If we look back fifty years we can wonder at the tremendous change that swept the industry. Companies that were solid as rocks and leaders in their field have disappeared (do you still remember ITT -telecommunications- or UNIVAC – computers?), others were born out of nowhere (Google, Facebook, Amazon,… of the 10 largest companies by market capitalisation 7 did not exist 50 years ago, a few have 20 years or less).
In these last twenty years, and more so in the last decade, we have seen two opposite trends developing:
- tumultuous growth of start ups often within ecosystems composed by SMEs
- consolidation of huge -worldwide- oligopolis
These trends are continuing with different impact in different market sectors, actually, they are accelerating as result of the Digital Transformation (DX). The reasons are twofold:
- DX is increasing the efficiency in the value chain, thus accelerating the decrease of margins throughout the value chain, resulting in lower price to the end customer. This is beneficial to companies in the value chain because it is increasing the market “volume” but the decrease in margins is often not compensated by that increased volume, i.e. the overall market value “shrinks”. This squeezes the revenue space and only those with a big market share can survive, thus pushing for consolidation and creating global companies with a worldwide footprint;
- DX is decreasing transaction cost, thus making possible the go to market for small companies (today if you are selling an “App” you don’t need to sustain infrastructure cost for the deployment (you use toolkits made available by the bigs), nor for advertisement (you use social media, YouTube,…), nor for managing sales (the on-line marketplace and platforms take care of all). Additionally, you can reach the world, doesn’t matter where you are. Hence the exponential growth of small companies, often a one-person company.
As I just said, the impact is felt almost everywhere but it is stronger in certain market/industry sector. To this effect it is interesting to look at the graphic (see picture) created by the McKinsey Global Institute analysing the data provided by the UN Comtrade. It shows the variation in percentage of the consolidation of markets over the last 20 years (2000-2018) looking at over 5,000 companies worldwide with a total turnover exceeding 1 trillion $.
The measure of consolidation is based on the Herfindhal-Hirschman index, an index that looks at the market share of a company in different markets. If a company has the total market share the index hits 10,000, if there are thousands of companies sharing that market space the index plummets to zero. It is a static photo of a market. What McKinsey did was to look at the changes over a period of 20 years and the results are presented in the graph.
We can see that companies in the mobile and communication equipment have consolidated the most, leading to big oligopolies (think about the many companies that were manufacturing cellphones back in the year 2000 and to the very few that are leading the market today). Similarly, the computer and peripherals industry has seen a huge consolidation. Notice that the semiconductor industry does not show a significant change in consolidation, but that is because it was already well consolidated twenty years ago!
Interestingly, the sectors of furniture, apparels, appliances have seen important consolidation (we still perceive several brands but, as a matter of fact, these only represent the interface with the customers, they are consolidated in very few groups). At the other side of the spectrum we are seeing a growing number of new companies that are disaggregating market sectors like the one of medical devices where quite a bit of new companies are entering and expanding the market.