High-Growth Market Risks: Competitors, Shakeouts, and Resources
Risks in High-Growth Markets
There are several conditions to consider when evaluating if a high-growth market is truly as attractive as it seems. According to T. Proctor’s analysis, these include:
Competitor Saturation
Whether the number of competitors serving the market is greater than can be sustained by the growth opportunity. Markets with the following conditions are likely to attract a surplus of competitors, leading to a subsequent shakeout:
- High visibility and growth rate
- Very high initial and forecast growth
- Few threats to growth sustainability
- Low initial barriers to entry
- Use of existing technology
- Low visibility of some potential entrants
Market Shakeout
The shakeout itself often occurs over a relatively short period of time. The trigger is likely a combination of:
- Unexpected slowing of market growth
- Aggressive late entrants cutting prices
- Market leader retaliation
- Changing key success factors due to technology
Superior Competitors
Whether a competitor may enter with a superior product or low-cost advantage (scale economies). The late entry of low-cost products has occurred in many industries.
Changing Success Factors
Whether the key success factors in the market are likely to change in a way that is incompatible with the evaluating firm’s capabilities. Many markets shift from product technology to process technology. A firm capable of product-technology advantages may lack the resources for process-technology advantages.
Resource Inadequacy
Whether resources are inadequate to maintain a high growth rate. Financing requirements often increase due to higher costs and price erosion. Organizational pressures and problems can also hinder growth. Many firms fail due to inability to train staff or adjust systems.
Distribution Issues
Whether distribution may be inadequate or not available. Most distribution channels can support only a few brands. As market growth slows, distributor power increases, leading to price and promotion concessions or supplier drops. Overcrowding in distribution channels can also cause serious repercussions for suppliers.