The number of industry competitors is on the decline

Symptom: The industry has undergone a shakeout; the number of competitors has declined significantly.

Implications for the market:

• Hostility develops when an industry's capacity growth begins to outrun demand, creating margin pressure that eventually forces weaker competitors out of the industry. The shakeout of competitors being experienced by the industry, therefore, is a normal stage in the cycle of competitive hostility.

• Unfortunately, the consolidation of competitors does not necessarily shrink industry capacity. The productive capacity of withdrawing or failing competitors is not shut down; rather, it is sold to surviving firms. Those firms then operate the facilities because most productive capacity can produce an attractive marginal contribution; shutting down the facility would reduce revenue more than cost.

• Furthermore, when one company acquires another, its cost structure is often lowered because overhead can be reduced. It may well become a more efficient competitor.

• As the industry continues its shakeout, things are likely to get still tougher before they improve.