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Industry Data & Market Research

Strategic Planning with the Experience Curve Framework


Experience Curve is a technique that enables better strategic planning in business.

The experience curve states that the more often a task is performed the lower will be the cost of doing it. The task can be the production of any good or service. Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage.

Research by BCG in the 1970s observed experience curve effects for various industries that ranged from 10 to 25 percent.

Strategic Planning BCG Experience Curve

These effects are often expressed graphically. The curve is plotted with cumulative units produced on the horizontal axis and unit cost on the vertical axis. A curve that depicts a 15% cost reduction for every doubling of output is called an '85% experience curve,' indicating that unit costs drop to 85% of their original level.

Based on the experience curve, a business can achieve dominance within an industry by capitalizing on the effects of experience: increased activity leads to increased learning, which leads to lower costs, which can lead to lower prices, which can lead to increased market share, which can lead to increased profitability and market dominance.

One consequence of the experience curve effect is that cost savings should be passed on as price decreases rather than kept as profit margin increases. The BCG strategists felt that maintaining a relatively high price, although very profitable in the short run, spelled disaster for the strategy in the long run. They felt that it encouraged competitors to enter the market, triggering a steep price decline and a competitive shakeout. If prices were reduced as unit costs fell (due to experience curve effects), then competitive entry would be discouraged and one's market share maintained. Using this strategy, you could always stay one step ahead of new or existing rivals.


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