- 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