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:
- 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
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