Reasons for reducing unit costs can be, for example:
- Learning effects occur in the course of the extensive production
- Purchase prices for raw materials decrease as larger quantities are bought
- Rationalization measures become possible, processes can be simplified and accelerated
- Technical progress – some machines can only be acquired meaningfully if large quantities are produced. They may even manufacture their own machines.
Of course, there can be other reasons, but above all, reduced purchase prices, great learning effects and the resulting process optimization possibilities are the basis for reducing the costs per unit.
Relationship of the experience curve with the market share and market growth
If we now look at economies of scale in relation to market share and market growth , there is a certain chicken-and-egg problem. Companies with a high market share sell large quantities; accordingly, they can take advantage of the economies of scale, produce large quantities and keep unit costs low. Market leadership can be achieved through cost leadership . Of course, other factors, such as the quality produced, also play an important role.
Basically, however, the theory says that companies should enter markets where it is possible to increase the output volume quickly through high growth in order to reduce costs and thus become the market leader as far as possible . The low production costs are accordingly the central advantage that must be used to put your own company in a good position on the market.
Experience curve vs. learning curve – the difference
A small, fine detail still needs to be addressed to avoid confusion. Because there are crucial differences between the experience curve and the learning curve .
The learning curve focuses on the human factor . It says that the average cost of labor goes down when people do jobs repeatedly. Anyone who performs a certain activity particularly frequently is always better at it, is faster and costs are reduced accordingly.
The experience curve, on the other hand, is not limited to the human factor, but rather addresses the total unit costs. The focus here is on the manufacturing costs per piece and on the production of goods .
However, both curves can be viewed together. An example of this would be if a manufacturing company still does some manual work. Through the experience of the employees, they develop a certain learning curve. These learning effects in turn help the experience curve to develop in accordance with the theory. These learning effects are therefore one of several influencing factors that are reflected in the experience curve.
Criticism of the experience curve
The main point of criticism of the experience curve is that it cannot be distinguished from the scaling effect described separately in science. The economies of scale always go hand in hand with the experience curve. It can be said that other factors are taken into account in the experience curve, but the difference is actually only very subtle. In other words, it could be said that the experience curve appears to be a result of economies of scale, supplemented by a few details.
This fact is not a systematic weakness, since the experience curve demonstrably exists, but rather criticism in the scientific field. It is possible that the terms that describe a similar effect, but are very different, sometimes cause confusion.
It should also be noted that the development of the experience curve can vary depending on the industry and company . Companies must also ensure that the effects of the experience curve are incorporated as intensively as possible. Otherwise it can happen that there is potential for optimization and savings , but nobody in the company is actively taking care of this potential. Think, for example, of situations in which it is said that processes are not changed because something has always been done that way. These are precisely those activities in which the experience curve might already take hold, but human resistance to change available. Accordingly, there is always personal responsibility to actually realize and use the experience curve in the company.
In sum, the experience curve is an effect that is easy to understand. The key message that costs can be reduced by significantly increasing the quantity is obvious. It is crucial that you are aware of this, because only with this knowledge can you specifically look for opportunities for improvement in your company. Therefore, check whether the number of pieces can be increased in production and calculate what effects this could have. To do this, you can very pragmatically request correspondingly high quantities of raw material from your suppliers to find out what leeway there would be. Also changing processes you can simulate it by considering what the new processes would have to look like if the amount could be increased accordingly.
It is therefore important that you know the model of the experience curve and are aware that the degression of costs exists. How exactly you use these opportunities in your company is now up to you. What is certain is that you gain a competitive advantage with every cost reduction, as you can offer your products more cheaply or your margin is increased.