Robinson, Ced ic G.
A icle
Expe ience cu es as a planning ool. Pa 2. Py hic
ic o ies and p ac ical p oblems
Sou h A ican Jou nal o Business Managemen
P o ided in Coope a ion wi h:
Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica
Sugges ed Ci a ion: Robinson, Ced ic G. (1982) : Expe ience cu es as a planning ool. Pa 2. Py hic
ic o ies and p ac ical p oblems, Sou h A ican Jou nal o Business Managemen , ISSN 2078-5976,
A ican Online Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 13, Iss. 4, pp. 159-168,
h ps://doi.o g/10.4102/sajbm. 13i4.1193
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/217811
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Expe ience
cu es
as
a
planning
ool.
1
Pa
2.
Py hic
ic o ies
and
p ac ical
p oblems
Ced ic
G an
Robinson
School o Business Leade ship, Uni e si y o Sou h A ica
S a egies based on he expe ience cu e e ec equi e ha
p eda o y p ice cu ing leads o enhanced ma ke sha e and
an
inc easingly compe i i e cos s uc u e
is-a- is
he com-
pe i ion.
The
company ha ides he expe ience cu e o he
bank has cos ad an ages, p icing disc e ion and eaps hand-
some
p o i s. Co po a e g a eya ds a e li e ed wi h he
co pses o companies who ha e adop ed oo nai e
an
app oach o, and oo
simplis ic
an accep ance o , he
concep s i s pionee ed by he Bos on Consul ing G oup.
This, he second
o
wo
a icles
on
he expe ience cu e,
highligh s py hic ic o ies in he ques o ma ke sha e and
asks six key ques ions ha need o
be
answe ed be o e
adop ing
an
expe ience-d i en s a egy. Likewise
12
p oblem
a eas
in he applica ion
o
his app oach a e iden i ied.
S.
A .
J.
Bus. Mgm . 1982,
13:
159-168
'n
Voo e eis e i s a egiee gebasee op die e a ingsku we-
e ek is da oo sug ige p yssnye y wel lei
o
e g o e
ma kaandeel
en
'n oenemend mee mededingende
kos es uk uu eenoo die an die mededinge s. Die maa -
skappy wa olle oo deel
ui
die e a ingsku we ek, he
kos e oo dele, disk esie oo p ys ass elling
en
maak
in-
d ukwekkende wins e. Die 'beg aa plase'
an
die sakewl! eld
he
in onlangse ja e heelwa g a e bygek y
an
maa skappye
wa onde gegaan he weens 'n e na'iewe benade ing eenoo ,
en
'n
e simplis iese aan aa ding
an
die konsep e wa deu
die Bos on Consul ing G oup oo ges el is. Hie die a ikel,
die
weede
an
wee a ikels oa die e a ingsku we, es ig
die
aandag op duu gekoop e skynoo winnings in die s yd om
ma kaandeel
en
s el ses sleu el ae wa bean woo d moe
wo d
oo da 'n maa skappy hul s a egie op die
e a-
ingsku we basee . Twaal p obleema eas in die oepassing
an
hie die benade ing wo d ook ge'iden i isee .
S.·A . Tydsk . Bed y sl. 1982, 13:
159-168
Second
in a se ies
o
wo
a icles
C.G,
Robinson
School
o
Business Leade ship, Uni e si y
o
Sou h A ica, P.O. Box 392,
P e o ia 0001, Republic
o
Sou h A ica
Recei ed
Ap il
1982;
accep ed May
1982
S a egies based
on
he expe ience cu e e ec a e immensely
appealing o manage s. The key o se ing s a egy
is
s a egic
ma ke segmen a ion ollowed by p eda o y p ice cu ing
o c ea e ba ie s o en y, o gain ma ke sha e and he eby
o dec ease cos s. Lowe cos s gene a e enhanced ma gins
and
keep compe i o s a bay. The company ha ides he
expe ience cu e o he bank domina es he chosen ma ke
segmen , has cos ad an ages and p icing disc e ion
and
eaps handsome p o i s, pa icula ly
on
indus y ma u i y.
The e
is
e idence ha a simplis ic accep ance
o
he ex-
pe ience cu e as a s a egic ool wi hou conside a ion
o
a numbe
o
key ques ions may be suicidal. This does no
nega e he use
o
he expe ience cu e, bu a he cau ions
agains he nai e accep ance
o
expe ience cu e s a egies.
Conside some
o
he e idence.
Py hic
ic o ies
in
he
ques
o
ma ke
sha e
In
1972
Texas Ins umen s cu he p ice
o
calcula o s by
42"7o.
They con e ed he slide ule business in o he silicon
chip business and gained o e
65D/o
o
he ma ke by 1978.
In 1974 Black and Decke cu hei p ices by
361170
in all
domes ic ma ke s o he mains eam chain saw business.
This ga e hem a ma ke sha e jump
o
20
poin s and a com-
manding lead in he
US
ma ke .2 In
1975
Black and Decke 's
majo compe i o s cu hei p ices
280/o
and began a long
ha d climb owa ds losing hei shi s agains Black
and
Decke . In
1976
a well-known
$3
billion u no e pape p o-
duc s company cu p ices o gain ma ke sha e. Fou yea s
la e hey we e s ill engaged in a uinous p ice wa which
was e mina ed by he
1979
-
80
ecession and hei demise. 2
A li le sel es ain could be an admi able hing. The e
a e imes when managemen should pu he ceiling
o
ealism
on
i s ambi ions when a h us o a la ge piece
o
he ac-
ion could spell disas e .
Al hough ROI
is
closely ela ed o ma ke sha e,3 com-
panies some imes launch campaigns o building ma ke
sha e wi hou g ea o esigh .
Six
key ques ions appea
o
be c i ical:
Does he expe ience cu e apply?
Does he company ha e he inancial esou ces?4
Will he company's s a egic posi ion emain iable
i
hwa ed?4
Will egula o y au ho i ies pe mi he company
o
n,-hi
..
