Recent attempts to apply industrial organization to the analysis and shaping of competitive strategy suggest that the approach of focusing on the static determination of prices in homogeneous industries is inadequate in explaining many competitive interactions. More fruitful is a combination of industrial organization and the industry history approach taken at business schools. In other words, micro-economic analysis has to be wedded to detailed consideration of strategic moves and countermoves, sufficiently broad coverage of firms' interactions along a number of different dimensions, and recognition that firms' resource endowments can frequently be varied only in the medium to long-term – and even then, only at a cost.

In this chapter, I use a hybrid approach to study the capacity expansion process in capital-intensive industries. In section 1, I develop a theoretical model that leads to the conclusion that where costs differ significantly across firms, the lowest cost producer will tend to pre-empt the others in adding new capacity. But two factors can reverse this outcome: resource constraints which are likely to occur during periods of very heavy investment, and uncertainty about demand. Conversely, concern about supply coordination failures and most sorts of informational asymmetries among firms are likely to favour pre-emption by the lowest-cost producer, as is a desire to dominate the industry in order to restrict output.