Capacity strategies can be discussed under two major heads:
- Short-term response
- Long -term response
- Short term strategies: In short term periods of up to one year, fundamental capacity is fixed. Major facilities are seldom opened or closed on a regular monthly or yearly basis. Many short term adjustments for increasing or decreasing capacity are possible, however. Which adjustment to make depend on whether the conversion process is labor or capital intensive and whether the product is one that can be stored in inventory
Capital intensive processes rely heavily on physical facilities, plant, and equipment. Short term capacity can be modified by operating these facilities more or less intensively than normal. The cost of setting up, changing over and maintaining facilities, procuring raw materials and managing inventory, and scheduling can all be modified by such capacity changes. In labor intensive processes, the short term capacity can be changed by lying off or hiring people or having employees overtime or be idle. These alternatives expensive, though since hiring costs, severance pay, or premium wages may have to be paid, the scarce human skills may be lost permanently.
Strategies for changing capacity also depend upon long the product can be stored in inventory. For products that are perishable (raw food) or subject to radical style changes, storing in inventory may not feasible. This is also true for many service organizations offering such products as insurance protection, emergency operations (fire, police etc,) and taxi and barber services. Instead of storing outputs in inventory, inputs can be expanded or shrunk temporarily in anticipation of demand.
- Long term Responses: Capacity expansion strategies- capacity expansion adds capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization. It focuses on growth of the Organization by enabling it to increase the flow of its products in the industry. Capacity expansion is a very significant decision; the strategic issue is how to add capacity while avoiding industry overcapacity. Overbuilding of capacity has plagued many industries e.g. paper, aluminum and many chemical businesses. The accountants’ or financial procedure for deciding on capacity expansion is straightforward. However two types of expectations are crucial:
- Those about future demand,
- Those about competitors behavior
With known future demand, organizations will compete to get the capacity on stream to supply that demand, and perhaps preempt such action from others.
- Horizontal and vertical integration: Horizontal and vertical integration add capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization
- Horizontal Integration: Horizontal integration is the growth of a company at the same stage of value chain. Horizontal integration consists of procuring (related companies, products or processes) the company could start related business within the firm, which would be an example of internal concentric diversification.
- Vertical Integration: Vertical integration is the combination of economic processes within the confines of a single organization. It reflects the decision the decision of the firm to utilize internal transaction rather than market transaction to accomplish its economic purpose. It is expressed by acquisition of a company either further down the supply chain, or further up the supply chain, or both.
- Backward Integration: In case of backward integration, it is critical that the volumes of purchases of the organization are large enough to support an in-house supplying unit, If the volume of through puts is sufficient to set up capacities with economies of scale, organization will rep benefits in production, sales purchasing and other areas.
- Takeover or Acquisitions: Takeover or acquisition is a popular strategic alternative to accelerate growth. Major companies which have been taken over post liberalization period include Shaw Wallace, Ashok Leyland, Dunlop, etc. Acquisition can either be for value creation or value capture.