GROUP 3

• The Experience Curve was developedby Bruce D. Henderson andthe Boston Consulting Group (BCG)while analysing overall cost behaviourin the 1960s.

• According to this concept firms whose marketing & pricing strategies are geared to accumulating experience much faster that the competitors can often achieve significant cost advantages.

• This effect is called “experience effect” which not only applies to the direct labour costs but also material cost etc.

• Learning curves only consider time of production (labour costs), while experience curve considers the total output of any function such as

It is described by

a power

law function

sometimes

referred to as

Henderson's

Law

• Labour efficiency - Labor's

contribution to experience effect

is portrayed by the learning

curve.

• New Process & Improved

Methods - Innovation &

improvement significantly

impacts the experience curve. It

is even more in Automated

sectors like electronic

semiconductor industry.

• Standardization - Without

standardisation the replication

necessary for worker learning

could not worker.

• Product redesign - Product

redesign can also impact the

experience effect. As a product

matures both its manufacturers

& its customers gain a clearer

understanding of its performance

requirement.

• Scale effect – Capital costs

increase by the six-tenths power

of the increase in capacity.

• Changes in the resource mix -

As a company acquires

experience, it can alter its mix of

inputs and thereby become more

• Cost/time relation –

Experience curve is

sometime misinterpreted as

a relation between cost vs

time and hence considered

irrelevant as the decrease in

cost becomes almost

negligible in a year or two.

What is missed out in the

context is the adjacent

growth in production.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

A.Constant Production @100 units. % cost decline per unit shrinks from 25% to 1.7% in 10yrs. Cap:100 units p.a.

B.Production starting at 100 units, growing @ 15%. % cost decline per unit shrinks from 27% to 2.2% in 10yrs. Cap:352 units p.a.

• High-Volume effect – A large

scale process allows a greater

increment to cumulative

volume in a time period than a

low scale process. Hence a

higher scale process will

advance further down the

experience curve over time.

• Building with shared

interest – A common

experience base – one root

from which several products

grow – can be an important

source of cost reduction.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

• Product Definition –Experience curves are specific to a particular product & in a strict sense apply only to its value added. Inherent in the end product are the experience bases of its components.

• Cost Data – It is difficult to obtain suitable data to build a product cost experience curve. It may not be available in the required form or be discontinuous. Then the credibility of the Experience Curve becomes Questionable.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

• Marginal vs Average Cost – Marginal & average costs are generally different product. But since marginal cost records the additional cost for an extra unit production, Learning Curve can be set up in terms of marginal cost.

• Inflation – Costs must be expressed in constant dollars as inflation can neutralise the cost decrease gained from experience.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

• Planning horizon –Experience Curve represents combined effects of numerous factor. Some of them vary on shorter duration. Hence this requires special care to be understood.

• External Influence – An experience effect is not normally visible where large percentage cost is determined under patent based monopoly, supply percentage cost, or govt. regulations.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

• Non equilibrium

Conditions – Rapid

Technological & design

innovation can bring about

undue work specialisation &

over commitment to

specialised production

equipment.

ITS NOT AN EVER

DESCENDING RIDE

SIMPLE CONCEPT

BUT COMPLEX TO

PRACTICE

EXPERIENCE & PRICE

In a stable competitive market, as cost

decreases as the result of experience

effect, price also decreases. But typically

this fall in price does not follow the

experience curve completely throughout the

Product Life Cycle.

A. New product prices are typically less than the

industry average cost. As it is the anticipated

price.

EXPERIENCE & PRICE

B. When the supply is generally small relative to

demand. Prices are according to the price

umbrella set the market leader, which is

higher than the cost. At this point, if a player

reduces the price the others have to follow. If

no one reduces the cost then the high margin

of the industry will lure in other players, who

ends up bringing down the price.

C. A major player or an initial player triggers a

shakeout, leading to bringing down the price

sharply. Since the price decline sharply in this

phase, it forces the marginal player out of the

market

D. In this section the price starts following the

experience curve.

EXPERIENCE & PRICE

C. A major player or an initial player triggers a

shakeout, leading to bringing down the price

sharply. Since the price decline sharply in this

phase, it forces the marginal player out of the

market

D. In this section the price starts following the

experience curve.

MARKET SHARE & PROFITABILITY

1. Research data reveals 10% of the marketshare point is accompanied by 5% in thepretax ROI.

2. From normative consideration, underequilibrium conditions, a firm with largestmarket share would generally be expectedto have the greatest accumulatedproduction volume.

COMPETITIVE IMPLICATIONProduct Life Stage

Growth Maturity Decline

Leader

(Higher

Share)

Reduce prices to

discourage new

competitive capacity

Hold market

share by

improving quality,

increasing sales

effort, advertising

Maximize cash

flow by reducing

investment &

advertising, R&D,

etc.,

expenses(market

share will

decline)

Use own capacity fully

Follower

(Lower

Share)

Invest to increase

market share

Withdraw from

the market or

hold share by

keeping the

prices & costs

below that of the

market leader

Withdraw from

the market.

Concentrate on the

segment that can be