Experience Curve

Building Strategy on the Experience CurveExperience curve refers to the systematic decrease in production costs that occur over the life of a product. Learning effects and economies of scale lie behind the experience curve and moving down that curve allows a company to lower the costs. A company that moves down the experience curve more quickly will have a cost advantage over its competitors.

Most of the sources of experience-based cost economies are generally found at the plant level. Dispersing the fixed costs of building productive capacity over a large output reduces the cost of producing a product. Hence the answer to riding down the experience curve as rapidly as possible is to increase the accumulated volume produced by a plant as quickly as possible.

Global markets are larger than domestic markets and, therefore, companies that serve a global market from a single location are likely to build up accumulated volume faster than companies that focus primarily on serving their home market or on serving multiple markets from multiple production locations.