New competition is entering a settled market

Symptom: Until recently the market was the almost exclusive domain of the large manufacturers. Competition has started slowly.

Implications for the market:

  • If new entrants succeed, they will do so at the expense of established competitors.

    • Markets with four or fewer competitors are often highly lucrative since relatively little price competition exists.

    • In these highly lucrative markets, competitors often allow costs to grow even faster than profits. Once profits are high, companies show a strong tendency to add cost to the product in order to satisfy customers paying high prices and to maintain the high profits.

    • Because of their high cost structure, established companies are naturally reluctant to compete on price. Their reluctance provides an opportunity for new entrants to enter by undercutting the leaders' prices.

    • These new entrants often grow faster than the market, drawing away demand that formerly went to the established competitors and leading the industry toward hostility.

  • With increasing volume the new entrants have increased profits, and, hence, an improved capability of sustaining low prices.

  • As a result, price competition is probable for some time.

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.

  • "Staying Alive in a Hostile Marketplace"
    A few companies survive and even prosper during periods of hostility. How do these companies avoid being the victims of tough market conditions?

  • "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?