QUESTION: 13 Topic 1: Part 1 Sec One (1 to 46) L1El

What is the key strategic issues when a firm is considering capacity expansion?

Forecasting long-term demand
Analyzing the behavior of competitors
Identifying options
Avoiding industry overcapacity

Answer(s): D

Explanation:

Whether to expand capacity is a major strategic decision because of the capital required, the difficulty of forming accurate expectations, and the long time frame of the lead times and the commitment. The key forecasting problems are long-term demand and behavior of competitors. The key strategic issue is avoidance of industry overcapacity. Under capacity in a portable industry trends to be a short-term issue. Profits ordinarily lure additional investors. Overcapacity trends to be a long-term problem because firms are more likely to compete intensely rather than reverse their expansion

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QUESTION: 14 Topic 1: Part 1 Sec One (1 to 46) L1El

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When demand uncertainty is low, firms tend to adopt a strategy of preemptive expansion. The conditions for successful preemption expansion include which of the following?

The firm should avoid market signals that alert competitors to the firm's plans
The expansion should be small relative to the market to minimize risk
Economic of scale should be large relative to demand
The business should be strategically vital to competitors

Answer(s): C

Explanation:

Economics of scale should be large in relation to demand, or the learning-curve effect should give an initial large investor a permanent cost advantage. For example, the preemptive firm may be able to secure too much of the market to allow a subsequent firm to invest at the efficient scale. That is, the residual demand available to be met by the later firm is less than the efficient scale of production. The later firm therefore must choose between intense competition at the efficient scale or a cost disadvantage.

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