buyers are, who the sellers are, who the suppliers are, the structure there. Makes consolidation and therefore growth basically impossible.

The other factor would be diseconomies of scale. That as you start to grow and get scale,, you get a lot of advantages. But as I've said, you know, in, in the past, at a certain point you also get diseconomies of scale. There's a lot of advantages to scale, but there's also some disadvantages. So, in these industries, the disadvantages of scale wipe out the advantages where you're actually better off staying small and in traditional [00:24:00] industry structure.

You know, in the digital world, we see global giants, you know, Google search with 85, 90% global market share in industrial companies and traditional businesses, we never saw that. We would only see industries get. You know, one player might get 40, 50, 60% of a market and then it would sort of not grow any further because there's a certain point at which the dis economies of scale would overtake the advantages.

And so, they all kind of stayed in this middle range. They didn't get too big. Well, digital world kind of blows that out the door, but, okay, so two factors can keep an industry fragmented and effectively function as the kryptonite. Against the superpower of growth and scale. So, industry structure, diseconomies of scale, two factors.

That's Michael Porter. My summary of what I think he said. Okay, so what are some examples [00:25:00] of that? Okay. Industry structure, you know, all business begins and ends with the customer. Sometimes what the customer wants and what they, you know, what they prefer, just doesn't standardize. Anything you're going to grow and do more of, you have to be able to standardize before you can scale it up.

Well. Turns out when you have very sort of diverse market needs,, you can't really standardize and you can't scale up. So, let's say, you know, you have a market that wants lots of different products and it wants them in very small batches. Let's say,, custom birthday cakes. Well, everyone wants different birthday cakes.

Nobody wants everyone. We all don't want the same exact one. And they're sold in very small batches. There's no real way to scale that up., [00:26:00] and also, you know, if you start to get into things like customization, so diverse market needs often sold in, sold in small batches. And let's put on top of that a certain degree of customization.

You know, I want you to write so and so on the top of the cake. Well, very hard to scale that up. That tends to be a local service business,, which is exactly how birthday cakes are sold. And you could say the same thing about it. Service firms that do lots and lots of,, customization for businesses, especially small.

Well, let's say medium sized businesses. So anyways, that sort of diversity in the market makes it hard to standardize and scale up, and that's a lot of businesses. If you walk down any street and just look at them, a whole lot of businesses are going to fall in that category., the second one, which is kind of related to that is you can have erratic and sort of [00:27:00] changing sales requirements and volumes.

You know, buyers are changing what they want., you know, I talked about this before under what I call sort of adaptation versus efficiency, that when we look at learning as a potential competitive advantage, learning is a very powerful skill in areas like fashion, where what people want changes all the time.

And so, I call that adaptive strategy. Well, the BCG does. It's sort of a contrast to classical strategy where the demands are more predictable and therefore you can scale up. So, there's always been that tradeoff between adaptability against lots of changing customer needs versus optimization and efficiency because the needs are relatively static and you want to go for real good efficiency.

So, optimization versus efficiency sort of a thing. So, all of that. It is [00:28:00] kind of an industry structure that's going to lead you to a more fragmented industry. So, we'll call that bucket number one., this is all Mark Michael Porter thinking, I'm just sort of summarizing second one, getting bigger growing., it just doesn't seem to matter.

It either doesn't work or it doesn't make you any stronger. Now an interesting one here is actually. Okay. Everyone kind of understands when we talk about scale advantages, we're usually talking about how big am I versus rivals and you know, to some degree, how big am I relative to the buyer? You know, if you're the only e-commerce company in the country or one of two, you're in a pretty good position relative to the buyer.

But you also have to think about the supplier. You know, the person you're getting your stuff from., purchasing economies of scale. We're Walmart. [00:29:00] We have tremendous scale. Therefore, we can buy things cheaper than our smaller rivals. Okay. You know, who doesn't have that sort of power?, people who, I don't know, sell on YouTube or merchants who work on Amazon.

You can be a very good merchant on Amazon and you can have tremendous scale versus other merchants on Amazon. But that gives you no power over Amazon itself. You are not going to get purchasing economies of scale. You know, Amazon is just going to tell you the rules. So, you know, when we talk about scale, we're usually talking about our size versus arrival.

But you got to keep in mind how big is the buyer and how big is our supplier? Because if they have tremendous size over us, whatever scale advantage we have versus arrival is not going to matter., so that's something to think about. So, getting bigger, even though it's a good idea, [00:30:00] if you're in an industry where you have a tremendously strong buyer or a tremendously strong supplier, it's not going to matter.

The, the advantages aren't going to manifest., merchants in particular, drivers on Uber, they live and die at the whims of the big platform. And you can get really big as a supplier. It doesn't matter. So that, that can kind of negate the whole idea of a scale advantage., and as mentioned, you can get diseconomies of scale when you get bigger and you're bigger and,, things start to not work as well.

