To mark The Boston Consulting Group’s fiftieth anniversary, BCG’s Strategy Institute is taking a fresh look at some of BCG’s classic thinking on strategy to explore its relevance to today’s business environment. This second in a planned series of articles examines the experience curve, an idea developed by BCG in the mid-1960s about the relationship between production experience and cost.
The experience curve is one of BCG’s signature concepts and arguably one of its best known. The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of “experience,” or accumulated production volume. The implications of this relationship for business, argued BCG’s founder, Bruce Henderson, were significant. In particular, he said, it suggested that market share leadership could confer a decisive competitive edge, because a company with dominant share could more rapidly accumulate valuable experience and thus achieve a self-perpetuating cost advantage over its rivals.
The experience curve theory proved a valuable descriptor and predictor of competitive dynamics across much of the business landscape through the 1970s, providing a sound guide for investment and pricing decisions and an invaluable tool for strategists. Is the idea applicable to today’s environment? Yes, but in some industries it is no longer sufficient by itself as a blueprint for competitive advantage. In contrast to the 1960s and 1970s, when the general business environment was relatively stable and new-product introduction relatively infrequent, today’s business climate is characterized by higher volatility, less stable industry structures, and frequent product launches in response to rapidly changing technologies and tastes.
Experience of the type addressed by the experience curve is still necessary—often critically so, depending on the industry. But we argue that most companies today need an additional kind of experience if they hope to create and sustain competitive advantage.