Capacity rationalization and exit strategies

Andrew Wood*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

A case study of the response to chronic excess capacity in a small competitive industry (the manufacturing of clay bricks) permits a generalization of Bower's concentration hypothesis. Barriers to exit produced a free rider problem where only smaller and lower quality brick plants were shut when the efficient solution demanded major closures. The exit logjam was resolved by the strategic actions of growth-maximizing managers. They used major acquisitions as the basis for substantial reductions in firm and industry capacity while growing their own market share. The fall in industry capacity enabled other firms to follow suit while maintaining their market share as predicted by prospect theory.

Original languageEnglish
Pages (from-to)25-44
Number of pages20
JournalStrategic Management Journal
Volume30
Issue number1
DOIs
Publication statusPublished - Jan 2009

Keywords

  • Barriers to exit
  • Capacity rationalization
  • Mergers and acquisitions
  • Prospect theory

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