The Pros and Cons of Management Using the Experience Curve to Determine Strategy
4. What are the pros and cons of management using theexperience curve to determine strategy?
The experience curve is an idea developed by the Boston Consulting Group (BCG) in the mid-1960s. Working with a leading manufacturer of semiconductors, the consultants noticed that the company's unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced. This relationship they called the experience curve: the more experience a firm has in producing a particular product, the lower are its costs. However, if the decline in cost is fast if growth is fast and slow if growth is slow.
The strategic implications of the experience curve came closer to shattering earth. For if costs fell (fairly predictably) with experience, and if experience was closely related to market share (as it seemed it must be), then the competitor with the biggest market share was going to have a big cost advantage over its rivals. This was the logical underpinning of the idea of the growth share matrix. The experience curve justified allocating financial resources to those businesses (out of a firm's portfolio of businesses) that were (or were going to be) market leaders in their particular sectors. This, of course, implied starvation for those businesses that were not and never would be market leaders.
Labour efficiency - Workers become physically more dexterous. They become mentally more confident and spend less time hesitating, learning, experimenting, or making mistakes. Over time they learn short-cuts and improvements. This applies to all employees and managers, not just those directly involved in production.
Standardization, specialization, and methods improvements - As processes, parts, and products become more standardized, efficiency tends to increase. When employees specialize in a limited set of tasks, they gain more experience with these tasks and operate at a faster rate.
Technology-Driven Learning - Automated production technology and information
The experience curve is an idea developed by the Boston Consulting Group (BCG) in the mid-1960s. Working with a leading manufacturer of semiconductors, the consultants noticed that the company's unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced. This relationship they called the experience curve: the more experience a firm has in producing a particular product, the lower are its costs. However, if the decline in cost is fast if growth is fast and slow if growth is slow.
The strategic implications of the experience curve came closer to shattering earth. For if costs fell (fairly predictably) with experience, and if experience was closely related to market share (as it seemed it must be), then the competitor with the biggest market share was going to have a big cost advantage over its rivals. This was the logical underpinning of the idea of the growth share matrix. The experience curve justified allocating financial resources to those businesses (out of a firm's portfolio of businesses) that were (or were going to be) market leaders in their particular sectors. This, of course, implied starvation for those businesses that were not and never would be market leaders.
Labour efficiency - Workers become physically more dexterous. They become mentally more confident and spend less time hesitating, learning, experimenting, or making mistakes. Over time they learn short-cuts and improvements. This applies to all employees and managers, not just those directly involved in production.
Standardization, specialization, and methods improvements - As processes, parts, and products become more standardized, efficiency tends to increase. When employees specialize in a limited set of tasks, they gain more experience with these tasks and operate at a faster rate.
Technology-Driven Learning - Automated production technology and information