Reducing Diversity

Technology erodes the boundries of ecological niches. Local communities are disrupted. This is true in ecologies, cultures, and business. In business you can take sides – you can seek big disruptions, or you can seek ways to defang the disruptions. No matter which side your on Michael Porter’s classic on Competitive Strategy has a facinating list of what prevents an industry from consolidating. What keeps it fragmented. This is one of the very few places I’ve found work that speaks directly to the question of what effects the slope of the power-law.

Here is a quick review of his list. Actually he has four lists: what keeps an industry fragmented, how these might be overcome, why some industries remain stuck in a fragmented state, and finally traps that catch the unwary industrialist into thinking he can consolidate. Really these are all the same list recast into different presentations.

Let me summarize the main list.

What things can keep an industry fragmented?

  • Low Overall Entry Barriers
  • High Exit Barriers
  • Absence of Economies of Scale or Experiance Curve
  • No scale advantage in inputs, i.e. buyers and suppliers
  • High Product differentiation, particularly if based on image.
  • Diverse market needs, and hence diverse product line.
  • Need for close local control and supervision
  • Personal service
  • Heavy creative content
  • High inventory costs and erratic sales
  • Local image or local contact
  • Local regulation
  • Goverment or physical constraint on concentration
  • High transportation costs

For example the first two. That pattern of low entry barrier/high exit makes an interesting combo. When the industry first emerges you get a huge number of firms popping up. Then because it is hard for them to exit (or merge) the industry remains fragmented. I think this happened in the web middleware industry. A huge number of ways of building web sites emerged, lots of sites were built using these assorted systems, reegineering them is extremely expensive; and so now the industry is delightfully diverse. The prescription for addressing this is to try and create some barriers to entry; for example in the middleware example really, really, really complex standard might do the trick.

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