..
i ,;: ohiec i e?4
160
Do
ade
and
a i
ba ie s con use he pic u e?
A e he s a egic cos implica ions changing?
The expe iences
o
a numbe
o
companies, in sepa a e
indus ies, ha ough disas ously
o
inc ease hei ma ke
sha es illus a es he poin .4
Does
he expe ience cu e apply?
The expe ience e ec
is
no a law
o
na u e. I
is
mo e akin
o a s a is ical law o any gi en company in
an
indus y.
I exis s, i i exis s,
o
can be made o occu . This sounds
a no e
o
wa ning. Sla ish belie in he exis ence
o
an
ex-
pe ience e ec can be ill- ounded.5 Conside he e ec
o
a p ice cu which
is
no
ollowed by a gain in ma ke sha e
o ,
i
a gain occu s, no cos bene i s a e ealized by he added
olumes. The e ec ,
i
demand elas ici y
is
less han one,
o
i
wo king capi al equi emen s a e g ea ,
is
a
d op
in
ma gin accompanied by a subs an ial
d op
in p o i abili y
o no eal long- e m gain.
The e ec can be
o
d ain p o i s o no long- e m
s a egic bene i . Be o e emba king
on
p eda o y p ice cu -
ing in ques s o ma ke sha e, i
is
wise o analyse indus y
and co po a e cos pa e ns o see
i
an
expe ience cu e e -
ec does in ac apply.
Smalle economies han
ha
o
he Uni ed S a es, pa -
icula ly hose
o
de eloping na ions, o en eso
o
o ms
o
a i
p o ec ion o assis he de elopmen
o
ledgling
indus ies. No de ini i e wo k appea s
o
ha e been
done
on
companies wi hin such economies,
bu
i seems p uden
no o bli hely assume he exis ence
o
expe ience e ec s
unless hey can be p o ed o exis .
This aises a seconda y p oblem o hose in cha ge
o
public policy o a de eloping na ion.
I
an
expe ience e -
ec does exis ou side
o
he bounda ies a o ded by p o-
ec ion, he p o ec ion does no o e su icien suppo
o
local companies in he e en
o
he a i ba ie being d op-
ped. The local company canno compe e in e na ionally
because:
cos s will
no
ha e been agg essi ely managed
downwa ds due
o
he p o ec i e umb ella,
o
he small size
o
local e hnic ma ke s may ha e p eclud-
ed he abili y
o
he local company
o
gain by d op-
ping ma ginal cos due
o
low cumula i e olumes.
Does
he company
ha e
he inancial esou ces?
Du ing Sep embe 1970 Gene al Elec ic's s udies indica ed
ha
i equi ed a
150/o
sha e
o
he main ame compu e
ma ke
i
he company we e
o
become compe i i e in he
indus y.2•6
A
abou
he same ime,
RCA
concluded
ha
i needed a
IOOJo
sha e
o
he main ame compu e ma ke
and
commi ed i sel , publicly,
o
mee ing
ha
goal by he
mid 1970s.2•7
Modes as hey seemed when ela ed o indus y s andings
(IBM
690/o
o
he ma ke ,
GE
40/o,
RCA
3,2,0Jo)
hese a ge s
ep esen ed mo e han a
2000/o
g ow h in sha e in a high
g ow h ma ke .2 Bo h companies decided, in he ligh
o
po en ial an i- us egula ions,
ha
expansion would be by
means
o
in e nal g ow h a he
han
ha
o
acquisi ion.
8
F uhan
4 poin s
ou
ha
in his indus y ope a ions equi e
la ge
amoun s
o
wo king capi al as compu e ma ke ing
is
by way
o
leased equipmen .
In
1969 IBM equi ed $5,9
S.-A .
Tydsk . Bed y sl.
1982,
13
(4)
billion o suppo shipmen s
o $4,95
billion sugges ing
abou
$1,20
o
capi al o each $1,00
o
shipmen s. Fo
RCA,
his
mean
ha
o
g ow
ma ke
sha e om
3,20/o
o
IO%
o e
i e yea s equi ed
$1
334 million in capi al wi h
yea ly
amoun s
o
new capi al ising om $95 million o
$475
million. Simila ly
GE
would ha e equi ed
$2
076
million
ising om $138 million
o
$785 million in he inal
s ages.4
Wi h
RCA
and
GE's
espec i e co po a e p o i s
being
$151
million and $357 million in 1969, wi h di idend
payou s
o
$68 million
and
$235 million,
and
deb equi y
a ios
o
0,45
and
0,27,
he
o al
capi al gene a ion po en ial o
each
company was only $120 million and $135 million a e
le e -
ing e ained equi y
up
wi h deb .
In
addi ion, in
1%9
he
compu e
di ision e enues accoun ed o less han
IO%
o
he o al
co po a e
e enues in
bo h
companies.
The
implica ions we e
ha
ei he he deb equi y
a ios,
al eady high by IBM
s anda ds,
would ha e o
be
aised
sha ply,
o
equi y should be
ob ained
by bo h
companies
h ough secu i ies ma ke s
a
lowe p ice ea nings a ios
han
IBM be o e ei he
company
could come close o
achie ing
hei g ow h objec i es.
The
ma ke
sha e aspi a ions
e-
qui ed capi al commi men s beyond he co po a e
capi al
gene a ing abili y
o
ei he company.
Bo h
GE
and
RCA
acknowledged in 1970 and
1971
ha
nei he could ma shal
he
esou ces
o
achie e a
ma ginal
ma ke sha e in he compu e indus y a
an
accep able
cos .
They qui he a ena.
