Experience curve effects

The experience curve is a business concept that was first discovered in 1925 in the U.S. aircraft industry.

The concept states that the inflation-adjusted ( real ) costs of production decline constant when increasing the cumulative production quantity (production quantity). Typically, the costs are reduced by 20 to 30 % with a doubling of cumulative production volume, according to a learning rate of L = 70% - 80%. This concept states so that it is advantageous as quickly as possible to gain large market shares in order to high output to reduce internal costs and thereby gain competitive advantage. It fall, only those costs that are subject to value added ( direct material costs decrease, for example, this does not ).

Here, the narrower concept of learning curve is defined by the fact that he simply refers to the amount of added ( cumulative ) hours worked. The experience curve refers also other factors with a.

Description

The expansion of this concept was operated in the 1970s by the Boston Consulting Group, which marketed it as a strategic marketing tool. The experience curve concept is therefore also known as the " Boston - effect" (see also BCG matrix ).

To experience curve effect contribute many individual causes, which can be grouped into two main categories:

  • Dynamic economies of scale You can differentiate the learning effect (exercise profits due to repetitive work activity )
  • Increased efficiency through progressive quality process technologies / product quality ( value analysis, standardization, Kanban, etc.)
  • And increase efficiency by automating and streamlining ( increase in productivity, technical progress etc ).

The often specified static effect stands in contradiction to the original definition, which assumes a cumulative application rate ( per unit of time will produce the same amount, the static effects can not arise ).

The dynamic effect caused, in contrast to the static effect, automatic reduction of the cost. It takes in part of the conscious effort to also realize the potential for cost reduction associated with money and time requirements. These costs represent the potential advantage sometimes up for it.

The meaningfulness of the experience curve is, among other things strongly depends on the industry, it shall in the chemical and electronic industry particularly hard, since there exist a homogeneity and small differences between first- and letztproduziertem product. In the service sector, in particular with customer contact experience curve effects may be limited. Reasons are the integration of the external factor in the production of services and the associated service as well as their non- storability individuality. Due to the increasing automation and standardization of services ( eg, ATMs ) higher experience curve effects are likely to be expected in the future.

Any problems with strategy persecution by the experience curve:

  • The experience curve closes due to their business efficiency increase focus from other strategies. They optimally for price or cost strategies.
  • For pure concentration on production volumes increase along the curve, we often forgot to look at the market and new products demanded.
  • The underlying objective of the production volume increase or the relative increase in market share may be other sources of experience (technology replacement etc ) aside, that is, you must not, therefore, be content with a high market share.
  • It is possible that competitors have the lowest unit cost with significantly lower cumulative amounts when they have planned from scratch, for example as part of a Greenfield approach their production site and erected. Sometimes this is done in combination with a shift of the production site to countries with lower wages. If this strategy is supplemented for example by the imitation of non-patented processes may well pass by less experienced competitors on cost leadership.

Respect to market share ( relative)

It can be seen an interaction between the relative market share and cost. The market share of assets reflects the experience factor. The unit costs are inversely proportional to the market share. The following criteria must be met for the market share can be considered as an experience factor:

  • All market participants must also have occurred
  • Market participants must have been equally developed and stabilized
  • The production volume produced were sold

Spelling

The percentage decrease in the cost of production to the learning rate in multiplying the production quantity follows an exponential function:

With

Example

The following example will serve to illustrate: learning rate L = 80%; that is, for a doubling of cumulative production volume to reduce costs to 80 % of the final value.

At the beginning of the observation period amount to the value added costs 100 GE. Every year the same amount of 10 pieces will be produced. The cumulative production volume increases. Downstream of each doubling of cumulative production volume reduces the cost by 20%.

Represented graphically, this example is as follows:

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