The first time you roll gimbap, a single roll takes more than 10 minutes and comes out lopsided. But after you have rolled a hundred or so, your hands move on their own and a neat roll comes out in a minute. The ingredients are the same, yet because time and mistakes shrink, the cost of each roll goes down too. The concept that shows this kind of change in numbers for companies is the ‘Experience Curve.’
Put simply, the experience curve means ‘the phenomenon in which the cost of making one unit falls by a fixed percentage every time the total amount produced so far doubles.’ It implies that the more a company has made, the more cheaply it can make things, and so it has long served as the basis for price competition and market share strategies.
In this piece we will look in turn at how the experience curve came about and why costs fall, the cases of automobiles and solar panels, and the limits this strategy runs into.
The Law of Costs That Fall the More You Make
What Is the Experience Curve?
The experience curve is a graph with cumulative production on the horizontal axis and the cost of one unit on the vertical axis. Costs drop steeply at first and then level off as production accumulates.
(1) A Discovery That Began in an Aircraft Factory
In 1936, Theodore Paul Wright, an engineer at the American aircraft company Curtiss-Wright, reported that every time the cumulative number of aircraft built doubled, the labor time needed to build one plane fell by about 20%. This rule is known as ‘Wright's Law,’ after him.
(2) A Curve That Became Business Strategy
In the 1960s, Bruce Henderson, founder of the Boston Consulting Group (BCG), found the same pattern not only in labor hours but in total costs, including management, marketing, and distribution. Analyzing semiconductor price data, he showed that real prices fell by about 25% every time cumulative experience doubled, and he named this the ‘experience curve.’ Henderson explained that the two concepts are related but quite different: whereas the learning curve deals mainly with workers' labor time, the experience curve deals with the costs of the company as a whole.
Why Costs Fall
The experience curve arises because the whole organization learns and refines itself while it repeats the same work. The factors that drive costs down can be divided into four broad groups.
- Labor Efficiency: Workers' hands get faster, and hesitation and mistakes decrease.
- Standardization: Parts and work procedures are unified, and tasks are divided among people to raise efficiency.
- Process Improvement: Better equipment and automation are brought in, and machines run without idle time.
- Product Redesign: Based on the experience of making the product, the number of parts is reduced or the design is changed to one that is easier to build.
(1) A Curve Named by a Number
BCG named each curve by the percentage of the original cost that remains when cumulative production doubles. If costs fall by 15% so that 85% remains, it is called an ‘85% experience curve.’ It varies by industry, but costs are generally known to fall by around 10–25% each time.
(2) Lower Costs Are Passed On as Lower Prices
BCG advised companies to cut prices as much as their costs fell. Holding on to high prices brings large profits for now, but those profits tend to draw competitors in, and prices can then collapse all at once. Cutting prices steadily makes it hard for new competitors to enter, and the larger market share builds up more experience, which lowers costs even further.
The Experience Curve in Practice
The experience curve is not just a graph in a textbook; it has been confirmed many times in the real history of industry.
[Case 1] The Ford Model T, Whose Price Kept Falling
Ford's Model T sold for $780 in 1910, but by 1924 its price had come down to $290. After Ford introduced the moving assembly line in 1913, the time needed to assemble one car fell from 12 hours and 30 minutes to 93 minutes. In 1914, Ford alone built more cars than all the other automakers combined. It is a classic example of a cycle in which prices fell as production grew, and sales grew as prices fell.
[Case 2] Solar Panels That Get Cheaper the More Are Installed
The price of solar panels has fallen by about 20% every time cumulative installations worldwide have doubled. This trend is called ‘Swanson's Law,’ after Richard Swanson, founder of the American solar company SunPower, and it is cited as a reason why solar power, once an expensive technology, has spread so widely.
The Limits of Experience Curve Strategy
BCG advised companies to expand market share quickly, since the company that makes the most first gains a cost advantage. The idea of exiting businesses with low market share and concentrating on businesses that can win also carried over into the BCG Matrix. But a strategy that looks only at costs has a clear pitfall.
(1) The Risk of Missing Change
In 1974, William Abernathy and Kenneth Wayne used Ford as an example in an article published in the Harvard Business Review. While Ford was focused solely on lowering the cost of the Model T, its competitors brought out a variety of colors, body styles, and convenience features, and after ending Model T production in 1927, Ford had to pay a heavy price to compete on quality and performance.
(2) When the Curve Breaks
When a new technology appears, the experience built up so far can lose its value all at once. In addition, the effects of experience and economies of scale are intertwined and hard to measure separately, and if every company uses the same strategy, it can turn into an endless price war.
The experience curve shows that repetition turns into skill, and skill turns into a cost advantage. Even while running along that curve, however, companies need to keep checking whether what customers want is changing.
Lowering costs through accumulated experience without missing the next change: that is the first step toward lasting competitiveness.
