Why does some industries consolidate while other fragment

Why does some industries consolidate while others fragment? Take PC industry for example. The big PC-makers seems to be buying up the smaller players… Acer bought Gateway, HP bought Compaq. But at the same time, the semiconductor industry remains very fragmented… e.g. you have the foundaries, manufacturers, testers, and Integrated manufacturers (e.g. Intel). What drives industry consolidation? If it was economies-of-scale, shouldn’t semiconductor industry should consolidate after so long?

Interesting question. Part of it has to do with the stage of the industry growth cycle, but it also has to do with barriers to entry and all that Porter’s Five Forces analysis. Some of this has to do with the technology of production - whether it is easier to source from multiple suppliers who compete on quality and delivery, or whether you need control over a specialized process, often with substantial capital investments. Another has to do with how you reach your customers and who they are. End consumers probably can’t handle keeping track of more than about 5 brands, which suggests that there is room in people’s memory for approximately 5 major names. If your customers are other industries (like PC manufacturers), these people have professionals dedicated to tracking and managing suppliers and so can deal with a larger number of potential suppliers, and making it more feasible to have a fragmented industry that competitors can enter easily. On the whole, the global trend has been toward the fragmenting of manufacturing and service provision, and the consolidation of end-customer channel provision through global brands who essentially market a kind of “quality control” process. Wal-Mart is known for “cheap, but usable,” Bose is known for “expensive and exquisite.” Actual production tends to be highly decentralized, except for highly capital intensive industries (airlines and autos, and even these have parts manufacturers that are fragmented), and then delivery (esp final stages) gets done by a major branding house.

this is a VERY complicated question…too many things to consider, given the limted nature of this forum…although chadwick gives it a good shot… there are also a myriad of market conditions and complex global considerations which play a significant role

Not a direct answer, but I just learned in my MBA that KPMG did a long-term study that shows that 83% of Mergers and Acquisitions can be deemed failures that don’t produce any economic profit. As Buffett says, companies are likely to do better if they stick to their core and grow organically rather than try to vertically or horizontally integrate.

Because I-Bankers need to get paid. Why did Home Depot buy Hughes Supply only to spin it off a year later?