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THE LEARNING CURVE EFFECT The learning curve effect states that the more times a task has been performed, the less time will be required on each subsequent iteration. This relationship was first quantified in 1936 at Wright-Patterson Air Force Base in the United States , where it was determined that every time total Aircraft production doubled, the required labour time decreased by 10 to 15 percent. Subsequent empirical studies from other industries have yielded different values ranging from only a couple of percent up to 30 percent, but in most cases it is a constant percentage: It did not vary at different scales of operation. THE EXPERIENCE CURVE EFFECT The experience curve effect is broader in scope than the learning curve effect encompassing far more than just labour time. It states that the more often a task is performed, the lower will be the cost of doing it. The task can be the production of any good or service. Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage. This broader effect was first noticed in the late 1960s by Bruce Henderson at the Boston Consulting Group (BCG). Research by BCG in the 1970s observed experience curve effects for various industries that ranged from 10 to 25 percent. These effects are often expressed graphically. The curve is plotted with cumulative units produced on the horizontal axis and unit cost on the vertical axis. A curve that depicts a 15% cost reduction for every doubling of output is called an “85% experience curve”, indicating that unit costs drop to 85% of their original level. Mathematically these curves are described by Power Law s (although another possible mathematical formulation of the effect would involve ). REASONS FOR THE EFFECT Examples NASA has calculated the following experience curves:
There are a number of reasons why the experience curve and learning curve apply in most situations. They include:
EXPERIENCE CURVE DISCONTINUITIES The experience curve effect can on occasion come to an abrupt stop. Graphically, the curve is truncated. Existing processes become obsolete and the firm must upgrade to remain competitive. The upgrade will mean the old experience curve will be replaced by a new one. This occurs when:
STRATEGIC CONSEQUENCES OF THE EFFECT The BCG strategists examined the consequences of the experience effect for businesses. They concluded that because relatively low cost of operations is a very powerful strategic advantage, firms should capitalize on these learning and experience effects. The reasoning is, increased activity leads to increased learning, which leads to lower costs, which can lead to lower prices, which can lead to increased market share, which can lead to increased profitability and market dominance. According to BCG, the most effective business strategy was one of striving for market dominance in this way. This was particularly true when a firm had an early leadership in market share. It was claimed that if you cannot get enough market share to be competitive, you should get out of that business and concentrate your resources where you can take advantage of experience effects and gain dominant market share. The BCG strategists developed Product Portfolio Techniques like the BCG Matrix (in part) to manage this strategy. Today we recognize that there are other strategies that are just as effective as cost leadership so we need not limit ourselves to this one path. See for example Porter Generic Strategies which talks about Product Differentiation and focused Market Segment ation as two alternatives to cost leadership. One consequence of the experience curve effect is that cost savings should be passed on as price decreases rather than kept as profit margin increases. The BCG strategists felt that maintaining a relatively high price, although very profitable in the short run, spelled disaster for the strategy in the long run. They felt that it encouraged competitors to enter the market, triggering a steep price decline and a competitive shakeout. If prices were reduced as unit costs fell (due to experience curve effects), then competitive entry would be discouraged and one's market share maintained. Using this strategy, you could always stay one step ahead of new or existing rivals. In his book ''Economia'', Geoff Davies describes the implications of the learning curve as fundamental. He argues along similar lines to BCG that, through Positive Feedback , the advantages conferred by the curve and other Economies Of Scale allow one or a few firms to increase market share until they dominate their market. Maintaining that because of the learning curve effect, economies of scale pervade modern economies, Davies infers that since the resulting monopolies distort the market away from equilibrium and optimality, the modern economy is not in equilibrium. "Large, modern free-market economies are characterised not by ''equilibrium'' but by exponential growth and ''instability''" (p46, Davies' italics). He concludes that the behaviour of real economic systems is radically different from the predictions of the General Equilibrium theory of Neoclassical Economics , and that therefore this theory fails as a useful description of a modern economy. CRITICISMS Some authors claim that in most organizations it is impossible to quantify the effects. They claim that experience effects are so closely intertwined with Economies Of Scale that it is impossible to separate the two. In theory we can say that economies of scale are those efficiencies that arise from an increased scale of production, and that experience effects are those efficiencies that arise from the learning and experience gained from repeated activities, but in practice the two mirror each other: growth of experience coincides with increased production. Economies of scale should be considered one of the reasons why experience effects exist. Likewise, experience effects are one of the reasons why economies of scale exist. This makes assigning a numerical value to either of them difficult. Others claim that it is a mistake to see either learning curve effects or experience curve effects as a given. They stress that they are not a universal law or even a strong tendency in nature. In fact, they claim that costs, if not managed, will tend to rise. Any experience effects that have been achieved results from a concerted effort by all those involved. They see the effect as an opportunity that management can create, rather than a general characteristic of organizations. SEE ALSO SEE ALSO
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