BCG on Strategy: The Experience Curve – Part 2

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.

HIGHLIGHTS
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.

MY THOUGHTS
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.

BCG on Strategy: The Experience Curve Reviewed – Part 1

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 1973. In this chapter he builds off of the already familiar concept of learning curves to introduce the subject of experience curves. In short, experience curves demonstrate that the more experience you develop in a particular skill, the less the cost to perform.

HIGHLIGHTS
Henderson describes the learning curve as a somewhat familiar concept that was well-quantified in airplane factories during World War 2. Briefly, learning curve studies revealed that the rate of labor decrease was about 10 to 15% per doubling of experience.

With the experience curve, the effect is even more pronounced and impacts more than just labor costs. The BCG’s findings showed that every time volume doubles, costs (including labor costs, administration costs and more) fall by between 10 and 25%.

MY THOUGHTS
Since a growing experience base means lower costs, business owners who find their groove can benefit from competitive pricing and higher profitability.

So, here’s what your business should do: Get experienced! Formalize your processes into clear, distinct steps and turn them into habits so you can do them over and over. This will help drive down your costs while raising your productivity and, ultimately your profitability.

If you’re not sure how to do that, start by writing out your sales funnel and identifying those procedures and processes. Then, create a checklist as you perform your services or build your products.

Now that you have a big list of step-by-step procedures, just do them. Over and over and over and over. Yes, you should dial in some changes and innovation from time to time, your experience and productivity over time will make you more profitable.

BCG on strategy: Strategic and Natural Competition

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: STRATEGIC AND NATURAL COMPETITION
Boston Consulting Group’s Bruce Henderson wrote the chapter “Strategic and Natural Competition” in 1980. In it, he says that natural competition is an evolutionary force that most businesses (and the larger business environment) goes through over time. It is slow yet efficient. On the other hand, strategic competition is blazingly fast and very risky but can compel a considerable shift in the business environment. Strategic competition is a cataclysmic change to some aspect of your business to completely shift the competitive landscape in your favor. It’s a new business model, a massive repositioning, a new suite of services.

HIGHLIGHTS
Henderson outlines the basic elements of strategic competitiveness, and they include:

  • The ability to understand competitive interaction as a complete dynamic system that includes the interaction of competitors, customers, money, people, and resources.
  • The ability to use this understanding to predict the consequences of a given intervention in that system and how that intervention will result in new patterns of stable dynamic equilibrium.
  • The availability of uncommitted resources that can be dedicated to different uses and purposes in the present even though the dedication is permanent and the benefits will be deferred.
  • The willingness to deliberately act to make the commitment.

He goes on to write about the results of strategic competitiveness and how businesses not only create an entirely new dynamic in the business environment, but they have to sustain it against other competitors.

MY THOUGHTS
Natural competition is the easy way for businesses to operate. After all, there are plenty of other things that entrepreneurs need to do without devoting time and effort to strategic competition. But if your small business is going to be noticed — and become a marquee name — you need to stop letting evolution slowly transform your business and, instead, you need to influence the transformation yourself.

In the list above, Henderson gives a very clear step-by-step methodology for entrepreneurs to prepare to perform a strategic competition shift.

First, they must clearly analyze the business environment to see its current state and how all the “moving parts” work together. (Shameless self-promotion: My Business Diamond Framework(TM) is a useful tool for this).

Second, business owners need to carefully (and realistically) predict the outcome of their effort. This isn’t easy but also isn’t impossible. A consideration of the best case scenario, worst case scenario, and realistic scenario will help to give business owners a clear picture.

Third, business owners need to commit resources (money, people, time, effort, etc.) to this shift. If a strategic competition effort is in your future, start putting aside money right now and start thinking about how you can put a few minutes of time in each day to accomplish the shift.

Fourth, business owners need to act. This is probably the most challenging part because natural competition seems so easy while a strategic competition shift is so big and seemingly risky that it can seriously hurt the business if it is done wrong. Yet, as Henderson implies, although the risk is there, the reward is dramatically greater.

New series introduction – Boston Consulting Group On Strategy

I’m starting a new semi-regular series called “BCG On Strategy” in which I review one chapter in the book The Boston Consulting Group On Strategy: Classic Concepts and New Perspectives (2nd edition). It’s a compilation of writings by the Boston Consulting Group from 1968 through 2005.

My plan is to read one article each week. Believe me, these need a couple of readings to really sink your teeth into them! Then, on Thursday or Friday, I’ll blog about some highlights, talking points, reflections, and my own thoughts and ideas. I may not review every chapter (and, truthfully, I might not be able to do it every single week) but I’ll generally try to go through the book from front to back.

Stay tuned… the first one is coming later today!