Experience curve

The experience curve is a business concept that was first discovered in US aircraft construction in 1925 .

The concept states that the inflation-adjusted (real) unit costs decrease constantly when the cumulative output volume ( production volume ) increases. Typically, the costs decrease by 20% to 30% when the cumulative output is doubled, corresponding to a progress ratio of PR = 70% - 80%. This concept means that it is advantageous to gain large market shares as quickly as possible in order to be able to reduce internal costs through high output and thereby gain competitive advantages. Only those costs are reduced that are subject to the added value (for example, direct material costs do not decrease as a result).

The narrower concept of the learning curve is defined by the fact that it only refers to the amount of added (cumulative) working time . The experience curve also includes other influencing factors .

description

The expansion of this concept was operated in the 1970s by the Boston Consulting Group , which marketed it as a strategic marketing tool . The experience curve concept is therefore also known as the "Boston Effect" (see also BCG matrix ).

Many individual causes contribute to the experience curve effect, which can be summarized in two main categories:

Dynamic economies of scale
- A distinction is made here between the learning effect (gain in practice due to repetitive work),
- Increased efficiency through progressive qualitative process engineering / product quality (value analysis, standardization, Kanban, etc.)
- and the increase in efficiency through automation and rationalization (increased productivity, technical progress, etc.).
Static economies of scale

Here, fixed cost degression , business size degression (economies of scale, network effects ) and transitions to more cost-effective production technologies (e.g. from workshop to flow production) dependent on the output volume must be considered.

The static effect that is often stated is in contradiction to the original definition, which is based on an accumulated output quantity (if the same quantity is produced per unit of time, the static effects cannot result).

In contrast to the static effect, the dynamic effect does not automatically reduce costs. In some cases, a conscious effort is required in order to also realize the cost reduction potential, which is also related to the need for money and time. These costs sometimes make up for the potential benefit.

The informative value of the experience curve is, among other things, heavily dependent on the industry ; it is particularly true in the chemical and electronics industry , since there is homogeneity and little difference between the first and last produced product. In the service sector, especially with customer contact, the experience curve effects can be limited. The reasons are the integration of the external factor in the service production and the associated individuality of the service as well as its non-storability. Due to the increasing automation and standardization of services (e.g. ATMs ), higher experience curve effects are likely to be expected in the future.

Possible problems in pursuing strategies using the experience curve:

The experience curve excludes other strategies due to its focus on increasing business efficiency. It is ideal for pricing or cost strategies.
When concentrating solely on increasing production volumes along the curve, one often loses sight of the market and the new products required.
The underlying goal of increasing production volume or increasing relative market share can ignore other sources of experience (technology replacement, etc.). H. therefore one cannot be satisfied with a high market share.
It can happen that competitors with significantly lower cumulative quantities have the lowest unit costs if, for example, they have completely redesigned and built their production facility as part of a greenfield approach . Sometimes this happens in combination with a relocation of the production site to countries with lower wages . If this strategy is supplemented, for example, by the imitation of non- patent-protected processes, less experienced competitors can bypass the cost leader.

Relation to market share (relative)

A relation can be seen between the relative market share and the costs. The market share reflects the experience factor. The unit costs are indirectly proportional to the market share. The following criteria must apply so that the market share can be considered an experience factor:

All market participants must have entered at the same time
The market participants must have developed and stabilized evenly
The production volumes produced were sold

Notation

The percentage decrease in production costs by the learning rate when multiplying the production quantity follows an exponential function : ${\ displaystyle K}$ ${\ displaystyle L}$ ${\ displaystyle p}$

{\ displaystyle K_ {L} (p) = K_ {0} \ cdot L ^ {\ operatorname {ld} \ left ({\ frac {p} {p_ {0}}} \ right)}}

With

{\ displaystyle \ operatorname {ld} (x)}

: Logarithm from to base 2

{\ displaystyle x}

{\ displaystyle p_ {0}}

: Production quantity at the beginning

{\ displaystyle K}

: Cost

example

The following example should serve as an illustration: learning rate L = 20%; d. H. after doubling the cumulative output volume, the costs are reduced to 80% (PR) of the last value.

At the beginning of the observation period, the value added costs are 100 MU. The same amount of 10 pieces is produced every year. The cumulative production volume increases. Each time the cumulative production volume is doubled, the costs decrease by approx. 20%.

year	production volume	Cumulative production volume	costs apiece
1	10	10	100
2	10	20th	80
3	10	30th	70
4th	10	40	64
5	10	50	59.6
6th	10	60	56.2
7th	10	70	53.5
8th	10	80	51.2

Graphically, this example looks like this:

Bibliography

AG Coenenberg : cost accounting and cost analysis . 4th edition. Landsberg (Lech) 1999, ISBN 3-478-39394-9 , pp. 199-219.
JR Crawford: Estimating, Budgeting and Scheduling . 1944.
Bruce D. Henderson: The Experience Curve in Corporate Strategy . Frankfurt / New York 1974, ISBN 3-585-32086-4 , p. 19 ff.
TP Wright: Factors affecting the cost of airplanes . Journal of the Aeronautical Science , 1936, pp. 122-128.

Individual evidence

[1] .de

[2] .de

[3] .de

[4] .de