The Experience Curve
Generally the production of any good or service shows the experience curve effect. Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant percentage.
In the late 1960s Bruce Henderson of the Boston Consulting Group (BCG) began to emphasize the implications of the experience curve for strategy. Research by BCG in the 1970s observed experience curve effects for various industries that ranged from 10 to 25 percent.
These effects are often expressed graphically. The curve is plotted with the of cumulative units produced on the horizontal axis and unit cost on the vertical axis. A curve showing a 15% cost reduction for every doubling of output is called an “85% experience curve”, indicating that unit costs drop to 85% of their original level.
The experience curve is described by a power law function sometimes referred to as Henderson's Law:
where
- is the cost of the first unit of production
- is the cost of the nth unit of production
- is the cumulative volume of production
- is the elasticity of cost with regard to output
Read more about this topic: Experience Curve Effects
Famous quotes containing the words experience and/or curve:
“The difference between tragedy and comedy is the difference between experience and intuition. In the experience we strive against every condition of our animal life: against death, against the frustration of ambition, against the instability of human love. In the intuition we trust the arduous eccentricities we’re born to, and see the oddness of a creature who has never got acclimatized to being created.”
—Christopher Fry (b. 1907)
“The years-heired feature that can
In curve and voice and eye
Despise the human span
Of durance—that is I;
The eternal thing in man,
That heeds no call to die.”
—Thomas Hardy (1840–1928)