EXPERIENCE CURVE
The experience curve, as a strategic concept, is based on strong relationships between market share and accumulated production.
A firm with the highest market share in the industry generally will have the greatest accumulated volume of production and therefore the lowest cost relative to other producers in the market.
- The experience curve, first promoted by the Boston Consulting Group (BCG) in the 1960s, is an extension of the learning curve.
- The learning curve was first used in the 1920s by the U.S. Air Force as a production-planning technique. This concept reflects an inverse mathematical relation between the cumulated output of a product and its direct labor costs per unit and total production in units (Exhibit II Typical Learning Curve).
- When plotted on a logarithmic scale, the curve becomes a straight line. Direct labor cost of an item decreases at a consistent rate as workers produce more of the item in question. Literally thousands of studies have shown that production costs usually decline by 10 to 30 percent with each doubling of accumulated output.
- BCG extended the mathematical relationship to activities other than direct labor and labeled it the experience curve.
- It is argued that many repetitive management activities, besides production, experience a declining cost, expressed in consistent dollars, as volume increases.
- In fact, BCG claims that experience curve slopes generally fall in the 70 to 90 percent range as organizations gain experience in such areas as working with a particular distribution approach, starting up new plants, redesigning products, developing new production processes, and substituting materials in parts.
- Since each component of the product or service has its own experience curve, the experience curve for a product is the sum of these component curves.
- If a particular component is the dominant cost of the product, its curve will be the major contributor to the total experience curve. (Markets undergoing rapid change may produce conditions in which experience analysis becomes impossible except at a very general level.)
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