Question

Determining capacity and how to achieve it, is complicated. To reduce risks in decision making, incremental changes may be a good option. Under what conditions would a firm want its capacity to lag demand? To lead demand? How will you decide between the two alternatives when business climate is stable?

Answer 1

Though aim of most of the industries is to supply as per demand and fulfill customer requirements. some businesses knowingly adjust their capacity to lag demand. This occurs in case of niche products. The business creates a desire or luxury-status for the product. Such as BmW cars. They have long delivery periods. Customers may have to wait for months before they receive their cars. The most important benefit of this is it creates a style or a high status for the individual possessing it. Thus, the customer is ready to spend more for the niche product. This leads to the business earning higher profit margins. Also, this helps create a brand image for the product and business reputation is built.