Brand View
October 26, 2006
Fragmented Industries – Observations

The Caribbean Gift & Craft Show, which was held in St Kitts on October 14-17, is the regional display case of the Caribbean Export Development Agency. My attendance at this event was a necessary step in my re-education of the Caribbean business culture, and of course to pick the brains of potential business clients. I got a chance to witness a Caribbean entrepreneurial atmosphere, influenced by both the trade industry (goods shipped to customers) and the tourism industry (customers shipped to goods). {{more}}

Exhibitors were very communal, especially amongst the long-time attendees of the regional craft shows. They appeared to share a certain camaraderie, possibly based on mutual understanding of how the buyer-seller relationship really plays out. Exhibitors are wary of buyers that make promises of future sales, and do not buy at the show. For the amateurs or first timers, there is the look of hope when someone with the red ‘BUYER’ tag stops to have an excited chat about future prospects. The veterans, however, possess a look of civil diplomacy – still showing a smiling face, but knowing the immediate sale is better than the promise of a future sale. After all, who knows, these superficial buyers may convince a real buyer to pass by. FirstCaribbean Bank provided functional ATM and currency exchange services at the show; extremely useful for facilitating the purchasing potential of buyers.

A majority of exhibitors with products that possessed international shopping appeal were designed by non-Caribbean exhibitors or expatriots. This observation was very surprising for me. At some measure, the expat exhibitor was at one point in time the target international tourist, visiting the Caribbean and shopping for souvenirs. Their love for the Caribbean not only convinced them to make the region home, but also to create souvenirs that would appeal to like-minded international visitors. The native exhibitors from Jamaica and Dominican Republic were advanced in understanding and producing marketable products. Barbados displayed products with good potential. St. Vincent & the Grenadines exhibited consumer goods that required better execution. It must be noted that collaborations occurred amongst Caribbean exhibitors, especially during the evening fashion show. For instance, Vincentian models were invited to catwalk clothing and jewelry designs from Barbados, Trinidad, Jamaica and St Kitts.

A Jamaican corporate exhibitor, with event-sponsored products by Cricket World Cup (CWC), was recruiting for additional Caribbean goods at the craft show. Fellow exhibitors displayed skepticism for the assumed initial investment necessary to be branded, but also were unsure of their companies’ ability to fulfill a high volume order. Some exhibitors attempted to take advantage of products being manufactured cheaply in Asian countries like China and India. However, the cost is only cheaper if the economies of scale are high-volume. There is no co-branding on CWC-labeled native products, which does not help in promoting the local brand. Also the CWC exhibitor admitted that World Cup branding expires directly after the event, with little to no post-event marketing.

The Caribbean Export Development Agency scheduled an Intellectual Property seminar, to educate exhibitors on how to secure their products. Exhibitors were unclear on the subject of intellectual property, and confessed their works have been at times copied by buyers or manufacturers stealing their ideas. Not many have heard of a non-disclosure agreement, to be signed prior to any discussions of proprietary knowledge. But then again, intellectual property protection is still in its infancy in the Caribbean. The Caribbean has had a long history of reactionary business development, where a successful venture is not only copied openly and frequently, but the copying is often expected. Regarding the Cricket World Cup, it will be interesting to witness what effect the enforcement of the “Sunset Legislation” to prevent ambush marketing will have on the ‘copycat’ companies.

Amerijet and LIAT’s ‘’ had adjacent booths, possibly joint advertising methods to facilitate the supply delivery of raw materials for craft making as well as order fulfillment for finished goods. The transporting of goods can be a backbreaker for many small businesses, due to the diseconomies of scale and the eating away of the sale’s profit margin. The shipping of booth materials, or consumer goods for that matter, is of major concern, in terms of shipper familiarity, office sites and return shipment cost of unsold goods. The common goal of every seller at the show is not to need shipping services for the return trip. The cost of transportation is one of the factors that lead to diseconomies of scale that all fragmented industries suffer from.

American business guru, Michael Porter, defines a fragmented industry as “An industry in which no firm has a significant market share and can strongly influence the industry outcome.” Usually fragmented industries are populated by a large number of small and medium-sized companies, many of them privately held. The common fragmented business sectors include services, retailing, distribution, wood and metal fabrication, agricultural products, and “creative” businesses.

The following are features of a fragmented industry:

Low overall entry barriers

If the starting expenses to begin operation are low, as is the case with baking pastries and cakes, the number of competition reduces the ability for any one company to dominate.

Absence of economies of scale or experience curve

If the operations involve a simple fabrication or assembly operation, a straightforward warehousing operation, an inherently high labor content, or a high personal service content, these factors can affect a business’ chances for success.

Intrinsically hard to mechanize or standardize due to:

Rapid product changes or style changes;

Low overhead;

Diverse product line;

Heavy creative content;

High product specialization;

Local regulations or trends;

Personal service;

Government customs limits;

Newness of industry.

Due to the above diseconomies of scale in some important aspect, the results lead to high transportation costs, high inventory costs or erratic sales fluctuations, and no advantages of size in dealing with buyers or suppliers. Listed below are some business strategies that may allow companies in fragmented industries to cope with fragmentation:

Tightly managed decentralization

Strategy – Small, individual, autonomous operations; tight central control; performance-oriented compensation for local managers

Result – Avoids homogenizing of individual units, thus insensitivity to local conditions

‘Formula’ facilities

Strategy – Building of efficient, low-cost facilities in multiple locations

Result – Lowers startup investment relative to competitors; provides a more attractive or efficient location from which to do business

Increase value-added

Strategy – Provide more service with sale; engage in some final fabrication of the product; do subassembly or assembly of components before customer sale

Result – Enhanced product differentiation

Specialization by product type or product segment

Result – Bargaining power with suppliers; enhancement of product differentiation; perceived as expert in product area

Specialization by

customer type

Strategy – Customer with the least bargaining leverage; customer with the least price sensitivity; customer who needs the most value-added support for a basic product/service

Specialization by type of order

Strategy – Small orders needing urgent delivery; custom orders with less price sensitivity; custom orders with switching costs

Focused geographic area

Strategy – Concentrating facilities, marketing attention, and sales activities

Result – Economized use of sales force; more efficient advertising; single distribution center

Bare bones/No frills

Strategy – Low overhead; low-skilled employees; tight cost control; attention to detail

Result – Best position to compete on price

Backward integration

Strategy – Controlling internally the key external inputs of product or service development

Result – Lower costs; secures proprietary knowledge; enhanced differentiation

So why doesn’t some big corporation just swoop in, place down a collection of big name franchise stores and run the region? Not so easy. The nature of fragmented industries encompasses firms that are small and privately held. The owners or managers may have non-economic reasons for being in the business (e.g. hobbyist). They often work out of homes, use family labour, and avoid regulatory costs and the need to offer employee benefits. These businesses may be satisfied with lower levels of profitability than larger corporations, and whose priorities may lean towards providing work for their employees. In other words, the nature of fragmented industries does not follow big corporate rules.

The underlying structure of a fragmented industry makes dominance futile unless that structure can be fundamentally changed.