Page 3 - Portfolio Analysis
P. 3
THE EXPERIENCE CURVE EFFECT
The best known of the portfolio planning systems is that of the Boston
Consulting Group (BCG) who developed their system - BCG Matrix - in the
1970’s. The Group conducted studies of company performance
throughout the world. Its findings have shown a direct and consistent
relationship between the aggregate growth in volume of production and
declining costs of production.
This is, in essence, a statement of the experience curve effect, a concept
which must be understood before the workings of the BCG Matrix can be
fully appreciated. It should also be made clear that the premises
underlying the BCG approach are:
a) that in any market segment of an industry, price levels tend to be
very similar for similar products;
b) and therefore what makes one company more profitable than the
next must be lower costs.
BCG tried to identify the key determinants of low cost levels and noted that
there was usually a relationship between the total cost of manufacturing
and distributing a product and cumulative production volume.
