A mature industry is characterized by i) limited growth and ii) a bunch of large companies (small and medium companies can co-exist as well but would represent a rather limit cumulated market share).
Entrenched players are very aware of the strategic nature of their interaction. They know that changing any attribute of their business model can trigger a chain of reactions and unbalance the industry equilibrium. As a result, established companies often seek to collectively moderate the intensity of competition (this can not be formally agreed in most countries - antitrust laws - however several signaling mechanisms can be used).
Existing players can deploy several strategies (all these strategies are carefully witnessed by anti-trust authorities) to prevent the entry of new players:
Product proliferation incumbent players attempt to limit new entries by making sure every market segments and market niches is well served (saturated). This prevent potential new players from gaining experience, scale and brand at the lower end of the market and then progressively move upmarket.
Limit price when economies of scale are not sufficient to discourage potential new entrants, incumbent players can (in the short run) charge a price that is lower than the profit-maximizing price to artificially cap profits (and make the industry less attractive).
Technology upgrading incumbent firms can invest in costly technological upgrades to increase upfront investments for new comers if they want to match the same technology level. Similarly, existing players can speed up research and development and launch more advanced products.
Strategic Commitments incumbent companies can signal potential entrants that entry will be difficult by committing significant and long term resources (e.g. sunk costs, investment in excess production capacity, etc). As a result, both the perceived cost and risk of entry will raise and limit the likelihood of new comers entering the industry.
Brand notoriety existing firms can increase their communication and advertising budgets to strengthen their brand at the expense of any potential entrants.
Strong rivalry among incumbents usually translate into price erosion which destroys industry profitability. Several techniques are used by companies to limit profitability losses.
Price Signaling the technique is basically a tit-for-tat strategy - price moves (increase or decrease) are copied by all the players. Collusion (an explicit agreement between parties to limit open competition) is usually illegal. However, through price signaling companies can exchange information which enables them to understand each other’s pricing policy and converge toward an homogeneous pricing policy across the industry (that optimizes profitability). It can also be a response when a firm decreases its price. The other players will cut their price even more aggressively to stress that the price war initiator stands for more to lose.
Price Leadership the industry waits for the firm with the highest cost structure (the firm that has the smallest margin) to set its price first. Then competitors offering products in the same market segment align their own prices (within a price range).
Non-price competition is a strategy where the value transferred to the end-customer is increased while keeping the price untouched (i.e. avoiding price cutting and price war). This is achieved by asymmetrically increasing the customer’s willingness to pay through product differentiation.
Market penetration is an attempt by one of the existing players to expand its market share (in the existing market). This usually involves aggressive marketing campaigns and advertising to strengthen the brand name. When successful this strategy has a two-fold effect : attracting new customers (from rivals’ customer base) and commanding premium prices.
Product proliferation see above, the largest players will grow their market presence (offer product in all the segments) in a attempt to increase their market penetration (usually at the expense of the smaller players).
Product development (see technology upgrading above) stimulate demand for product renewal by introducing new models (e.g. new car mo- del). This will usually go hand-in-hand with new non-price features. This however can drive the industry profitability down as more and more in- novation & development will be needed.
Market development with this strategy, a company seeks to leverage the notoriety it has developed by starting to compete in new markets/industries (see Corporate Strategy section).
HPh — 2009 - 2019
“ Fortune favors the prepared minds only - le hasard ne favorise que les esprits préparés ” L. Pasteur