Are market structures reverting to a niche, fractal, existence?

Are market hierarchies about to crumble?

One of the great side effects of long bike rides is that it allows plenty of time to ponder. To take a step back and look at the totality of a subject or issue instead of the constant focus on the immediate. For some reason as I was wending my way through the back roads of Chattanooga, dodging dogs and rednecks, this thought stuck with me.

(Fair warning, this post contains sweeping generalizations and reduction of complex socio-economic principles to their simplest form.)

Back before economies of scale

Back in the land that time forgot everything was local, mostly because you really couldn’t get there from here. This bred a local need for almost every service. Economies of scale were difficult to leverage because it was difficult to expand beyond a locality. In many ways each locality and it’s associated services was duplicated almost exactly every few miles at the center of another concentration of population.

I see these as being the main patterns of a fractal market structure, (fractal is probably not the correct mathematical term for this pattern but my use of it is to describe the repeating nature of a pattern at varying resolutions of population). A specific industry at the regional level would be a copy of the industry at the state level which would be a copy of the industry at the county level which is a copy of the industry at a city level.

The market was essentially flat with no national brands or presence. As the geographic area of study expands and contracts the same pattern emerges.

After economies of scale

Improvements of communication, road, rail etc etc broke that pattern. It allowed strong companies to take over weak companies and exploit underserved markets. It allowed a brand and presence to be built which allowed certain brands to stand above the others in its industry and exploit a national presence. Thus the hierarchy.

Few giants, multiple regional players and hundreds of local wannabe’s.

After hierarchies were established there was always some competitor to measure yourself against, take over, outsell or sell out to. So,  for a few hundred years, that’s what we did. We planned and measured our businesses against the hierarchy of our industry.

Then the internet arrived, bringing with it a whole new set of economies of scale which are now beginning to cause market structures to revert back to a fractal existence.

Web 2.0 – The consumer takes over

For me, one of the main differences between web 1.0 and web 2.0 is that the protagonists have shifted from organizations wanting to sell to consumers wanting to consume. Instead of the organization forcing consumers into a behavior to serve the needs of the company, the company now has to serve the consumer in order to maintain its success.

Consumer driven markets tend towards multiple niches as each consumer exercises choice in order to satisfy needs, wants and interests.

Replace geography with demographic.

I think that as markets were niche due to geography before road and rail, they are now returning to niche due to demographic. I believe that companies will discover that mountain bikers in Oregon are separate and respond to different messages and value propositions to bikers in Washington or Montana.

“All politics are local” is one of the great rules of politics. I think we’re moving towards “All industries are local.” I see this as a marketing and customer service transition rather than a manufacturing and distribution one. In fact globalization of the manufacturing and distribution chains may well have hastened this reversion to niche demographics. When all products in an industry come from several large suppliers who supply all to everyone the only thing to differentiate between competitors is how they relate to their customers.

Those who relate best to the most number of market niches will succeed. However I do not see one company being the best at relating to all niches. There will be variation in how each company succeeds in this relationship. It is a model built on accepting variances of penetration in specific niches and looking at the totality of success across the market as a whole, the macro of all the markets niches.

It’s all breaking up!

I just discovered from a great Wired article that Tom Malone at MIT pondered this same thought in the late 80’s. His paper dealt more with the effect of more traditional economies of scale forcing the breakup of industries into smaller more agile business units acting as an affiliation in a market, but his conclusion was still the same. Markets and the industries that serve them are breaking up into niches. As I’ve said before, you’d better know who your customer is.

What do you think?

Have I found the wrong tree to bark up? Did I miss something in econ 101? Are you seeing it in your own market? Let me know.