Measuring the Value of Increasing Capacity

A firm looking to expand the capacity of its current locations wanted to measure the impact on sales volumes of adding a set amount of square footage to a location. The firm’s past expansions had been undertaken in response to the sales performance of its individual locations, and so a simple comparison of sales volumes between its expanded locations versus those not expanded resulted in an estimate that was suspected to be biased upward. Due to limited construction costs, a randomized experiment testing the impact of increasing the size of a location was not possible. Drawing on research in the economics literature, our approach utilized several different methodologies to provide a valid “control” group with which to compare the expanded locations’ sales volumes. The results provided the firm with the information they needed to make decisions regarding subsequent location expansions.