Page 4 - Portfolio Analysis
P. 4
FIGURE 1
THE EXPERIENCE CURVE
COSTS
a
b
x y
VOLUME
It has been shown that each time the accumulated experience of
manufacturing a particular product doubles (See figure 1) so the total
costs of making it tend to decline by a characteristic percentage - usually
between 20 and 30 per cent.
Since the experience curve effect applies to all value added it subsumes
economies of scale and specialisation effects. In addition cost savings will
occur through learning by doing.
The BCG suggest various reasons for the experience curve effect.
a) THE LEARNING FUNCTION:
Labour (and management) learns by repetition. Consequently, anyone
doing a job does it more and more efficiently over time. This should lead
to a reduction in labour costs which should decline by between 10-15 per
cent each time cumulative experience doubles.
