In this BCG On Strategy series, I go chapter-by-chapter through the book: The Boston Consulting Group On Strategy: Classic Concepts and New Perspectives (2nd edition). Join me each week for BCG On Strategy at AaronHoos.com.
OVERVIEW: THE EXPERIENCE CURVE REVIEWED
Bruce Henderson wrote this chapter in 1974. In this chapter he continues with his line of thinking about the experience curve and its potentially positive cost-saving impact on businesses.
Henderson writes that there are 4 factors that contribute to the experience curve: Learning, specialization, investment, and scale. Briefly…
- Learning to do the job better (whether it’s a small task or a larger business function) will help to speed up productivity by as much as 10% to 15% every time total output is doubled. This is the well-known learning curve.
- Specialization, which occurs when you narrow your focus on specific tasks, can also improve productivity — increasing output by another 10% to 15% every time total output is doubled. I suspect some of this was also apparent in the earliest studies of learning curves, and it’s one of the reasons why Ford was an early success in automobile manufacturing.
- Investment is a little more difficult to understand and there isn’t a specific percentage that Henderson ties to investment’s impact on the experience curve. He writes, “Return on investment does result in cost reduction. Without investment, capacity increase cannot occur and neither can cost reduction at constant capacity.”
- Scale, the addition of capacity (“scaling up”), is Henderson’s fourth contribution to experience curves. Henderson writes that in process industries, “an increase of 52 percent in capital cost [will] provide a 100 percent increase in capacity.” Here’s an example (adapted from Henderson): If your company spends $100 to produce 100 widgets, you can scale up with a total capital cost investment of $152 (your previous $100 plus another $52) to produce 200 widgets.
These four factors that contribute to the experience curve are good to know and important to implement in business. Unfortunately, entrepreneurs and small business owners can’t always afford the additional funds required to invest and scale. If they can’t get some additional funds (i.e. through a loan or through investors) those factors may be unavailable to them.
Fortunately, two other factors cost less up-front while still being able to provide dramatic cost savings (which could fund investment and scaling up in the future): Learning and specialization allow the business owner to get better and faster at what he or she does without having to spend more than they are already spending.
So, if you want to reduce costs and improve output, the fastest, cheapest way to do it is by learning everything you can about what you do and then breaking your work down into discrete units and learning to do each one better.