Why capacity management is of strategic importance

Capacity, capacity, capacity

Something similar is truly relevant for the leisure or hospitality industries: capacity, capacity, capacity. Capacity is linked to two major economic decisions to be made by “operators”. The decisions concerning capacity are highly linked to the delivery of the (future) value proposition to the target group. Of course entrepreneurs have done some research into potential visitor numbers or at least they have expectations. But what if your venue or place is too big or too small? Or what if it cannot support any expected growth? Or what if the total package is unbalanced, like a restaurant with the right amount of seats but too small a kitchen? Getting it right is crucial.

Estimating capacity needs is crucial

Your capacity, whether it is an initial investment, a growth related or even an innovation related investment requires financing. If you scale to big you finance assets or resources that cannot be recuperated by operational profits because of a lack of visitors. If you scale to small you might easily recuperate the original investment, but you lose out on a lot of turnover and potential profits.

3 concepts that can help make capacity decisions

Getting your capacity decisions right gives you the best possible outlook on profitability. Get it wrong and operational management will become a nightmare. There is some sort of “sweet spot” where you get it right. Not too big or too small and futureproof. There are several insights relevant to the issue:

1. The first notion is the notion of “maximum capacity”. This is the theoretical maximum of all possible concurrent tables, seats in airplanes, hotel rooms etc. This is linked to the investment and the financing issue.
2. The next important notion would be “rational capacity”. This is the capacity that is, on average, filled with guests or visitors. This notion is linked to operations and to operational profit. That is how we generate and deliver value and make our money.
3. The third notion is the notion of “rational overcapacity”. This is capacity that we sometimes (seldom) need to cater for more than average number of guests, or outside a predetermined bandwidth. If you cannot get premium prices for the deployment of this capacity, you would prefer to not have it. The “sweet spot “in economic terms is where the marginal income equals the marginal cost. The solution to deal with this is to deploy some sort of revenue management if possible given market conditions.