The experience curve was the ultimate vindication of push institutions in a push economy. But the push economy is giving way to a pull economy as everything is less predictable
Posted on The Big Shift: April 2, 2009 4:47 PM
In the 1920s a group of analysts at a U.S. Air Force base outside Dayton, Ohio, were following an intriguing trend. Wright-Patterson AFB, where they worked, was the manufacturing center for a number of iconic World War I era airplanes—including the ninety horsepower Curtiss "Jenny" that a generation of barnstorming daredevils made famous after the war.
Examining the production data for the Jenny and other planes, these production managers noticed the amount of time it took to build a plane was declining by a certain percentage with each doubling in the cumulative units of aircraft produced. A variation of this learning curve had actually been first described by Hermann Ebbinghaus, a German psychologist, in the nineteenth century, who focused on the time required to memorize nonsense syllables. The Air Force analysis, however, was the first known effort to apply this concept to commercial activity. In subsequent years, other analysts identified products like semiconductors that seemed to follow a similar pattern.
Some forty years later, Bruce Henderson, a business strategist and the founder of Boston Consulting Group, led an effort to more systematically quantify this relationship across a broad range of products, including beer and toilet paper as well as machinery and industrial components. The relationship proved remarkably consistent, although the specific rate of performance improvement did vary, ranging anywhere from about 10% to 30% reduction in cost with each doubling in performance. Re-branding this concept as "the experience curve," BCG spelled out the wide-ranging implications of this relationship for business strategy, including the economic importance of market share and the opportunity to build balanced portfolios of business initiatives to more effectively leverage the economics of the experience curve.
The idea caught on in a big way among the large corporations that dominated our twentieth century push economy. Scalable efficiency soon became something of a secular religion, with the experience curve as its creed.
The experience curve was simple and powerful. But it had one troublesome characteristic. Every experience curve was in the end a diminishing returns curve. The more experience accumulated in a specific industry, the longer it took to get the next increment of performance improvement.
From the viewpoint of the institutional leaders of the time, this was not particularly worrisome. In fact, it had a calming effect. The more mature an industry became, the more difficult it became for new entrants to come into it. Experience effects led to stability. Institutional leaders could keep their leadership positions safe by continually getting bigger, continually reducing costs, and staying at the edge of performance improvement thereby.
Paradoxically, in the push economy, the edge, at least in the sense of a performance edge, was firmly entrenched in the core. No need to worry about smaller competitors out on the fringe—fringes were largely destined to become increasingly marginalized as operational scale trumped all else. Fringe players seeking to challenge core players faced a nearly insurmountable obstacle in their efforts to compete with the core—their best hope was to carve out a sustainable, but much smaller niche, where they could harness their own experience curve advantage. The experience curve was the ultimate vindication of push institutions in a push economy.
As for individuals, they had to integrate into institutions and adapt to the demands of push production systems if they wanted to be successful. Individual success came with institutional success but only if the individual played a carefully scripted role as one (usually tiny) gear in the overall machine. The man in the grey flannel suit and the unionized worker dreaming of early retirement became the role models for success. Retirement, when it finally arrived, was celebrated with the gift of a gold watch, a suitable symbol for the decades ticked away in dreary labor.
Having read our previous posts, you've seen us argue that the push economy is giving way to a pull economy as the big shift makes everything less predictable. Is the big shift creating opportunities to redefine performance curves and move from diminishing returns curves to increasing returns curves? Could the experience curve become less and less relevant in describing how business leaders create value? Our next posting wil explore these possibilities in more detail. Meanwhile, please let us know—in your observation and analysis, is the experience curve still the economic force it used to be? Where does it persist, and why? And where and why is it now less relevant?