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The Experience Curve—Reviewed (Part II)

History

1973 by Bruce Henderson
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  • Prices, in constant dollars, decline steadily at a constant rate of about 25 percent each time accumulated experience doubles—that is the experience curve.

  • The experience curve effect can be observed and measured in any business, any industry, any cost element, anywhere.

  • Accounting data are frequently misleading for cost analysis: the choice between expensing and capitalizing can distort apparent cost changes.

 

Experience curve is the name applied in 1966 to overall cost behavior by The Boston Consulting Group. The name was selected to distinguish this phenomenon from the well known and well documented learning curve effect. The two are related, but quite different.

January 1973
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

It has been known for many years that labor hours per unit declined on repetitive tasks. This effect was particularly easy to observe in such things as aircraft production in wartime. The rate of labor decrease was characteristically 10 to 15 percent approximately per doubling of experience. This expectation has long been a part of military contracting.


The so-called learning curve effect apparently had somewhat limited application, however. It only applied to direct labor. Unless the job changed, this meant the time required to obtain a given cost decline tended to double each cycle of experience. This masked the far reaching implication of the possibilities of job element management with volume changes.