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Study notes

The Experience Curve

  • Levels: A Level
  • Exam boards: AQA

The concept behind the Experience Curve is that the more experience a business has in producing a particular product, the lower its costs.

The short video below provides an overview of the Experience Curve model and there are some additional study notes below the video. 

The Experience Curve - Explained

The Experience Curve concept was devised by the Boston Consulting Group.

From BCG's research into a major manufacturer of semiconductors, they found that the unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced.

BCG concluded: the more experience a firm has in producing a particular product, the lower are its costs

The logic behind the Experience Curve is this:

  • As businesses grow, they gain experience...
  • That experience may provide an advantage over the competition...
  • The “experience effect” of lower unit costs is likely to be particularly strong for large, successful businesses (market leaders)
The Experience Curve - Illustrated

If the Experience Curve concept is valid, then it has some significant implications for growth strategy:

  • Business with the most experience should have a significant cost advantage
  • Business 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 (e.g. takeovers) might be the best way to do this if a business can acquire firms with strong experience

Criticisms of the Experience Curve concept

  • 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?
  • The Experience Curve concept is a relatively old theory that is less relevant in a competitive environment that changes so rapidly

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