Boston experience curve has become a reference point for business analysis in recent decades. The experience curve is a concept developed in the 1960s by the Boston Consulting Group, a global management consulting firm that helps businesses maximize their potential for profitable growth. It suggests that the more experience a company has in producing a specific product or service, the lower its costs of production become. This is because the company learns from its mistakes and overall efficiency improves with time.
The experience curve is believed to be applicable to all industries - from manufacturing to finance to software development. Theoretically, these curves can be plotted for any type of experience in producing a particular product or service. Boston Consulting Group believes that companies that have low unit costs of production will gain more business as their output increases.
The experience curve theory has two components. The first is the learning curve, which measures the steady rate of improvement in a companys efficiency as it gains experience in producing a particular product or service. The second component of the experience curve is the cost-reduction curve, which demonstrates the cost savings associated with the gains in efficiency.
Here’s an example:
Let’s say a company is producing widgets and its cost of production decreases by 10% each time its annual output doubles. After two years, the widget production doubles, and the cost of production decreases by 20%. After four years, the widget production doubles again, and the cost of production decreases by 30%. This would represent the company’s experience curve.
From an operational standpoint, the company is receiving the same benefit from its experience curve each time: significant savings from decreased production costs.
The advantages of the experience curve are quite clear. When cost savings are quantified, businesses are able to gain a competitive advantage from their operations. This allows them to produce higher quality products at a lower cost. Companies can also use their experience curve as a way to predict future costs, allowing them to plan production more effectively.
The experience curve is not without its drawbacks, however. It may be difficult to accurately predict the amount of savings associated with an experience curve because the rate of learning and cost reduction is often different between companies. Additionally, in a world rapidly evolving due to new technologies and global competition, companies may find that their experience has little relevance to the current market.
Despite its drawbacks, the experience curve is still one of the most widely accepted economic theories. The concept of learning from experience and using cost savings to gain a competitive edge rings true in the modern business world. As such, it is likely to continue being a vital tool for businesses seeking to optimize operations and maximize profits.
