Diagnosing the Experience Curve

Diagnosing the Experience Curve

By George S. Day, David Bruce Montgomery
1982Working Paper No. 641

Few strategy concepts have gained wider acceptance than the notion underlying the experience curve, that real unit costs decline systematically with increases in cumulative volume. The logic is appealing, the empirical support seems persuasive and the strategic implications are often profound. Yet despite these advantages, acceptance is waning. The application problems were always formidable, but now there is a growing suspicion that some of the key strategic implications may be delusions (Kiechel 1981). The purpose of this paper is to evaluate progress in overcoming the application problems, as a basis for diagnosing the strategic relevance of this concept. Before turning to these issues, we will first review the concept and the supporting empirical evidenceTHE CONCEPT OF THE EXPERIENCE CURVEThe antecedent of the experience curve is the production learning curve, first observed in the 1930's as a systematic decline in the number of labor hours required to produce an airplane (Yelle 1979). It was only in the mid-1960's that the notion of the learning curve was generalized by the Boston Consulting Group (1972) to encompass the behavior of all value-added costs and prices as cumulative volume or experience increases.