Capacity is generally considered only in one sense – to provide the means for producing a product or service. Defines capacity as serving two functions – to provide the means for producing a long‐run, stable level of a good or service, and to provide the means to adapt to fluctuations in demand over the short run and intermediate runs. Given this definition, develops the implications for strategic capacity planning and offers a model for firms to carry out this planning. Presents examples of where this model has been followed and discusses the implications.