Be o e emba king
on
a
ma ke
sha e inc easing s a egy
i
is
p uden
o
calcula e explici ly he cash low and capi al
equi emen s equi ed
o
gain
and
hold ma ke sha e. A
se
o
p o
o ma p ojec ions o he en isaged ime ho izon
will
indica e whe he he s a egic a ge
is
easible o
e en
desi able. Abell
and
Hammond
9
·P·
116 poin
ou
ha o
g ow
sha e om
60/o
in
he
ace
o
an
indus y leade wi h
240Jo
in
an
indus y g owing
a
80/o
pe
annum
equi es a
com-
pound g ow h a e
o
260/o
pe
annum
o nine yea s o
ca ch
up
o
he leade . I implies g ow h
a
h ee imes indus y
le els
and
a sales
and
capaci y expansion
o
6400/o.
The
impo an
ques ions a e:
Wha
a e
he equi emen s o cash low and capi al
unding o
bo h
ixed
and
wo king capi al?
Wha
a e
he explici mechanics o gaining ma ke
sha e?
The
expe ience model as a ame model 10
ad-
oca es gains in
ma ke
sha e,
bu
o e s li le ad ice
on
how
o
ope a ionalize
g ow h
e o .
The
ollowing ques ions mus be answe ed:
A
whose expense will sha e be gained?
Wha
a e
he likely s a egic compe i i e eac ions?
Will he e be a clea cu ad an age associa ed
wi h
ma ke dominance se e al yea s down he line?
Will he company's s a egic posi ion emain
iable
i hwa ed?
The
issue he e
is
i
he
company
is hwa ed en ou e in a
ques o
ma ke
sha e,
he
s a egic posi ion
o
he com-
pany
may
become un enable. In
Food
Re ailing he
US
Fede al
T ade
Commission
ound
a high co ela ion
be-
ween he p o i con ibu ion
o
chain s o es in a
gi en
geog aphic a ea
and
he ma ke sha e in he same a ea.
This
means ha he p o i abili y
o
a chain
o
g oce y e ail s o es
s.
A . J. Bus. Mgm . 1982,
13(4)
depends no on he na ional ma ke sha e, bu a he on
he
weigh ed a e age
o
i s ela i e ma ke sha es
in
a ious
ci y
ma ke a eas in which i pa icipa es, as can be seen in
Figu e
1.
8,0 -
ai
6,9
ii
7,0
en
~
-
0
6,0
5,9 6,0
-
-
0
ii.
4,9
Q) 5,0
iii
0 -
4,3
a. -
0
u 4,0
B
C
.Q
45
3,0
:g
c
~
2,1
0 -
u 2,0
Q)
..
CII
Ill
cii
>
<
1,0
0,2
-
5%
10% 15% 20% 25%
4,9% o o o o o 35%
9,9% 14,9% 19,9% 24,9% 34,9%
Ma ke
Sha e (Pe cen )
Figu e
1 Ma ke sha e e sus s o e con ibu ion o co po a e p o i
by
g oups
o
ci ies4
Du ing
1948
-
58
many US chains mo ed owa d consoli-
da ion. The mos ac i e acqui e , Na ional Tea, e ed by
going o na ional geog aphic ma ke sha e a he han o
sha e in speci ic me opoli an ma ke s. As he las
o
he
independen s we e being me ged in o he compe i i e chains,
he Fede al T ade Commission was aking decisi e ac ion
o s op consolida ion by blocking u u e indus y me ge s.
11
As
a consequence Na ional Tea could no y o dominance
o
ci y geog aphic segmen s
and
has a conside ably lowe
ROI
han Winn-Dixie who a e dominan in he Sou heas
USA. This e oneous oehold s a egy illus a es bo h he
need o pay ca e ul a en ion o s a egic ma ke segmen a-
ion, and he need o ensu e ha an expe ience cu e eally
does apply in he pa icula si ua ion. I also illus a es he
dange in ge ing s opped hal -way in a ques o ma ke
sha e.
Will egula o y au ho i ies pe mi he company o
achie e i s objec i e?
Regula o y bodies may abo he ques o ma ke sha e o
a ious easons, especially o an i-monopoly easons
o
o
p e en s a egic dependence
on
a single majo supplie .
F uhan poin s ou ha in making a el plans cus ome s
ini ially con ac he ai ca ie which hey belie e has he
mos daily ligh s
o
hei des ina ion.4 Thus, analogous o
he alloca ion
o
shel space in a supe ma ke , high ligh
equencies imply g ea e ma ke sha e and highe load ac-
161
o s pe ip and hence lowe cos s pe passenge mile and
highe ma gins. The mino i y ca ie s should ope a e
a
a
signi ican loss. The ai ca ie wi h su icien inancial
esou ces o pu chase ex a ai c a and
ly
highe equen-
cies
on a pa icula in e ci y ou e should achie e he
bene i s
o
expe ience e ec s.
In p ac ice his does no always occu
in
he Uni ed S a es
as he Ci il Ae onau ics Boa d (CAB) ends o in luence
ma ke sha es and ela i e p o i abili y
o
US
domes ic unk
ai ca ie s. This
is
achie ed bo h
by
wi hholding
o
g an-
ing licences o any in e ci y ma ke , and by egula ing he
numbe
o
ca ie s compe ing
on
he ou e. Hence he CAB
exe cised emendous powe o e he ela i e p o i abili y
o
he a ious ai lines and
in
ac he big ou , Ame ican,
Eas e n, T ans Wo ld and Uni ed a e less p o i able han
he se en smalle
US
ca ie s. This, howe e , does no seem
o ha e blun ed he majo s' appe i e o waging expensi e
capaci y wa s
in
a no-win en i onmen .
I
seems wise, p io o going all ou o ma ke sha e, o
check whe he any legal, social, e hical o poli ical obs acles
may
lie
ahead. Such obs acles may p e en he gaining
o
ma ke sha e,
o
may o ce companies o incu such cos s
ha any expe ience bene i s a e nega ed.
Do
ade and a i ba ie s con use he pic u e?
In economies less compe i i e han he Uni ed S a es, in-
e en ion agains ques s o subs an ial ma ke sha e e-
quen ly occu s. Me ge s
o
akeo e s can be blocked o
an i- us easons
o
o p e en s a egic na ional dependence
on a majo supplie , pa icula ly i he supplie
is
a sub-
sidia y
o
a mul i-na ional.
