Experience curve
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Transcript of Experience curve
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