You get more bureaucracy, you lose specialization. Usually, to get bigger you have to add more products, usually, well, as you add more product types,. It gets harder to be efficient. It gets harder to really stay on the pulse of a, of a trend or a need., it gets harder to adapt [00:31:00] to sort of changing demand types to product lifestyles that may be short.

So, there are naturally a lot of disadvantages that come with scale, bureaucracy, corruption, self-interest,, a lack of adaptability, vulnerability to more specialist plays. Well, okay, so that would be another reason why scale would not help you. And the last bucket here is, you know, sometimes being smaller, it's, it's just a better solution.

If you are in a business that has a high degree of personal service, which means you have lots and lots of back and forth with your customer. You know, maybe it could be a plumber, maybe it could be a barber., things like that. Maybe it could be your accountant, maybe it could be your tax attorney,, when you know a dentist, things like that.

When you have sort of a high degree of back and forth. Maybe it's just the personal, [00:32:00] the personal service, or maybe it's a highly skilled service like dentistry., it's very hard to scale those up. You that, that the requirements of the personal action. The personal interaction, kind of make it impossible.

You know, every now and then people try to buy a bunch of dental practices and consolidate them and create a bigger dental practice. Doesn't really work., that personal service just doesn't work as well. Under that structure, you're far better off having a fairly small dental group, two or three doctors down the street.

Um, highly skilled, lot of back and forth. If you get pain at 2:00 AM you can call immediately and come right down the street and get it taken care of, right? None of that works better at a larger size. So, one personal service., if you need a lot of supervision to achieve high [00:33:00] performance nightclubs, certain,, hair salons, anytime, I mean.

When we're talking about fragmented industries, you know I talk about moats and marathons with moats being competitive advantages that are structural. Well, in fragmented industries you don't have any of that. There's no structural advantage. So, the only ISTs strategy you can do when you're in a fragmented industry is superior operating performance.

We just have to be better operators than our rivals because we don't have any structural advantages. We're one of 20 restaurants on this street. That's just the way it is. We have to out operate them. Well, how do you out operate them? You get very good local supervision to drive performance, and anytime you pull management up to the next level.

Which is what scale being. You have a lot of business units and then you pull [00:34:00] management up to another level. Above that, anytime you pull management decisions out of that sort of core operating unit, up a level, performance degrades. We see it all the time., so that's one. If you need high performance, performance,, dependent on local supervision, you want a smaller firm.

Uh, creative firms tend to work better. Smaller. In fact, there's almost no examples that I can think of creativity working at large scale. You know, why are the Beatles so good and this other band are not, I don't know, it's just four dudes. But one is better creativity's kind of a, I don't really understand why it works in some places and others, but I do know if you try to scale it up.

It, it doesn't seem to work. If you throw 10 times the money at something you get, you don't get 10 times the number of hitch TV shows. And most people in that field, [00:35:00] if you look at how they structure themselves, gaming TV shows, they have small studios that all report to a corporate parent, but they kind of lead the small studios on their own, you know, and then a gaming Studio out of Tokyo comes up with a hit.

Game one. And you know, this little group came up with the hit TV show. You know, they're just placing bets in these little studios. cause you got to keep the creativity at that smaller level. And last one in here is if you're in a fragmented market, a good percentage of the time, let's say 50%, your operating strategy is just to be cheaper than everybody else.

You just got to be low cost, low cost, low cost. More than often than not. That is your go-to strategy to win as a fragmented, in a fragmented industry. How do you do that? You keep your overhead cost super cheap, and you try and have owner [00:36:00] managers where the person working at the counter of the yogurt shop is also the person who owns the store.

You know the Korean grocery store in Los Angeles where the owner is actually the person sitting at the cashier, or he's in the back and maybe the wife and the child are out front, right? Owner managers are very cheap because the salary for that person is the compensation. So low overhead cost owner managers, you know, that can get you down to a lean and mean operating structure for a small business that's.

You know, you're not even thinking about investment returns. Really. That kind of structure is very common. It doesn't scale up, just doesn't. Anyways, those are sort of three buckets to think about for fragmented industries., I'm going to send out a,, I. An article to subscribers in the next day sort of detailing this out.

But this is mostly Michael [00:37:00] Porter thinking. You can find it in the book and if you don't want to look at my notes,, although the book is pretty long, it's a massive textbook actually. So yeah. If I were to say like, why do industries stay this way? Well, okay, we can put it into like, look, it's the structure of the industry and it's dis economies of scale.

Fine. The structure of the industry that's the most powerful is I think when you have fragmented and changing buyer demand and taste when you have a need for a lot of personal service and interaction. And when you're trying to keep your small operation lean and mean. I think those are the three main reasons why these, you know, firms are always going to stay small and that kind of tees up.

The last question and then I'll finish up for today. I. Okay, if that's where you are, what are you supposed to do? Well, it kind of tees up the,, the strategy, which is you've got to [00:38:00] focus entirely on operating performance and you got to forget going for growth because actually going for growth is a mistake if you go for growth and you achieve it as a small, local, you know, convenience mart.

