Capacity and capability stand out as two broad terms that are often confused for their very similar meanings. Both the words are often interchangeably used in similar contexts; however, the meaning of both the terms have some technical differences, particularly when used for a business.
The article capacity vs capability looks into the meaning of both the terms and highlights the key differences between them.
Definitions and meanings
The capacity of a business refers to the maximum level of output that it can yield and deliver. In this sence, the achievement of capacity is highly linked to the current set-up and resources of a business entity like human resources, manufacturing plants, buildings and techincal resources etc. The term capacity is also equally applicable to the service organizations.
While planning the growth of their business, owners must take into account the capacity of their business i.e. the maximum level of output that their system can sustain to produce. What must also be noted is the fact that no system can operate at its full capacity in the long run. It is due to the inherent inefficiencies, hinderances and delays present in every system that make it impossible to practically reach its full level of capacity.
Faiza Manufacturing Co. has three fertilizer manufacturing plants operating in three remote locations. Each plant can operate at the maximum capacity of manufacturing 2,000 tons of nitrogen a month. However, each plant effectively produces only around 1800 tons of nitrogen every month due to inherent limitations including heating up of the plant, abnormal production when run for more than 10 hours consecutively, electricity outage, and delay at the end of operating staff.
In total, Faiza Manufacturing Co. can only accept orders for a maximum of 5400 tons of nitrogen every month keeping in view the capacity of its manufacturing plants.
The capability of a business refers to its ability to do something when all its resources are optimally employed. In simpler terms, this reflects on the potential of a business under optimal resources and working conditions.
In establishing the capability of a business, one must not bind the potential of a business only to its present set of circumstances and resources. For example, the capability of a business may significantly change upon re-employment of the present resources of the entity like splitting up departments, laying off staff to automate or outsource specialized processes, or simplifying the organizational hierarchy to achieve a more transparent reporting system, etc.
Alpha Ltd. is a public company incorporated in the 1900s. Being an old incorporation with conventionally defined business policies, the company’s capabilities are significantly undermined. Recently, the company decided to revamp its business model in order to enhance its capability. It outsourced some of its underperforming functions to specialized agencies. Some tactical-level employees were laid off to simplify the reporting lines. Also, the information and control systems were shifted from manual to fully automated modes.
Consequently, Alpha Ltd. was able to win more contracts due to enhanced quality of services. Also, its operational costs were reduced by 35% in the following year and, the same savings were utilized for additional venture capital investments.
Difference between capacity and capability
Seven key points of difference between capacity and capability are listed as follows.
- In business context, the capacity of an entity reflects on the maximum level of output that an it can possibly produce under a given set of conditions and with the resources available to it.
- However, capability refers to the potential of an entity to achieve better results under circumstances that are not bound to the present set of resources or conditions.
- The capacity of an entity keeps changing from time to time with the addition of more resources or, in some cases, through the better application of the available resources to eliminate inefficiencies.
- However, the capabilities of a business are likely to be defined in its overall business terms. These capabilities would rarely change unless the business undergoes restructuring in its operations such as undertaking a new line of business or reorganizing the resources of an entity under a formal scheme.
3. Measurement metrics
- The capacity of an entity can often be measured in terms of units. For example, an entity may be able to produce 1000 liters of XYZ chemical every month, assemble up to 400 cars per month, or offer labor and manpower services for 2000 hours every month, etc.
- On the contrary, capability entails the potential of an entity to integrate, reorganize and strengthen its internal and external competencies to achieve better results. It is therefore not measurable in terms of units.
- The capacity of a business can be enhanced by adding more resources to the business in accordance with its needs. For example, let’s consider an entity that operates with a single plant having the capacity to deliver 1000 tons of steel every month. If the entity enters into a contract to supply 2000 tons of steel every month, it may need to procure an additional plant (resource to enhance the capacity of its business) to fulfill the requirements of its new contract.
- To enhance the capabilities of a business, it is often important to employ experts for better management of the available resources of the entity.
5. Capacity planning vs. capability planning
- Capacity planning involves determining the resources available to an entity to meets its present and future demands. Capacity planning strategies guide businesses on how much manufacturing resources, human resources, and investment facilities they need to meet the anticipated demands of their business.
- On the other end, capability-planning within an enterprise focuses on introducing changes purported to achieve a better resource application. Capability-planning strategies of an entity usually involve the process of identifying its capabilities, assessing the extent of change required to optimize its capabilities, prioritizing those changes, and finally developing a plan to implement those changes.
6. Capacity gap vs. capability gap
- A capacity gap implies a lack of resources to operationalize processes. For example, as a service provider, your firm can only provide services up to a certain number of man-hours which vary with the number of employees in service. As a manufacturing concern, an entity can only produce goods up to the capacity of its plants and machinery. Insufficient resources result in a capacity gap.
- Whereas, capability gap is the lack of capability of a business to better manage its resources in order to fulfill its needs. It calls out for the management of resources including revamping the existing ones and laying off the redundant ones to optimize the business operations of an entity.
7. Business Growth:
- Capacity planning and management play a vital role in defining and planning the growth of a business. An entity needs to perform a thorough analysis of the resources available to it and of the additional resources that must be employed in the business to maximize its growth.
- Capability planning and management help a business grow by optimizing the usage of its available resources. While it is not as essential to business growth as capacity planning and management, it may substitute the need to employ additional resources to a business to some extent by better managing the available resources.
Many successful and progressive entrepreneurs are often focused on scaling their businesses to new heights. Whether such scaling involves developing new service lines, launching new products, or taking orders bigger than ever, business owners need to take into account both the capacity and capability of their business to ascertain if they can successfully step their business up.
As capacity and capability form the two most crucial factors of business growth, every business must rightly understand the difference between them to develop its resources and achieve its growth plans.