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.

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.

  • "Overcapacity: Threat or Opportunity?"
    Overcapacity is a problem that occurs in service, as well as manufacturing industries. When it strikes, the problem affects most functions in a company, and astute managements in a wide range of industries have found common formulas to outperform competition in markets with overcapacity.

  • "Entering A Different Dimension"
    Understanding key differences between hostile and non-hostile markets can help leaders make the transition between the two.

  • "Must the Cycle Start Again?"
    Does hostility represent an inevitable cycle at work or can an industry prevent, or at least delay, the return of bad times?

  • "The Myth of the Hockey Stick"
    From the early stages of hostility, real improvement in price was a long time in coming.