Greg Alexander in American Express 

Understanding and appreciating what makes fragmented markets distinctive is important. When you understand them better – especially those in the professional services field – you can adjust your operations to consistently improve your market share and margins.

What is a fragmented market? From a broad brushstroke perspective, a fragmented market is essentially a large market with plenty of providers. No single firm effectively dominates the market, though. Instead, there is an even spread of companies serving all customers.

A prime instance of a fragmented market is the fast food sector, with its almost endless supply of eateries to choose from. The opportunities to serve are spread out among countless organizations rather than concentrated among just a few key players.

Fragmented markets are so familiar that we tend to take them for granted. Yet, understanding and appreciating what makes fragmented markets distinctive is important. When you understand them better – especially those in the professional services field – you can adjust your operations to consistently improve your market share and margins.

Why Does Market Fragmentation Occur?

Understandably, figuring out how to grow or scale your professional services business in a fragmented market can seem hard. After all, you can’t just go with the typical approach, which involves consolidating the market via acquisitions and roll-ups. This won’t work because of several realities.

The first reality that gets in the way of consolidation is that clients can expect a high degree of personalization from the firms they choose. Consequently, it can be difficult to standardize, develop a routine, and reduce labor. Economies of scale don’t tend to dovetail with customization.

Another snag relates to selling. Professional service firms’ sales tend to be made using relationships and referrals. Here’s why that’s a concern: consolidating a market by rolling up disparate firms often leads to centralized sales efforts and a lowered focus on relationships. Therefore, revenue growth historically attached to relationship selling may begin to suffer.

Along those same lines, professional service firms hired by clients that want help solving new problems with innovative approaches can feel stifled after a merger or acquisition. Rather than being able to adjust, flex, and create, they become bogged down by consolidation-related policies and procedures. Unsurprisingly, this can stifle client responsiveness and hurt growth.

Finally, it’s worth mentioning that many firms are run by individuals who see them as lifestyle businesses. These owner-operators may not be interested in consolidating because they’re not trying to get bigger. They’re fine with having a tiny slice of market share as long as it provides them with enough profit.

SPECIALIZATION IS OFTEN THE KEY TO WINNING INSIDE A FRAGMENTED MARKET, SO DON’T GO OUTSIDE YOUR COMPETENCIES. THE MORE SPECIALIZED YOU ARE, THE MORE BUSINESS YOU CAN WIN.

Expansion in a Fragmented Market

Despite these snags, leaders of services firms within fragmented markets can bypass the typical playbook and grow and scale their businesses by applying alternative methods to get ahead.

The first is through tightly managed decentralization. A firm that’s in the process of consolidating can scale efficiently if its people embrace localization. For example, a notable executive coaching organization has scaled nicely by leveraging the franchising model. This organization creates intellectual capital centrally. Then, the firm licenses the use of its intellectual capital to a network of independent business coaches. Each coach adjusts this toolkit based on the localized market’s unique needs.

The second way to win in a fragmented industry is through geographic expansion backed by a framework of formulas that have worked at previous locations. Another executive coaching organization has been doing this for more than 60 years. It opens new groups by recruiting a geographically focused coach, certifying the coach and expecting the coach to follow a standard operating procedure. This enables the organization to maintain a degree of control as it keeps building its presence outward.

Specialization is a third fragmented market strategy. For instance, many service firms in the IT sector specialize in a technology product and add value through customization and implementation. Case in point: print shops that can handle small batch orders can achieve market share. Players that lead with their deep market segmentation experts are the ones most likely to grab more attention and revenue.

Maximizing Chances in a Fragmented Market

Is a fragmented market an opportunity? Absolutely, if you know the top strategic traps to avoid.

1. 1. Let go of dominance.

Some firms seek dominance when dominance is impossible. Try not to attempt to consolidate a market that cannot be consolidated. Try to understand the underlying structure of the industry that has caused its fragmentation before you try to consolidate it. In most cases, markets are fragmented for a good reason.

1. 2. Stay within your core competencies.

Specialization is often the key to winning inside a fragmented market, so try not to go outside your competencies. The more specialized you are, the more business you can win. And inside of a fragmented market, there are plenty of clients to pursue. Try to avoid the temptation of going after clients outside of your core market.

1. 3. Be cautious of over-centralization.

As firms try to scale, they can often over-centralize. Try not to make this mistake. Consider pushing authority to those closest to the clients to enable and embrace localization and creativity. Remember: the market is fragmented because of the clients. Try to lean into this. Consider developing relationships and be easy to do business with.

1. 4. Be thankful there are many competitors in your space.

Competition means there are lots of clients spending money on what you do. Therefore, try not to  overreact to your competitors. Their presence is a good thing – and something to be thankful for because it shows a demand for what you offer.

Fragmented markets may be challenging to navigate. However, if you understand how they work, you can gain some serious advantages for your professional services firm.

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