The industry is adding new, more efficient capacity in the effort to reduce costs

Symptom: Improvements in product and process design have triggered the construction of new, more efficient capacity, at the same time that older facilities are being converted for more efficient use. At the same time, the industry has been consolidating. These events have reduced the industry's overall cost structure.

Implications for the market:

  • Industries in hostility often see major reductions in overall cost structure as consolidation brings economies of scale and product evolution reduces labor costs.

  • These improvements actually exacerbate industry overcapacity and hostility. Consolidation and resulting overhead reductions bring short-term relief for individual competitors but put additional cost pressure on the industry as a whole, forcing more consolidations and driving margins further downward.

  • These hostile competitive conditions can persist for years, until capacity growth slows and the industry is rescued by demand growth, or until only three or four key competitors control the overwhelming majority of the market and no longer discount against one another.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:


Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"
    Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position

  • "Can We Raise Margins With A Price Increase?"
    Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.

  • "Cutting The Right Cost"
    When markets turn hostile, managers turn to cost cutting. Reducing cost seems like the most direct route to improving profitability. Often, though, efforts to control costs make the situation worse.

  • "What Makes Returns High?"
    At any point in time, most high returns can be traced to external factors that enable the company to charge high prices. Management really can not claim credit. Long term high returns, however, usually are the result of management efforts to control cost.