Entrepreneurial Strategies 143Most of what we understand to be the small business sector of the economy is actu-
ally the set of fragmented industries and the ventures within it. Businesses in fragment-
ed industries can be profitable, and they can grow to be relatively large. But by defini-
tion, if they are large enough to have a market share that can influence conditions, the
industry is no longer fragmented.
Overcoming Fragmentation. New ventures in fragmented industries sometimes have
the potential to introduce strategic, technological, or managerial innovations that may
help the industry overcome fragmentation. If the new venture enters with technologies
that introduce economies of scale, the venture will grow larger. For example, the brew-
ery industry used to be fragmented, with thousands of local brewers. The technological
breakthrough that overcame this fragmentation was the refrigerated freight car, which
enabled brewers to ship their beer long distances without danger of it spoiling.
Fragmentation may also be overcome by strategies that reconstruct the way firms
operate. The sneaker used to be a fragmented product in the sporting goods industry.
With few exceptions, it was sold as commodity footwear for kids (Keds, Converse).
When it was reconstructed as an “athletic shoe,” developed technologically, and promot-
ed as a personal fashion statement, the result was a highly profitable industry dominat-
ed by a few very large firms (Nike, Reebok, Adidas).
Another method of reconstructing an industry is to separate the assets responsible for
fragmentation from other assets. This is known asunbundling.Two classic examples of
unbundling are campgrounds and fast food.^55 These industries are characterized by thou-
sands of small owners. Both require tight local control and supervision and must be
located near their customers, but significant economies of scale in purchasing and mar-
keting were achieved through franchising. Local control was maintained by the fran-
chisee, and purchasing and marketing economies were obtained by the franchisor. The
initial beneficiaries of these economies were McDonald’s and KOA.
Investors, and especially venture capitalists, are increasingly targeting fragmented
industries as neglected but high-potential opportunities. Why? Because a firm that over-
comes fragmentation can become the industry leader, achieve enormous size and prof-
itability, and provide rates of return in the thousands of percent range. The Chicago firm
of Golder, Thoma & Cressy is often credited with originating this investment strategy.
So far, it has applied its strategy to the nursing home, answering service, and bottled
water businesses. Other industries ripe for consolidation are small-niche food proces-
sors, small-town newspapers, security alarm companies, and (the ultimate local busi-
ness) funeral homes.
The strategy is not easy to execute. First, the investor identifies and acquires a com-
pany in a fragmented industry, one with no market leader. Then a new management
team is recruited to run the business. Together the investors and new managers identi-
fy and negotiate to buy a few additional companies in the target industry. The hardest
part is next: consolidating all the companies under a common name and set of operat-
ing practices. If this strategy works, the payoffs are huge.^56
Coping with Fragmentation. Quite often the new entrant lacks the resources, means,
or imagination to overcome fragmentation. Excellent money can still be made, however,