Uh, well, not a, let's say supermarket. Not only is it not going to work, but it’s also probably going to hurt you. You have to resist going for growth in a lot of these businesses. Now, maybe a bit, you can go from one to 2% market share, but you know, you try to go for 10, it's probably going to hurt you more than it helps you depending on the structure of the industry.

So, you know, keep it lean and mean. Go for a no-frills operation. Hire cheap employees, have owner managers. Not professional management on top. Keep your overhead and all the other costs, you know, as low as possible., think about maybe if you do want to grow, you think about a local [00:39:00] focus. Okay, we're not going to get big, but we're going to get big in our little part of town.

Okay? That could work., there might be some advantages there. Maybe you can do some regional focus. Now McDonald's and these other firms thought up a clever solution to this. 50 years ago, by basically doing the franchise. Okay, we need to create standalone operations that are local, that are never going to have significant market share.

So, we want those to run in just the fashion. I've, I've said we want owner managers, you sell the franchise to somebody, they own it, they're the manager., you have sort of tight operational control, fine. But then you centralize certain functions, marketing supply chain, and you get the benefits of economies of scale in one part of the organization, but you keep the sort of fragmented local structure in the other.

That's the franchisee business model. Really smart structure. It's a way of around this [00:40:00] entire problem., franchises are pretty great. But yeah, I mean, that's kind of the thing., don't try to be dominant. Don't try to go for growth. Don't overly centralize things. You centralize in these businesses are usually going to hurt you.

Not always. You can centralize some purchasing and some things, but yeah, they could.. They could hurt you probably more likely than not. And that's really it for today. It's an, it's an interesting,, industry to think about. There's a couple industries like this now, I won't go into this, but international competition, international industries.

I mean, that has a lot of the characteristics of everything. I sort of started talking about, oh, it's overly competitive. That's not good. Well, if you're competing with companies in China and India that can compete with you in the US or Europe, I mean that the degree of competition is unbelievable. And by the way, the [00:41:00] ferocity of competition coming from developing economies also off the charts.

So, it's like fragmented times 10. That's not good. And then the other factor I mentioned, like when you have,, too much diversity in the company type. It gets very confusing and hard to navigate, you know, SMEs versus owner managers versus a business unit in a larger organization. Well, companies that operate internationally have very different goals than domestic companies, so you get that factor in there too.

I mean, two industries that kind of scare me, fragmented industries and international industries,, I'm, I'm pretty daunted by both of those,, for pretty much the same reasons., but that said, you know, you, you can do well in these businesses. Like dental practices do quite well. Doctors do quite well.

Um, but they're not going to do well by growth. It's a different strategy. It's an [00:42:00] operating strategy, so you got to kind of keep that in mind. But you can do very well as a small business in a fragmented industry if you're the owner, manager and stuff like that. But yeah, you, you got to know what sort of game you're playing cause it's a very different game.

Anyways, that's it for me for content for today. Kind of a fun subject., I probably don't think about it as much as I should, but I'm going to, I'm going to start doing some more on this, some other sort of unique situations, industry structure-wise. Anyways, we'll see. So, the two concepts for today. Yeah.

Fragmented industries let's call it. Unattractive, overly competitive industries of which fragmented would be one type. I would say international is another type. Yeah. We're thinking about, as for me, I'm doing all right. I just noticed this is actually podcast 250. That's crazy that it's,, it still surprises me that I've been doing this that long [00:43:00] and, I'm actually kind of afraid to go back and listen to the early ones.

cause. I've changed my thinking so much. You know, in the course of 250 podcasts, I've written all my books, well, not all my books, the Seven Moats and Marathons books to a large degree fell out of the podcast and the articles all during this period. I'd been working on it before, but this kind of fleshed it all out.

When I started this on my website, I had a concept library page. I think it had 20 concepts. Now, I don't even know how many it is. Probably 75, a hundred. And on the company library, which is another web tab, I mean there were probably 50 companies. I don't even know how many, there are hundreds now. So, it's, it's very satisfying to see how things sort of accumulate.

If you turn something into sort of a weekly or a daily habit and then time goes by faster than you think, and you turn around and it's like, wow, look at all that. It's kind of,, [00:44:00] it's kind of amazing. Anyways, I'm going to actually start rewriting the moats and Marathons books because I probably disagree with about 30% of it.

Now, maybe not disagree. I think it's not important, so I think I either have to rewrite about 30% or just delete and then add some things. My, my thinking has changed over time, but I, I still think directionally I, I agree and the main framework I agree with, but yeah, I, I think it needs a. A moderate rewrite.

So, I'm starting to do that now. I'm not sure what the timeframe is. Probably I'll start this year. I'll publish the first one again. Anyways, we'll see. Anyways, that is it for me. I hope this is helpful. If you've been,, listening to this for 250, that's amazing. Kind of crazy, but really cool. I appreciate it.

Anyways, thank you so much and I'll talk to you next week. Bye-bye.