Profits are high because the company is in a niche segment
Symptom: Some competitors dominate segments of the industry that still support high margins, while the rest of the industry suffers from low margins.
Implications for the market:
This is rarely a sustainable position throughout the industry's long-term evolution through hostility.
Although high margins bring short term profits to established competitors, they simultaneously undermine the long-term strategic positions of those competitors by increasing competition. Existing competitors may expand their capacity. And, competitors in adjacent products or markets may be encouraged to enter because the "umbrella" of high returns offers some protection against start-up investments and early losses. The result can be large increases in total industry capacity.
At the same time, the niche may shrink as the market matures. An ever-smaller part of the total customer base may require the advantages of the niche products, while an ever-larger part could rely on the standardized products. Large suppliers of standardized products, with their superior economies of scale, are then well positioned to take share from niche players.
Although a few higher-priced, lower volume niche competitors may remain to serve a customer segment requiring high functionality, most niche players will be bought out or squeezed out of the market.
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Perspectives: Conclusions we have reached as a result of our long-term study and observations.