• As businesses grow, they gain experience
  • That experience may provide an advantage over the competition
  • The “experience effect” might be particularly strong for large, successful businesses (market leaders)

The gist

The more experience a business has in producing a particular product, the lower its costs.

  • Devised by the Boston Consulting Group
  • Researched a manufacturer of semiconductors: found that unit cost of manufacturing fell by about 25% for each doubling of the volume it produced
  • Concluded that the more experience a firm has in producing a particular product, the lower its costs are

Implications of the Experience Curve (if true)

  • Businesses with the most experience will have a significant cost advantage
  • Businesses with the highest market share likely to have the most/best experience
  • Therefore:
    • Experience is a key barrier to entry
    • Firms should try to maximise market share
    • External growth (such as takeovers) might work if a business can acquire firms with strong experience

Criticisms of the Experience Curve

  • Market leaders often become complacent - perhaps because of their “experience”
  • Experience may cause resistance to change and innovation
  • Might this cancel out cost benefits of experience?
  • A relatively old theory that is less relevant in an environment that changes so rapidly