Demand continues to grow but margins are low and new entrants are taking share

Symptom: Demand continues to grow but margins are under pressure due to new entrants. A margin squeeze in an environment of growing demand is due either to aggressive expansion by existing competitors or to the entry of new competitors. This margin squeeze is due entirely to new entrants, since the existing industry competitors are losing share.

Implications for the market:

New entrants are offering lower prices that, if not countered quickly, will enable the low-priced company to gain share and become stronger.
The success of the low-priced company will tend to perpetuate the industry's hostility. The customer learns that he can get lower prices by changing his buying patterns because all suppliers are not alike on the basis of price. The lower-priced competitors learn that they can win share with price. In the future they will return to that thrust whenever they feel economic pressure.
Unless both the performance and the price of the new entrants are countered early in the game, the industry will become markedly less attractive for all existing competitors. Margins will fall for everyone, including the industry leaders who would not counter price discounts at the time new entrants arrived and who consequently become weaker as they lose volume.

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.
"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.
"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.