The Experience Curve

1
The Experience Curve
4 Ps - Product, Price, Place, Promotion

• A special topic
• Presented by John Kelly

2
Introduction

• In the 1960s, the Boston Consulting Group
  observed a consistent trend that seemed to hold
  true across industry
• Production Costs declined with accumulated
  production experience.
• Labor efficiencies
• Standardization
• Automated production
• Changes in resource mix
• Product redesign

3
The Experience Curve
4
Observed Relationships

• Experience Curve effects hold true for various
  industries.
• Cost reductions range from 10-25 percent
• Aerospace Industry 85
• Repetitive Electrical Operations 75-85
• Repetitive Electronics Manufacturing 90-95
• Shipbuilding 80-85
• Repetitive Welding Operations 90
• Repetitive machining or punch-press 90-95

5
Exponential Decay Curves
Examples of 90 experience curve 10 percent
cost reduction 70 experience curve 30 percent
cost reduction
6
Implications (2 strategies)

• Firms can realize increases in profit margins or
• Firms can gain market share over competitors
  through aggressive pricing brought on by
  decreases in production costs.

7
Potential Problems

• Not a universal law requires sound management or
  production costs will rise
• Competing firms may replicate cost reductions
  without making large investments (copy plant
  efficiencies)
• New technologies may create a new experience
  curve rendering old plants obsolete (old
  experience curve truncates)

8
Conclusions

• For most industries, the Experience Curve Concept
  holds true
• Firms can expect production costs to decrease
  with production experience
• The relationship is not a substitution for sound
  management practices