The 'Deadlock' Structure Where Effort Leads to Exhaustion

When I face business strategy frameworks, there is a phrase that always comes back to me. It is a very essential question that the president always asked students during lectures.

No matter how precise a strategy you build, if you misunderstand the ‘rules of the structure’ of the industry you belong to, all those resources will be wasted.

A representative approach for classifying these business types is the ‘Advantage Matrix’ proposed by the Boston Consulting Group. (*Visual matrix diagrams and detailed definitions are summarized very clearly in the explanatory article on Fujifilm’s business media ‘Future Clip’. Please check it out.)

BCG Advantage Matrix

In this model, industries are classified into the following four types based on two axes: the ‘number of elements’ to build a competitive advantage and the ‘size of the advantage’ that can be maintained.

Quantifying the structure: The correlation between ROA and scale

These four types can be determined quantitatively, not by intuition or image, but by plotting competitive data from the industry your company belongs to.

There are two simple variables used.

• X-axis (horizontal axis): Business scale (sales or market share of each company)

• Y-axis (vertical axis): Profitability (Return on Assets: ROA = net income / total assets)

When the figures of major players in the industry are plotted on this graph, the rules are brought to light by the ‘dispersion (correlation)’ of the data.

The logic for calculation and determination is as follows.

In a ‘fragmented’ industry where small businesses easily get stuck, no matter how much you extend sales (X-axis) to the right, profitability (Y-axis) does not rise. The structural characteristic that scale expansion does not directly lead to profit is proven by this mathematical data.

The realism of management: Knowing your current location

Why do we need to accurately grasp ‘which type our company is classified into’ first?

It is because only by knowing your company’s current location (position on the map) can the ‘winning strategic route’ you should choose next be logically derived.

The biggest failure that many small businesses fall into is imitating the success rules of a ‘volume-based’ model (simple price reduction or scale expansion) even though they are in a ‘fragmented’ structure. Efforts made while misinterpreting the rules can end up as wasted motion that depletes the organization’s capital and exhausts management.

To stop wasting resources and to identify the predictable next move, rather than just gaining knowledge, first look directly at the structure. Grasping this current location is the first step in a survival strategy.

The essence of the ‘fragmented’ quagmire

Here, I want to focus on the 'fragmented' trap that many small businesses and newly independent companies face.

In textbook terms, a fragmented industry has the definitive characteristic that 'no major player can monopolize the market share (or grow large).' Because the barriers to entry are low, it might seem like there is an opportunity for everyone. However, a structural trap is hidden here.

No matter how much you choose unique approaches, because the technical and structural barriers are low, 'competitors will immediately imitate you.' As a result, there is almost no difference in competitive advantage, and with the exception of a very small percentage, a large number of homogeneous businesses remain small and continue to proliferate.

Typical industries that fall into this 'fragmented' category are all around us.

• Food and Beverage/Cafes: While individual passion and entry are easy, hit business models are immediately imitated, and they are constantly exposed to fierce survival competition.

• Hair Salons/Beauty Salons: While you can open a business with a license and minimal equipment, excessive competition makes it difficult to escape the pressure to lower prices.

• Web Design/Freelance Individuals: As technology becomes more generalized, it is difficult to differentiate through portfolios, and it is easy to end up caught in price wars on crowdsourcing platforms.

The 'interior design' industry that our company is in will also be swallowed up by this 'fragmented' structure if we limit ourselves to the function of simply arranging craftsmen and managing sites as requested.

Furthermore, if the rise in material costs and price negotiations from prime contractors accelerate, we risk being dragged into a dead-end scenario called a 'deadlock type,' where even the options for differentiation disappear and it makes no difference who does the work.

So, when a business owner coldly realizes the rules of this structure, how should they move next?

Logically, there are only two options.

1. Overwhelming operational efficiency: Win overwhelmingly within the framework with speed and costs that competitors cannot catch up with.

2. Redefining the value provided itself: Shift to a 'specialized type' that can maintain a clear competitive advantage.

Many companies burn out with the spirit of just 'trying hard' while misidentifying their current location on the map where they are fighting. What is important is not spirit, but an understanding of the structure.

Identifying the rules of the structure

Where are we currently located in the matrix, and in which direction are we aiming to shift?

Our company is currently in the process of reviewing our business plan. This is because the plan we drew up before founding the company faced the reality that it could not literally be 'armchair theory' in the face of the severe actual market structure.

That is precisely why we are now re-examining our current location from a flat perspective, deeply considering our next move, and continuing to explore.

This steady process of trial and error of 'identifying the rules of the structure and redefining our own position' becomes a solid foundation for our business. This is because I am convinced that it will fundamentally strengthen the 'basic physical strength' of the spaces we provide, and in turn, become the most important foundation for enriching the quality of life (QOL) of everyone involved.

The success or failure of a strategy does not begin with the amount of knowledge one has about frameworks or the overuse of buzzwords, but rather from a flat perspective on the 'structure' to which one's company belongs. A reliable quality of life can only be designed on top of a healthy profit structure. We are currently in the process of making definitive choices to rewrite those rules.

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