EXPERIENCE CURVE

Abstract

The experience curve theory, centered on the relationship between production experience and costs, proved a valuable predictor of competitive dynamics through the 1970s. The theory remains valid today, especially in industries that are relatively stable, cost-sensitive, competitive, and production-intensive. Many companies today, however, need to develop an additional type of experience—experience in shaping de- mand—to build and sustain competi- tive advantage. he experience curve is one of BCG’s signature concepts and arguably one of its best known. The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of “experience,” or accumulated production volume. The implications of this relationship for business, argued BCG’s founder, Bruce Henderson, were significant.1 In partic- ular, he said, it suggested that market share leadership could confer a decisive competitive edge, because a company with dominant share could more rapidly accumulate valuable ex- perience and thus achieve a self-perpetuating cost advantage over its rivals. The experience curve theory proved a valuable descriptor and predictor of competitive dynamics across much of the business landscape through the 1970s, providing a sound guide for investment and pricing decisions and an invaluable tool for strategists. Is the idea applicable to today’s environment? Yes, but in some industries it is no longer sufficient by itself as a blueprint for competitive advantage.