It's all about consolidation...

Authors: Alessandro Raschellà (Founder at arKap ) and Giacomo Cassutti (Advisor)

Consolidation is not just a well-documented phenomenon, but a shared experience in the business world.

It usually starts with many small players and progresses towards a more concentrated market as the industry matures.

Several papers focused on global mergers and acquisitions revealed a typical consolidation pattern, allowing companies to assess their position within this cycle.

After establishing or deregulating an industry, it typically goes through four (plus one) distinct stages of consolidation, taking up to 30 years to complete.

A number of academic researchers have observed that this timeline has been decreasing over time and is expected to continue to do so in the future. Every company in every industry will go through these stages of consolidation.

Among others, this emphasizes the importance of understanding the industry's position as a fundamental aspect of a company's long-term strategic planning.

Stage 1: Starting.

In the initial phase of industry consolidation, it usually starts with the emergence of a single start-up or the transition of a monopoly due to deregulation or privatization.

To start, the initial industry concentration quickly goes down as the combined market share of the largest players drops to a range of 30% to 10%.

Among others, this decline is also due to the fast emergence of competitors, setting their stage for an industry consolidation. This phase is usually seen in newly deregulated or privatized sectors worldwide including, for example, energy, telcos and banking.

In stage 1, companies are advised to proactively protect their first-mover advantage by focusing on building scale, establishing a global presence, and creating barriers to entry by safeguarding proprietary technology or intellectual property.

At this stage, companies should prioritize revenue generation and growth over profitability with the simple goal to gain market share.

The bigger the better.

While it might be considered "premature", developing acquisition skills is already crucial as it forms a cornerstone for success in the subsequent stages of industry consolidation.

Stage 2: Scale.

In the second phase of industry development, companies prioritize achieving scale.

Revenue growth is still important, but now profitability has become more relevant. This phase is crucial as leading companies begin to dominate the market by acquiring competitors and establishing their empires. 

At this stage, the three most significant companies in the industry might reach a market share ranging from 10% to 40% as the industry consolidates rapidly. 

Industries at this stage typically include airlines, hotel chains, automotive suppliers, banks, and pharmaceuticals. 

Because of the numerous acquisitions during this period, companies must develop strong M&A integration skills.

This involves:

• preserving their core culture while integrating new players focusing on retaining the best people from the acquired firms
• creating a scalable IT infrastructure becomes essential for a smooth integration of companies to be acquired.

As companies aim to progress to stage 3, they must be proactive in acquiring major competitors in key markets and expanding their global presence to maintain a competitive edge in the industry.

Stage 3: Focus.

In the third stage, firms experience significant expansion of their core business and aim to outpace their competitors.

Focus is now stronger on profit as revenue growth is more and more difficult. 

At this point, the top three leaders typically control a substantial portion of the market, ranging from 35% to 70%.

There are usually 5 to 15 major players still "in the running" during this stage.

In this period megadeals and large-scale consolidation happen; the goal of these transactions is to emerge as one of a small number of global industry "go getters".

Industries at this stage include, as an example, steel producers, automotive OEMs, shipbuilders, and distillers. Do you remember the work of Sergio Marchionne at the Italian company Fiat? 

For companies in stage 3 industries, it is crucial to emphasize their core capabilities, as previously mentioned, prioritize profitability, and strengthen or divest from underperforming businesses. Competition is fierce at this phase, and underperforming companies are susceptible to attacks from well-established rivals.

It is important for companies in this stage to identify emerging start-up competitors and make strategic decisions on whether to "compete, acquire, or emulate them".

Stage 3 companies should also identify other major players likely to survive into the final stage and avoid engaging in all-out assaults.

Stage 4: Balance and cooperate

In the realm of business, major industry players have a significant influence, covering a wide range of sectors from tobacco and soft drinks to defense.

The market shows a leveling off in industry dominance, with the top three companies holding a massive 70% to 90% share.

Faced with this challenging landscape, large corporations are looking to form alliances with their counterparts.

Instead of moving beyond this stage, companies tend to stay firmly entrenched within it. As a result, businesses in these sectors must fiercely protect their leading positions. They need to innovate to expand their core operations in a mature industry and stimulate new growth by diversifying into industries that are in the early stages of consolidation.

It's crucial for them, at this stage, to stay vigilant to anticipate industry regulations and avoid becoming complacent due to their own dominance. The long-term success of a company depends on its skillful navigation of the consolidation process. Speed is essential, and the strategic merger decisions made by managers are critical, especially during the intermediate stages of consolidation.

Companies that carefully evaluate each strategic and operational move based on its potential to propel them through the stages, securing crucial ground early on, and swiftly ascending the curve, are poised for the greatest success. Slower enterprises are at risk of being acquired and may ultimately disappear. By failing to engage in the competition or, even worse, by ignoring it, most companies are unlikely to survive until the endgame.

Stage 5: fight to survive.

This is a different story. Because nothing lasts forever.

Not even industries