Dear Karthick,
Imagine you own theatre without balcony. Then what is your capacity? Seats are your capacity. When you add balcony, you add capacity in your business.
Few other examples: -
Hotel adds rooms
Airlines adds aeroplanes
Manufacturing plant adds few more machines to increase the volume of production
In above examples, capacity can be also added by:
Adding more hotels
Raising more manufacturing plants at same or multiple locations
By taking over business units from the same industry
Management science teaches us to increase the capacity and further utilise it optimally in order to gain competitive advantage.
Capacity can also be built by utilising the human and physical resources optimally. Classic example is Southwest Airlines. With the same number of aeroplanes as that of competitors or even with fewer, they are able to operate more flights.
Higher capacity always gives competitive advantage as it brings economies of scale. Wal-Mart is classic example of this.
Another important feature of adding capacity is to capture and record the knowledge. Knowledge is also a capacity. Businesses of 21st century are more knowledge-intensive than physical capacities. Knowledge of what brought success or failure to you or your competitor is very important to sustain the competitive advantage.
Human resources have turnover, physical resources have wear and tear but knowledge remains intact. Companies like Microsoft that built knowledge assets could raise almost their empire in short span.
Hope the above reply satisfies you.
Dinesh V Divekar