A sage piece
o
ad ice, o en gi en by s a
o
he S a egic
Planning Ins i u e o clien s wi h ma ke sha es app oxi-
ma ing 100%,
is
o cul i a e a small docile and appa en ly
independen compe i o o suppo p ices. F equen ly he
la ge dominan compe i o has o
gi e
away expe ience cu e
gains
so
as no o suppo a p ice umb ella which in i es
compe i i e en y
o
ac ion by he hos go e nmen .
A e
he s a egic cos implica ions changed?
Al hough hey ha e achie ed ame mainly owing o hei
wo k on he expe ience cu e e ec and hei g ow h sha e
ma ix, discussed la e , he Bos on Consul ing G oup has
also done excellen wo k in he a ea
o
s a egic cos ing
associa ed wi h he expe ience e ec . This has no achie ed
such widesp ead publici y. The expe ience e ec o any
gi en company ope a es only on he company's con ibu-
ion o he p oduc and
is
applicable o he alue-added com-
ponen
o
o al cos . (Cos
o
goods sold minus cos
o
aw
ma e ials, including ene gy, bough in.)
I ,
o easons
o
simplici y, expe ience e ec s a e being analysed using sel-
ling p ices, he expe ience cu e ope a es
on
he alue ad-
ded componen in e ms
o
selling p ice minus cos
o
aw
ma e ials.
I
includes ha alue added con ibu ion due
o
p o i , he alue added by he ma ke place.
I ,
as ad oca ed
by he Bos on Consul ing G oup, ma ginal p icing
is
used
and no p ice umb ella
is
sus ained, he p ice and cos cu es
ollow simila pa e ns.
This means ha o a gi en p oduc a numbe
o
ex-
.
pe ience e ec s, o en sha ed wi h o he p oduc lines,
162
some imes un ela ed, can ope a e. This
can
ha e a p o ound
e ec on he op imum s a egy
o
he mos inno a i e and
success ul numbe
o
a complex p oduc chain.
This has occu ed in he wa ch indus y. The classic Swiss
wa ch was he handc a ed p oduc
o
a illage indus y.
A e e ol ing h ough a numbe
o
p o o ypes, he
clockwo k iming and mechanical sp ing mechanism we e
in ecen yea s eplaced by solid s a e componen s and elec-
ical s o age de ices. Ini ially qui e cos ly, and o ming a
la ge pa
o
he cos
o
a wa ch, he semiconduc o com-
ponen s ha e sped down an expe ience cu e ou s ipping
he o he cos componen s o such an ex en ha semi-
conduc o componen cos s a e no longe
o
majo impo -
ance in he p oduc ion and ma ke ing
o
wa ches. This has
led o Texas Ins umen s, a ho a ou i e
in
he s akes o
wa ch indus y dominance because
o
hei compe ence in
semiconduc o s, exi ing he indus y in he ealiza ion ha
success
will
depend mo e on design and dis ibu ion han
on expe ience e ec s applied o one
o
he mino , once ma-
jo , cos componen s.
Elec onic calcula o s, which in he space
o
a
ew
yea s
ha e been ans o med om expensi e luxu ies o e e y-day
i ems, p o ide a good example
o
he s a egic impac
o
changing cos pa e ns. The e en s in he calcula o ma ke
illus a e he need o manage s o eally unde s and he
dynamics
o
expe ience cu e cos educ ion and i s e ec
on s a egy and hei abili y o emain compe i i e. Table
I p esen s a simpli ied his o y
o
he de elopmen
o
solid
s a e elec onic calcula o s up o 1975.
12
Table 1 His o y o solid s a e elec onic calcula o s
up o
1975
Majo cos Dominan
elemen s compe i o s
Phase I Semiconduc o s Ame icans,
( disc e e de ices) e.g. Wang
Phase 2 Assembly Japanese
Sha p, Casio
Phase 3 In eg a ed Ame icans,
ci cui s e.g. Texas Ins umen s
Phase 4 Assembly and Un esol ed
dis ibu ion Tesco, Woolwo hs, Boo s
In he ea ly days he majo cos componen s we e he
disc e e semiconduc o de ices such as ansis o s and
diodes. Leading compe i o s we e based in he USA close
o he sou ce
o
solid s a e componen s and echnology. The
calcula o s we e expensi e and he ma ke was limi ed
o
a
ew
applica ions o which hey we e cos e ec i e.
Rapid ma ke g ow h occu ed. The ma ke o solid s a e
diodes expanded a mo e han
500Jo
pe annum du ing he
ea ly and mid 1960s. Rapid expe ience-based cos and p ice
declines occu ed. The p ice
o
an a e age ge manium diode
ell
by
a ac o
o
7 in eal e ms be ween
1960
and
1965.
The main cos componen soon became ha
o
he labou
equi ed o assemble he calcula o , and he compe i i e ad-
an age passed o he Japanese who assumed i ual con-
ol
o
he ma ke by he end
o
he decade.
S.-A . Tydsk . Bed y sl.
1982,
IJ(
4)
Cos s con inued o decline and he ma ke became
so
la ge
and a ac i e ha he Ame ican semiconduc o
manu ac.
u e s hemsel es en e ed he ma ke . Thei s a egy
was
o
use la ge-scale in eg a ed ci cui s (LSI). The
LSI
chips
made
many assembly ope a ions edundan and Texas
Ins umen s
se ou o domina e he indus y.
Calcula o s we e now a consume i em. The
consume
calcula o ma ke had expanded om only 2 million
uni s
in
1972
o 20 million uni s
in
1974. P ices
d opped
d ama ically bo h as a esul
o
expe ience-based
gains
and
a shakeou due o compe i ion o ma ke sha e.
The
shakeou
is
no ye comple e.
The cos s uc u e
is
again changing wi h he
in eg a ed
ci cui s and displays becoming a smalle pa
o
he
o al
cos . Labou cos s a e again becoming impo an .
