Observers expect industry capacity reduction

Symptom: Many observers expect the industry to reduce capacity.

Implications for the market:

A significant reduction in capacity for the industry as a whole is unlikely.
- It is a rare industry that sees pricing fall to such a point that the company cannot make a good contribution on productive capacity. Most productive "hardware" can produce an attractive marginal contribution. Shutting it down will usually take away more revenue than cost.
- Even when a competitor is forced out of business, its productive capacity is usually acquired by a stronger competitor and kept on line. Overall capacity does not decline.
In fact, during periods of hostility, capacity continues to rise. Even in hostility, an industry is moving down the learning curve, with the result that process or production improvements continue to add effective capacity..

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.