After high growth, demand has leveled and capacity has increased

Symptom: Demand has leveled but new capacity continues to come on stream to squeeze margins.

Implications for the market:

Overcapacity and hostility can be particularly severe after a period of high growth and attractive industry margins because the good times have allowed even high-cost competitors and new entrants to justify expensive expansion plans. As a result, the industry has significant excess capacity.
Prices will stay under pressure for some time.
- If companies believe they can keep their own utilization rates high by price cutting, they will discount.
- Customers and competitors then lateralize these discounts across the industry, with the result that all prices remain under pressure.
- This pressure will usually last until demand growth absorbs the excess capacity or (a much less likely case) until competitors stop price discounting against one another.

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.

"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.
"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?
"The Myth of the Hockey Stick"
From the early stages of hostility, real improvement in price was a long time in coming.