This
im-
plies a e u n
o
compe i i e edge o low labou cos
coun-
ies, o o highly au oma ed cos -e ec i e mass
p oduc ion
in ad anced coun ies. The dis ibu ion cos s ha e
become
a signi ican cos componen now ha calcula o s
a e
so
cheap. The leading compe i o s
o
he u u e may
e y
well
be hose wi h he bes dis ibu ion channels and
mass
me -
chandising ou le s.
Wi h p ices declining mo e apidly han cos s many
p o-
duce s mus be squeezed, and Texas Ins umen s
is
p epa ed
o ole a e hea y losses
o
e ain he ma ke .
A equen e-analysis
is
essen ial in an expe ience
cu e
d i en indus y o see i he cos componen s upon
which
ea ly s a egies we e based a e s ill
o
s a egic
signi icance.
The e
is
a pa icula dange ha success ul candida es
may
be lulled in o a s a e
o
alse secu i y.
P ac ical p oblems wi h applying he
expe ience
e ec
Al hough he use
o
expe ience cu es
is
in ui i ely
appeal-
ing as a s a egic planning ool, a numbe
o
p oblems
in
applica ion can a ise. Some may be o e come easily,
o he s
a e no . Twel e basic p oblem a eas appea o
exis :
The ma ke de ini ion p oblem
Analysing cos beha iou pa e ns
The e ec
o
economic cycles
Fo eign exchange a ia ions
The ime span o analysis
The choice
o
uni
o
analysis
Sepa a ing ou cos componen s
The e ec
o
sha ed expe ience
Analysing cos componen s o compe i o s
The issue
o
e ec i eness e sus e iciency
P oblems in o ganiza ion
P oblems in mo i a ion.
Many
o
he issues a e in e linked
o
one ano he , o
a e
mani es a ions
o
unde lying p oblems
in
he
s a egic
p ocess.
The ma ke de lni ion p oblem
The p oblem
o
accu a ely de ining he ma ke
is
such
an
ubiqui ous one ha a ull book can be de o ed o he
issues
in ol ed.
I
mani es s i sel in he expe ience con ex
e en
hough he use
o
expe ience cu e s a egies does
no
e-
qui e a de ini i e measu e
o
ma ke sha e o a
gi en
p oduc .

s.
A . J. Bus. Mgm . 1982,
13(4)
The expe ience e ec elies
on
cumula i e p oduc ion
olume
o
a p oduc o d i e cos s down he expe ience
cu e. This depends on accu a ely de ining wha
is
a p o-
duc and i s associa ed ma ke . Fo example, piping comes
in
di e en ma e ials
o
di e en sizes and p ope ies o
di e en uses. n ying o analyse cos beha iou pa e ns,
decisions ha e o be made as o wha cons i u es a gi en p o-
duc
in
o de o alloca e o e heads (a p oblem discussed
la e ), and as o wha cons i u es a gi en ma ke o analysis
o
.compe i o s and onesel in con ex . Technology ans e .
be ween ela ed ma ke s gi es ise o sha ed e ec s wi h
ega d o expe ience.
Al hough he ma ke de ini ion p oblem
is
no made
ex-
. plici in se ing s a egy based on he expe ience e ec , i
mus be esol ed soone
o
la e o enable he s a egis o
assess he impac
o
sha ed expe ience, and o decide on he
co ec alloca ion
o
co po a e o e head.
Analysing cos beha iou pa e ns
The·analysis
o
cos beha iou pa e ns
is
complica ed
by
ou issues:
he e ec
o
in la ion,
he ac ha cos s a e compa ed wi h expe ience, and
no ime,
he di icul y in ob aining accu a e in o ma ion,
he join o e head cos alloca ion p oblem.
The essence
o
he expe ience cu e
is
ha cos s exp ess-
ed
in
eal e ms co ec ed o in la ion decline in a-p edi~-
able way as expe ience
is
accumula ed. The e ec s
o
in-
la ion a e el in se e al ways. Fi .s ly, inpu cos s, because
o
a i hme ic, a ec he alue added componen , pa icula ly
i p ice, no p oduc cos ,
is
being used as a su oga e
a iable. Cos s do no mo e smoo hly and adjus men s;
when
hey occu , ake he o m
o
s ep changes, hus dis o -
ing he cos pic u e.
Secondly, because he expe ience cu e depends on eal
cos s, he e
is
he p oblem
o
he choice
o
de la o . Should
i
be na ional, and i so which one; o should i be a
sec-
o al de la o ? The Bos on Consul ing G oup a e qui e
de ini i e
on
he non-use
o
sec o al de la o s which hey
claim may hemsel es ei he ha e an expe ience cu e e -
ec ela ed o he indus y conce ned o , i he p oduc
is
a la ge inpu in o
an
indus y index, may ac ually implici ly
inco po a e he expe ience e ec s unde analysis. On he
choice
o
which na ional index, he e appea s no eal
guidance o he han he use
o
he consume p ice index by
de aul . Since indices a e man-made and subjec o e o s
in concep ual design, i may be wise o ou inely
see
i
any
e ec s a e implici in he choice
o
any gi en de la o .
The expe ience e ec
is
a ela ionship be ween cos s and
cumula ed expe ience, no ime. This means ha manage s
o
ma u e p oduc s wi h la ge cumula i e p oduc ion may
no obse e dec eases in cos o e sho ime spans
e en
a e
in la ion has been compensa ed o . I annual olume g ows
a a cons an a e, expe ience accumula es a a slowe and
slowe a e wi h espec o ime. Fo example, o a
new
p oduc g owing a
200'/o
pe annum, expe ience doubles in
less
han wo yea s om s a
o
p oduc ion (100 uni s in
yea
l,
120
in yea 2, o al 220). In jus 5 yea s 3 mon hs,
cumula i e p oduc ion
will
ha e gone up by a ac o
o
eigh ,
163
bu
i
will
ake an addi ional 2 yea s 7 mon hs o double
again. On a
700'/o
expe ience cu e, a cos educ ion
o
300'/o
is
achie ed be ween he end
o
yea one and yea wo, ye
i
akes om ea ly in he i h yea o close o he end
o
he se en h yea o achie e an equi alen
300 o
educ ion.
