Both new entrants as well as existing competitors have added capacity

Symptom: Expecting high profits, several new competitors aggressively entered the industry, and existing market players added capacity.

Implications for the market:

This expansion by competitors has caused the industry's growing hostility. Hostility is typically the result of too many competitors, rather than too few customers. Specifically, competitors' total capacity expansion exceeds demand growth, plunging the industry into a period of overcapacity. Of course, hostility is even more severe in situations where real demand growth decreases or becomes negative.
Hostility will continue for some time to come
- Capacity increases during a period of declining demand are likely to exert extreme financial pressures on the smaller market players.
- These smaller competitors, with a declining stake in the former industry status quo, respond with discounts and aggressive marketing.
- As the industry margins shrink, competitors will begin acting defensively. They will increasingly operate on marginal rather than full cost returns, and this changed thinking takes some time to run its course.

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