Demand rose quickly for some time in the past
Symptom: Demand in the past grew very rapidly. These have been very profitable times for the industry, with most players realizing good operating profits.
Implications for the market:
The current high levels of profitability are not sustainable because they are based on high prices. An industry can have high prices for one of two reasons (1) a dominant player may set prices, or (2) prices may have been driven up by high demand growth. The industry got its high prices from high demand growth, so these prices are sustainable only so long as demand grows faster than capacity and players do not need to compete on price.
One reason competitors want to keep prices up is to cover the cost of capacity additions. Most industries cannot grow faster than 7% per annum without having to add capacity in expensive forms in order to meet that demand. Prices have to be high enough to support this additional capacity.
High prices, however, lead to high cost structures. Each customer becomes so important that a competitor is glad to add a few customized services to keep the customer loyal. As this practice becomes widespread, unit costs rise. As a result, the industry is likely to have developed a high unit cost structure. Offering someone an opportunity to grow with a new low cost product.
|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.