The ac ual collec ion
o
company cos in o ma ion
is
o en
e y di icul o a numbe
o
easons. Fi s ly, cos s o a
numbe
o
p oduc lines may ha e been collec ed on an ab-
so p ion a h~ han a di ec cos ing basis. One needs o ind
some means
o
e-alloca ing cos s ela ed o uni s p oduc-
ed, a he han wi h ega d o di isional e o , such as
ma ke ing o esea ch and de elopmen . Secondly, e en
ho1,1gh
a o m
o
di ec cos ing may ha e been used, alloca-
ion
o
join o e heads
is
o en no made on a basis com-
mensu a e wi h he ac ual p oduc ion ci cums ances,
esul ing
in
oo la ge
o
oo small an alloca ion. As poin ed
ou elsewhe e, he join o e head cos alloca ion p oblems
is
a di icul one
which
has no e en been add essed
by
many
companies, pa icula ly se ice indus y companies. La ge
gene al banks, o example, ake in e ail deposi s, lend ou
money, unde w i e leases, and
so
on, and ha e no way
o
alloca ing cos s o s a egic ma ke segmen s.
Ab up changes in accoun ing p ocedu es, aw ma e ial
p ices, plan modi ica ion, sales ax changes, p oduc
modi ica ion and o he
c~uses
can also dis o he cos da a.
Rela ing he cos da a o he uni
o
p oduc ion, kilowa
hou s
o
gene a ing capaci y
o
kilos
o
chicken p oduced,
is
ano he s umbling block as cos ing sys ems a e usually
se up o cap u e disc e e
uni s.,
sueh as gene a o s manu ac-
u ed o chickens sold, a he han cos pe expe ience uni .
The ca e ul un a elling
o
his o ic cos pa e ns can be a
. di icul job.
The e ec o economic
cy<:les
Mos businesses a e cyclical. Du ing a down u n olumes
con ac , while hey expand in he upwa d phase.
O e heads emain ela i ely ixed. As a esul , alloca ion
o
ixed o e head pe uni
o
p oduc ion a ies acco ding
o he cycle and dis o s he cos da a. Changing demand
his o ies and a ying loadings and o e heads need o be
smoo hed using a long enough ime span o ob ain da a con-
sis en wi h he long- un cos beha iou pa e ns o e ime.
Fo eign exchange a ia ions
This p oblem
is
becoming mo e impo an wi h he g ow h
o
mul ina ional co po a ions, he in e ela ionship be ween
geog aphically dispe sed p oduce s, who may p o ide in-
pu s o one ano he , and he eali y ha i
is
inc easingly
s a egically nai e o conside indus ies such as au omobile
manu ac u e on a geog aphic basis. The e ec s
o
bo h
o eign exchange a ia ions and a ying na ional in la ion
.
a es
can o ally ans o m di e en ela i e expe ience
cu es. Thus
Q
a g aph such as Figu e 2, when cos s a e
measu ed in a weake cu ency like s e ling, he slope
o
he
cu e could e e se and a eal ela i e cos inc ease could
ake place. 14
,P·
113
The e
is
a mi iga ing e ec in ha economies subjec o
high a es
o
in la ion a e also hose wi h poo exchange
a e pe o mance and he wo e ec s can cancel one ano he
ou
o some ex; en . Howe e , no all cu encies a e allow-
164
in
~
-
§
100
C
80
Ql
C.
60
Ql
()
&:
40
Ql
a
<II
a;
>
<
20
126
-
250cc
10
Cumula i e Volume (Million Uni s)
Figu e
2 P ice expe ience cu e o he Japanese mo o cycle indus y
(1959-
)974)
14
ed
o
loa eely. They a e sho ed up, slide, glide, mo e
cyclically,
and
some imes ab up ly de alue, hus changing
he expe ience e ec when measu ed in
ano he
cu ency.
Fo
ma ke s whe e ela i e cos posi ions
on
an in e na-
ional basis a e impo an
bo h
exchange a e luc ua ions,
sui ably smoo hed,
and
in la ion need
o
be aken in o ac-
coun when assessing ela i e cos ad an ages.
The
ime span o analysis
As no ed, luc ua ing economic cycles a ec cos s, as
do
exchange a e a ia ions, plan modi ica ion,
p oduc
modi ica ion, wage a e changes
and
o he unlis ed a iables.
As he expe ience e ec
is
a long- un phenomenon, a su i-
cien ly long ime span mus be chosen o he analysis
and
sho - un
da a
mus be a e aged
o
sui ably
smoo hed
o
educe he e ec s
o
luc ua ions.
The
choice o uni o analysis
This
is
coupled wi h he ma ke de ini ion p oblem which
has been discussed. The uni
o
analysis should ela e
o
he
s a egic ma ke segmen which
is
being s udied.
Fo
exam-
ple,
i
he s a egic conside a ions
a e
ocussed
on
a gi en
de ined ma ke segmen , e o s
can
be
made
in choosing
a uni which ela es
o
he o al ma ke a he
han
he
speci ic segmen .
I
chosen
oo
b oadly, he uni neglec s
he specialized cos ad an ages
ha
may acc ue
o
only a
segmen
o
a o al ma ke due
o
i s unique equi emen s.
The
mi o image p oblem exis s
i
he
uni
is
chosen
oo
na owly, pa icula ly
i
sha ed expe ience e ec s acc ue
om common p oduc ion, esea ch
and
de elopmen ,
ma ke ing, componen s
and
so on.
Too
na ow a choice
neglec s
he
impac
o
pe iphe al ac i i ies which
may
be
sha ed.
The uni should also be chosen
o
be meaning ul in e ms
o
he bene i s
o
he
use associa ed wi h
an
indus y.
