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The Experience Curve—Reviewed (Part I)

The Concept
1974 by Bruce Henderson
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    • Value-added costs decline approximately 20 to 30 percent in real terms each time accumulated experience doubles.

    • High market share should produce low costs, and relative costs should improve if growth exceeds that of the competition.

    • Cost declines are predictable and should therefore be the basis for cost control and management evaluation.

     

    Costs of value added decline approximately 20 to 30 percent in real terms each time accumulated experience is doubled.

    The above relationship plotted on ratio paper (i.e., logarithmic coordinates) appears as follows:

    experience_curve_reviewed_one_exh1

    If the growth rate is constant, then annual physical volume grows at the same rate as total experience. The approximate ratios are shown below.

    experience_curve_reviewed_one_exh2

    January 1974
    The Experience Curve—Reviewed

    In this five-part series, BCG's Bruce Henderson reviews the experience curve concept and describes its enduring impact on corporate strategy. The series:

    I. The Concept 
    II. History 
    III. Why Does It Work? 
    IV. The Growth Share Matrix or  
    The Product Portfolio
     
    V. Price Stability


    Such cost declines are after removing inflation. They continue indefinitely as long as the growth rate continues.

    If the growth stops, costs continue to decline, but the rate of decline is cut in half each time the accumulated experience doubles.

    Such cost declines do not occur automatically. They require management. In particular, added investment is required in an amount commensurate with the marginal cost of capital.

    The business effects of this relationship are summarized below:

    • Market Share
      Costs are inversely proportional to market share. High market share should produce low cost.

    • Growth
      Relative costs should improve if growth is faster than competitors.

    • Debt Capacity
      Relative debt capacity should increase with no loss of safety if market share increases.

    • Shared Experience
      Cost will decline proportionately faster or slower when cost elements are shared between more than one product.

    • Cost Control
      Cost declines are predictable and therefore should be the basis for cost control and management evaluation.

    • Product Design
      Choice of design element alternatives can be determined by whether initial experience is high or low compared to future volume expected.

    • Make or Buy
      Choice of make or buy should be determined by relative experience between your experience and supplier experience differential if you make.

    • Procurement Negotiation
      The value to the supplier of large scale procurement can be calculated. Also the rate of normal cost change for the supplier can be calculated.

    • Market Potential
      By comparing market elasticity with cost decline, the market potential can be approximated.

    • Product Line Breadth
      The total economic effect of product line extension can be evaluated by interaction of  the experience and volume of combined cost elements.

    The experience curve cost effects are an observable fact. They can be confirmed by observation. The principal problems encountered in application are those of defining cost elements and in defining the measuring unit of experience.



    experience_curve_reviewed_one_exh3

     

    experience_curve_reviewed_one_exh4

    Source: Automobile Manufacturers' Association

    experience_curve_reviewed_one_exh5

     

    experience_curve_reviewed_one_exh6

    Source: Texas Instruments Incorporated, First Quarter and Stockholders Meeting Report, April 18, 1973.

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