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.

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