| We develop two models to study the effects of risk and competition on strategic capacity decisions. The first is risk-sensitive, makes use of readily obtainable data, and addresses both capacity and responsiveness considerations. The solution is generally robust relative to demand forecast uncertainty, which is important since capacity planning must be done at a stage when demand forecasts are necessarily poor. The model leads to important managerial insights, including: (1) the facility size is typically eventually decreasing in forecast uncertainty and (2) neglecting risk attitude considerations can result in very poor facility sizing decisions that deteriorate with increased forecast uncertainty. We also derive accurate spreadsheet-implementable approximations to the optimal solution, which make this model a practical capacity planning tool.; To study the effects of competition we combine a game-theoretic market model, which clears on price and lead time, with a queueing-based manufacturing model, and analyze the Stackelberg equilibrium to the capacity investment game. When prices are fixed, key conclusions from this model are: (1) There is a very strong first mover advantage because the first mover can use capacity as a barrier to entry. (2) Cost or operational improvements by a second mover must be very large to offset the first mover advantage. (3) Even if the first mover has limited information about its competitor's capabilities, it can still erect a formidable barrier to entry. (4) Information about uncertain demand obtained by the second mover through observation of the first mover's experience can be a powerful factor for enabling followers to enter this type of market. In contrast, when firms commit to their respective capacity decisions sequentially, and subsequently engage in a Nash price subgame, then: (1) Price competition allows the second mover into the market, albeit with lower price, capacity, and profit. (2) A second mover with a substantial cost or operational advantage is able to overcome the first mover advantage, either in a competitive market generating higher profits, or holding a monopoly. (3) Information on the second mover's capabilities is most valuable when maintaining a first mover monopoly requires a capacity barrier to entry. In this case, the first mover's ability to hedge against information uncertainty is limited when the second mover is sufficiently capable. |
