Page 59 - 100 Great Business Ideas: From Leading Companies Around the World (100 Great Ideas)

23 THE EXPERIENCE CURVE

Increases in production allow workers to become more
experienced—and firms with experienced workers are able to
reduce their costs and increase their revenues.

The idea

In the mid-1960s, Boston Consulting Group (BCG) noticed that a
manufacturer of semiconductors was able to cut unit production
costs by 25 percent every time it doubled its production level. It was
concluded this was because the workers gained valuable experience,
which allowed them to be become more efficient.

A slight variation of the traditional “economies of scale” principle,
the idea’s emphasis on employee experience has a range of broad,
strategic implications that should be taken into consideration when
deciding which workers to hire and how much to produce.

However, the effects of the experience curve are not universal to all
companies and industries. Although it is generally estimated that a
cost reduction of 20–30 percent will occur when experience doubles,
there are many firms that deviate from these figures, with some only
gaining a cost reduction of 5 percent. This is thought to be because
different production processes provide different opportunities for
gaining experience. It is also not feasible for many firms to drastically
increase their production levels when there is a fixed demand for a
product or when the production process is highly time-consuming
and complex. It should also be noted that some firms simply do not
have the resources to increase their production.

52 • 100 GREAT BUSINESS IDEAS