experience curve and cost behaviors

 
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 • experience curve and cost behaviours 

George Stalk, Jr. (and) Thomas M. Hout., Competing against time, 2009  [ ]
p.5
experience curve strategies 
'experience curve and cost behaviours strategy'

1960s
An example of an early insight is experience-curve cost behaviour.  The theory of the experience curve is that the costs of complex products and services, when corrected for the effects of inflation and arbitrary accounting standards, typically decline about 20 to 30 percent with each doubling of accumulated experience.
   The fact that cost decline with accumulated volume has been recognized for a long time.  In 1925, officers in the U.S. Army observed that as accumulated production volume of airframes increased, per-unit costs declined.  In later investigations, the Army more specifically described the nature of this dynamic:  They calculated that the 4th plane assembled required only 80 percent as much direct labour as the 2nd, the 8th plane only 80 percent as much direct labour as the 4th, the 16th plane required only 80 percent as much direct labour as the 13th, and so on.
   During World War II, the understanding of this cost behaviour was critical for planning resource requirements in the aircraft industry.  After the war, the aircraft industry continued to plot learning curves.  For example, the learning phenomena for the Martin-Marietta-built Boeing B-29 and the Lockheed-built Boeing B-17, as decribed in a 1957 article, are shown in Exhibit 1-1.  Learning curves continue to be used to predict program costs, to set schedules, to evaluate management performance, and to justify contract pricings.  Moreover, the concept has been disseminated beyond the aircraft industry. 

   (Stalk, George, HD69.T54S73  1990, 658.5'6——dc20, copyright © 2009)
( Competing against time : how time-based competition is reshaping gloabl markets / George Stalk, Jr. (and) Thomas M. Hout., 1. time management., 2. delivery of goods., 3. competition, international., 4. comparative advantage (international trade)., p.5)

George Stalk, Jr. (and) Thomas M. Hout., Competing against time, 2009  [ ]
pp.6-8
experience cost behaviours
'experience curve and cost behaviours strategy'
   Being able to predict next year's prices is enormously important to management.  Being able to predict prices in five and ten years hence is a major strategic advantage.  The managements of certain aggressive companies have realized that well-documented cost behaviour could be factored into their pricing strategies.  They set pricing and investment strategies as a function of volume-driven costs.  At time, they reduced prices below current costs in anticipation of the decline in costs that they knew would result from expansion of volume.  Capacity was added ahead of demand.  The earliest companies to adopt experience-based strategies ran roughshod over their slower-adapting competitors.  They often pre-empted their competitors by claiming enough of a growing demand so that when their competitors attempted a response, little volume remained, and the leaders' cost could not be matched. 

   (Stalk, George, HD69.T54S73  1990, 658.5'6——dc20, copyright © 2009)
( Competing against time : how time-based competition is reshaping gloabl markets / George Stalk, Jr. (and) Thomas M. Hout., 1. time management., 2. delivery of goods., 3. competition, international., 4. comparative advantage (international trade)., pp.6-8)
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