Nick looks more closely at the problem of overcapacity, Why did we go to Abilene?

Some economists say that overcapacity is a feature of modern economies once they reach a certain stage.

Most markets find that supply and demand get out of balance for short periods.Suppliers may add a little more than demand requires, and then prices weaken. At other times demand surges, manufacturers struggle to supply, and prices rise. But in most healthy, growing markets, imbalances don’t last long and either supply or demand soon catches up.

In less healthy markets overcapacity and oversupply can persist for long periods of time with disastrous consequences for prices, profitability and employment prospects. And the overhang – the amount of overcapacity or oversupply – can be large. The longer the period of market distortion, the bigger and more painful the eventual correction.

European car park

In the car industry the correction is causing widespread pain. Fiat is broke and Mercedes, Jaguar and Saab are all reporting market share losses. Car sales fell again in May for the fifth month in a row and the European car industry is currently saddled with 30% overcapacity. Unsold cars on lots and airfields stretch for miles. But while some are doing badly, BMW’s share of sales was up 23% and Audi were up 17.2%.

The effects were notorious in the chemical industry in the 1970s, when it lurched from one period of massive overcapacity to another and wrecked the profitability of the industry. Industrial psychologists were asked to explain how the best brains in companies such as Shell and Esso got things so terribly wrong.

Management psychologist Jerry Harvey created what is now known as the Abilene Paradox in 1974 to explain how companies, even entire industries, can make big, bad decisions time after time.

Abilene Paradox

A family is playing dominoes on the porch. An idea is floated across the domino table, receives lukewarm support, and is ultimately accepted. The group is off to dinner in Abilene, Texas, a 53-mile drive in 104-degree heat in a car without air conditioning. Upon their return from Abilene, the recriminations begin. It seems that no one really wanted to go, but each thought the other did.

The mother-in-law says she went along to keep the others happy. The wife says, ‘I don’t like Abilene, but didn’t want to stand in your way.’ The father-in-law says he suggested it because he thought the others might be bored. It was a bad idea, and no one’s idea, but everyone went along with the crowd thinking someone must have a good reason to go.

Dr. Harvey used this simple parable to illustrate what he believes is a major symptom of organisational dysfunction: the management of agreement–as opposed to the management of disagreement or conflict. This unique perspective has much to teach us about how we do or do not engage in deep inquiry and in self-disclosure when attempting to come to agreement with others.

There is overcapacity in the window industry – too much for demand. But overcapacity isn’t the whole story.

Dumb and Dumber

It’s easy to laugh. We couldn’t be that dumb… but if companies like Esso and Shell – and most of their big rivals – can add massive amounts of capacity at the same time, not just once, but time after time, then others can too. Adding capacity when there’s already loads of capacity, and doing it without thinking what your rivals are doing, doesn’t make sense.

Meeting the needs of the market

There is overcapacity in the window industry – too much for demand. But overcapacity isn’t the whole story. It is not a general industry malaise – although the industry as a whole suffers – it is a more localised sickness.

In simple terms manufacturers with significant overcapacity or unused capacity are those whose products no longer meet the needs of the market.

In the car industry companies that get customer needs wrong and produce cars that consumers no longer want have trouble giving them away – as airfields full of unwanted cars demonstrate. And many car companies are in deep trouble.

Industry fallout

Many systems companies are also in deep trouble. Some have already packed it in or put themselves on the market. Whatever the spin that accompanies such announcements it doesn’t disguise the brutal reality. They failed or are sold because not enough fabricators want their products, or are prepared to pay much for them.

Choose your supplier with care. The wrong systems company can damage your business; and choosing a new supplier when the last one let you down or failed is a big decision. There is a reason why some systems companies have excess capacity. Some do invest in capacity ahead of demand, but it is more sensible to keep in step. More often they failed to satisfy their customers, who left to find what was missing, or their customers could not compete effectively in the market with their products and lost sales as a result. As a systems company’s sales fall, the amount of its spare capacity grows. Be careful who you get into bed with. A one night stand might be fun but can have serious consequences. You might think you’ve got into bed with a BMW but wake up with a Fiat!