Examples
o
well-de ined uni s a e kilog ams
o
chicken pe
dolla , no chickens p oduced; kilowa s
o
elec ici y
gene a ed pe dolla , no gene a o s manu ac u ed;
and
passenge kilome e s pe dolla ,
no
ai lines sea bookings.
I may be necessa y
o
de ine he uni in se e al ways
and
es
he
applicabili y
and
sensi i i y
o
he expe ience e ec
o
di e en uni s. Simila ly i may be necessa y in he case
S.-A . Tydsk . Bed y sl.
1982,
l3(
4)
o
sha ed expe ience e ec s, discussed below, o
use
di -
e en uni s
o
analysis o di e en p oduc
componen s
in o de
o
co ec ly model he e ec s. This
is
especially
ue
when
common
ac i i ies
o
componen s
a e
used
o
a
numbe
o
p oduc s.
I
may
be necessa y o analyse
cos s
di e en ly o di e en unc ions such as manu ac u ing
and
ma ke ing,
o
e en
communica ion
cos s in he
case
o
a se ice business such
as
a a el o ganiza ion. This
de ail-
ed analysis e eals
he
po en ial o expe ience cos
gains
o
he
a ious
componen s
o
unc ions
ha
cons i u e
he
p oduc .
The
cos
da a
is
no always linea due
o
mixed
expe ience
e ec s.
I
may
be necessa y
o
disagg ega e cos s and
hen,
in
he
ligh
o
he
analysis,
o
e-agg ega e in o la ge
mo e
meaning ul uni s
o
analysis.
Di e en uni s
o
analysis
may
ha e
o
be used o
di -
e en compe i o s in di e en ma ke s. Dependen
on
he
ma ke ,
o
ac o s such as
he
compe i o s' le el
o
e ical
in eg a ion, di e en uni s
may
need
o
be used o he
com-
pany
and
i s
compe i o s,
pa icula ly in he case
o
some
subs i u e
p oduc s.
Al e na i ely i may some imes
be
necessa y
o
choose a uni
o
ensu e
compa abili y
be ween
wo di e en p oduc s
ha
a e subs i u able o one
ano he ,
such as s eel piping e sus plas ic piping.
Sepa a ing ou cos componen s
The
cos
o
an
indi idual
p oduc
educes acco ding o
he
expe ience cu e e ec .
Cos s
educe because
o
expe ience
e ec s ac ing
on
he
company's
alue-added componen .
Cos s also educe because
o
expe ience e ec s ope a ing
on
he
inpu
componen s.
Each
componen
cos ,
including
he
company's
own,
may
be
d i en by di e en expe ience
cu es ope a ing
on
di e en s a ing posi ions
and
cumula i e
p oduc ion
a es. Hence
he
o al cos ,
being
he
sum
o
he
indi idual cos s, ope a es as ollows:
To al
cos =
sum
o
all indi idual cos s
n
CT, E
k=I
(1)
=
whe e:
CT, =
he
o al
cos
a
ime
c,.
=
he
cos o
componen
k
a
ime
n =
he
numbe
o
componen
cos s being summed.
Subs i u ing o c,.k
om
equa ion
11
,P·
102 in e ms o
p oduc ion olumes.
CT, =
1
c,-;,
(:,. )
-A
(2)
1-i,k
whe e:
c,-i.k
V
,k
=
he
cos o
componen
k
a
ime
-
i
= he cumula i e p oduc ion olume
o
componen
k
a
ime
V,-i,k
= he cumula i e p oduc ion olume
o
componen
k
a
ime
-i
=
he
expe ience cu e exponen o componen
k.
Each
componen
may
ha e di e en cos s C,-i,kandd! -
e en cumula i e olumes
;,k
and
,-i.k associa ed wi h 1
~·
The
olumes
can
cumula e
e y di e en ly pa icula ly
i
componen
k is used in a
numbe
o
applica ions, no jus
S.
A . J. Bus. Mgm .
1982,
13(4)
he p oduc unde analysis. Each componen may also be
mo ing down di e en lea ning cu es wi h di e en slopes
ela ed o di e en alues
o
A*.
To al cos can be exp essed as
n n
~V
)
In(
CT,) =
*~
1
In(
C,
_
u>
-
*~•
A*
In
V ' * .
-1,k
(3)
Because
o
accoun ing p ocedu es,
and
a i hme ic, he
cos componen s
a e
addi i e. The successi e cos alues
o
ln(CT) will, howe e , no be a s aigh line. In gene al,
i
a
non-linea expe ience cu e
is
encoun e ed, i may mean he
exis ence
o
mo e
han
one expe ience cu e wi h he same
slope, which
is
unlikely.
Figu es 3
and
4 a e g aphic examples. In Figu e 3 a p o-
duc uses h ee componen s in equal amoun s o make one
uni
o
he p oduc .
Fo
simplici y, each
is
assumed o be
on di e en expe ience cu es bu
o
ha e mo ed om
cumula i e expe ience olumes V,-;,i,
V,_;,i
and
V,_;,J
wi h
V,-;,i = V,-;,2 = V,-;,3 o a inalcumula i eexpe ience
,
1 =
,.
2 =
,.
The o al ajec o y
is
plo ed and he esul ing
o al cos cu e
is
he
simple sum
o
he h ee cos s. I
is
no linea as shown by he s aigh line which has been plo -
ed angen ially o he o al cos cu e. (The cos
is
he linea
addi i e alue
o
all h ee expe ience cu es. I can be seen
ha ini ially he cu e o componen 1 will domina e and
inally he cu e o componen 3 will domina e he cos
pa e n.)
Simila ly Figu e 4 ep esen s a p oduc consis ing
o
h ee
componen s each
on
di e en expe ience cu es bu each
cu e has he same slope.
