Capacity investments

Decisions about large-capacity investments usually impact the conditions affecting the interaction of stakeholders in a market. Particularly when markets are dominated by a few large suppliers, substantive capacity investments crucially impact the dynamics of these markets. Because capacity decisions are typically difficult to reverse and highly visible, they can be strong signals of commitment. However, at the same time, they are high-volume, long-term, and often risky decisions. This is why a consideration of possible reactions on the part of competitors and other stakeholders is required.

Also, in combination with other pivotal strategic options, such as pricing strategy, we must deal with such investment decisions in multiple industries.

Selected cases: Capacity investments

Competitive dynamic pricing strategy

For one of the top products of our client, a large chemical company, we developed a pricing strategy, taking into account multiple scenarios regarding action-reaction patterns in the pricing, capacity building, utilization, and positioning of the three main competitors.

As a result, our client gained a deep understanding of how the respective dynamic pricing strategies (i.e., action-reaction patterns) influenced one another and how he should act in the light of this. During the project, the specific impact of multiple regions and customer groups were included.

Coping with competitor overreaction

In a market with significant overcapacities, prices had recovered due to an unforeseen capacity shortage. After a period of disciplined capacity and pricing policy, a new competitor showed aggressive behavior once more. In analyzing the action-reaction patterns, we discovered that the greatest danger to industry profitability was not the aggressive behavior of the new competitor but a resulting overreaction on the part of a larger player, and we came to conclusions regarding actions to mitigate part of the risk.

Pre-emptive capacity investment and termination of a co-producer agreement

In a market with short capacity but an unstable market environment, the logical competitor for the next capacity investment, given established industry conduct, hesitated, while our client ran short on capacity.

The client asked us to evaluate the options for pre-emptive capacity building and/or the termination of a co-producer agreement, with the danger of aggressive retaliation. In spite of these doubts, our team came to the clear decision, advocating a significant investment while also cutting down the co-producer agreement.

Procurement decision to build a significant long position in a key feedstock

Due to a significant and specific development in a certain global feedstock, our client asked whether building up a significant long position on the contract market made sense or competitive forces were likely to drive prices and availabilities even further toward the desired direction. The team developed scenarios regarding when the procurement investment would make sense, depending on precursor dynamics, and finally recommended a major capacity investment.