Profits are under pressure despite demand growth

Symptom: Profits in the industry have been flat or down for several years while demand has grown.

Implications for the market:

The falloff in profits is the result of capacity overexpansion.
- Contrary to common belief, industry hostility is usually brought on not by demand falloff but by competitor overexpansion.
- The high profitability enjoyed by the industry in the past was the primary cause of the current hostile situation because high margins encouraged existing competitors to expand capacity and encouraged other firms to enter the industry.
A decline in product service or quality may have worsened the situation. Established competitors increase the likelihood of new competitors entering an industry by allowing their products or service to slip in quality while profits were high and easy. It is simpler to attack an industry with slipping products and high prices than to attack an industry suffering only from high prices.
This situation promises to get much worse before it gets better. Once competitor expansion has started, prices must get quite low to stop it. Competitors will expand in marginal ways for some time because prices rarely get low enough to discourage this type of expansion.

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.
"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.
"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.