After high growth, demand has leveled and capacity has increased
Symptom: Demand has leveled but new capacity continues to come on stream to squeeze margins.
Implications for the market:
Overcapacity and hostility can be particularly severe after a period of high growth and attractive industry margins because the good times have allowed even high-cost competitors and new entrants to justify expensive expansion plans. As a result, the industry has significant excess capacity.
Prices will stay under pressure for some time.
If companies believe they can keep their own utilization rates high by price cutting, they will discount.
Customers and competitors then lateralize these discounts across the industry, with the result that all prices remain under pressure.
This pressure will usually last until demand growth absorbs the excess capacity or (a much less likely case) until competitors stop price discounting against one another.
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Perspectives: Conclusions we have reached as a result of our long-term study and observations.