Business Strategy Theories and Frameworks

Experience Curves and Business Strategy

The interplay between experience curves and business strategy was first investigated by Bruce Henderson of the Boston Consulting Group (BCG) in the 1960s. Half a century later, the experience curve remains an important element of business strategy planning.

It's more important than ever for businesses to have a solid strategy in place before they commit to decision.

But in changing economic times, variable demand patterns and unexpected market shifts are making it difficult for business owners to accurately predict what will happen in the short to medium term.

Traditionally, the most successful entrepreneurs have relied on a handful of tried and true business strategy tools. Although some of these tools have become outdated in the new economy, others continue to have value for new and existing companies. Based on learning curve theory, experience curves are a powerful strategic planning tool – with a few twists.

What Are Experience Curves?

During the 1920s, a group of analysts at Wright-Patterson AFB in Ohio observed that the amount of time required to manufacture an aircraft decreased with each time they doubled the number of aircraft they produced. Using the "learning curve that was first discovered in the 19th century, the Wright Patterson analysts were the first to apply the concept to a production environment.

Later research proved that although performance improvement percentages varied, the experience curve held true across multiple industries. The fundamental truth that greater experience results in greater efficiency eventually launched an emphasis on scalable efficiency, a concept that dominated business theory throughout much of the twentieth century.

Strategic Planning Implications

• Core competencies. According to the experience curve, the more experience your company has in producing a specific product, the less it will cost to produce it. This reinforces the need for businesses to emphasize the development of core competencies in strategic planning.
• Market entrenchment. The scalable efficiency concepts derived from the experience curve underscore the idea that established companies have a considerable advantage over new entries. For strategic planning purposes, this should influence your decision to abandon established market segments and business activities in favor of unproven expansion opportunities.
• Adaptation. Some evidence suggests that the experience curve may not be suitable in today's economy. As the marketplace becomes less predictable, it may be more important for leaders to create business models that allow for the rapid deployment of resources than it is for them to focus on experience as a primary strategic emphasis.

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