Margins are falling but competition continues to expand aggressively

Symptom: Several competitors continue to expand aggressively despite the falling margin environment.

Implications for the market:

Hostility has some time to go and will get worse.
- Once capacity exists, a company is likely to expand it on the basis of marginal returns rather than on full cost returns.
- In most industries that are hostile, marginal returns on growth investment remain attractive throughout the period of hostility.
- Enough competitors usually find marginal growth sufficiently attractive to bring capacity on as fast, or faster than, demand grows. The result is continued or even intensified pressure on margins.
Even an end to the capacity additions would not necessarily end hostility. Industries are rarely rescued from hostility by reductions in capacity because productive capacity is almost always recycled. Either demand grows an industry out of hostility or the industry will consolidate around three to four competitors who cease all price-based competition.

Recommended Reading

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

Analyses:

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

"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.
"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?
"What Ends Hostility?"
The challenge for business leaders is to recognize the true end of a hostile market place when it arrives and to avoid being deceived by a temporary ending.