I
i is assumed ha one uni
o
p oduc uses one uni
o
componen
1,
wo uni s
o
com-
ponen 2 and ou uni s
o
componen
3,
i he e
is
no sha ed
expe ience om o he p oduc s, he o al cos cu e has he
same slope as he componen cu es. The cos cu e does,
howe e , ha e a much mo e complex con igu a ion when
he di e en componen s a e mo ing a di e en and
un ela ed eloci ies down sepa a e cu es. (No e ha in his
case all h ee componen cos s ha e been mo ing wi h con-
s an eloci ies down he h ee cu es. Non-cons an
eloci ies may gene a e a non-linea o al cos cu e.)
Fi ing he componen cos
da a
will
allow p edic ions o
be accu a ely made as
o
componen cos s and, p o ided
supplie s' u u e p oduc ion olumes can be es ima ed,
should p o ide a be e ool o o ecas ing inpu compo-
nen cos s.
Mul iple expe ience cu es can ha e s a egic ele ance,
as al eady poin ed ou . The expe ience e ec appa en ly
slows wi h ega d o p oduc ion, and especially ime, as one
o
he cos componen s apidly diminishes in ela i e im-
po ance as was he example wi h he solid s a e semi-
conduc o indus y. The ela i e impo ance and change in
impo ance be ween cos componen s can indica e he need
o a e ised s a egy.
The
e ec o sha ed expe ience
This
is
simila
o
he concep , discussed abo e,
o
compound
expe ience cu es. Howe e , he s a egic ele ance
is
ha
wo,
o
mo e, p oduc s may ha e common expe ience ei he
bough in,
o
as a esul
o
common componen s, common
p oduc ion lines, common unc ions such as ma ke ing
and
165
Cumula i e Volume (Uni s)
Figu e
3 To al cos and indi idual cos cu es o a h ee componen
p oduc
Componen 3
Cumula i e Volume (Uni s)
Figu e
4 To al cos and indi idual cos o a h ee componen
p oduc
so on. The equa ions gi en a e alid. Howe e ,
we
a e now
in e es ed in he a ious cos pe o mances
o
se e al p o-
duc s which u ilize common componen s.
The ela ionship can be exp essed as
whe e:
CT,J
c,-i.kJ
V,,k
n
= E (
~)-A*
C,-;,
J
V .
k=I
1-1,k
= he o al cos a ime o p oduc
j,
= he componen cos o componen k used in
p oduc j a ime -
i,
= he cumula i e olume
o
componen k p o-
duc a ime
.
I includes he olumes o all
o
componen k p oduced o all he p oduc s
using he componen ,
166
= as abo e
a
ime
-
i, and
= he expe ience componen o componen
k's
own expe ience cu e.
The s a egic signi icance
is
ha , al hough i may be wise
o ollow a gi en s a egy o one p oduc , he sha ed ex-
pe ience e ec s and hei impac
on
o he p oduc s in he
line may esul in o al co po a e subop imiza ion. I may,
o example, pay
o
cu p ice
on
a gi en p oduc
o
d i e
a second p oduc down an expe ience cu e o enhance p o-
i s, p o ec a ulne able posi ion
o
ha es a ma ke . Con-
e sely, he emo al
o
a p oduc om a ange may ha e
an unexpec ed impac in he s a egic posi ioning
o
o he
ela ed p oduc s.
One
o
he simples ypes
o
sha ed expe ience
is
ha
o
common componen s, bu common unc ions, ma ke s,
echnologies all impac he expe ience. The e ec i e use
o
sha ed expe ience
is
illus a ed by he emendous in e na-
ional success
o
he Japanese in he mo o cycle indus y.
Ini ially Japanese expo s we e aimed
a
he low cubic
capaci y end
o
he ma ke . Ha ing achie ed success ul
pene a ion and inally dominance
o
he low capaci y
segmen s, he Japanese successi ely mo ed
o
la ge cubic
capaci y segmen s, making e y e ec i e use
o
modula
componen designs and sha ed expe ience
on
many com-
ponen s. The e ec s
on
B i ish
and
Ge man manu ac u e s
was auma ic.
14
Simila ly, no malized silicon de ice p ice ends
15
can be
ela ed o compu ing cos s as shown in Figu e 516 using a
no malized ime basis, a he
han
cumula i e p oduc ion.
The conclusion can be eached ha he compu e indus y's
spec acula g ow h has been due mainly
o
i s abili y
o
p o-
duce equipmen which could compu e
a
e e inc easing
speeds and eliabili y le els, and a e e dec easing cos s and
sizes. All
o
hese a ibu es ha e s emmed om ad ances
in silicon echnology. 16
S a egically, oppo uni ies o he use
o
sha ed ex-
pe ience can be explo ed, analysed
and
exploi ed
o
gain he
bene i s
o
sha ed expe ience. Sha ed expe ience can be a
co e s eng h, i s lack a co e weakness.
The
s a egic
ele ance
o
sha ed expe ience mus be analysed in decisions
o
add
o
elimina e p oduc s om
he
company po olio.
Analysing cos componen s o compe i o s
Analysing compe i o s' cos s is e en mo e di icul han
analysing one's own cos s, owing o he lack
o
cos in o -
ma ion
on,
and
de ailed
insigh in o, he compe i o s'
business. Howe e , he a emp
o
do
so in i sel gene a es
mo e
han
jus
cos in o ma ion.
I
gene a es a lo
o
in-
sigh in o he compe i o s' way
o
unning hei businesses.
In gene al, cos in o ma ion
is
no eadily a ailable
and
es ima es may ha e
o
be made
on
he basis
o
known sel-
ling p ices, which may,
o
may no be, adjus ed
o
he ex-
pec ed ma gins.
Fi ms can make inco ec assessmen s
o
compe i o s'
cos s based on
an
o e simpli ied idea ha a single expe ience
cu e exis s down which e e yone
is
mo ing
a
a a e ela ed
o
hei ma ke sha e. This o e simpli ica ion can be e -
oneous,
and
companies may ha e di e en cu es, s a -
ing posi ions, eloci ies;
o
hey may e en play leap og
S.-Al .
Tydsk . Bed y sl.
1982,
13{4)
- - -
Compu ing
Cos s
----
Silicon De ice P ice T ends
'ii, 10
~
0
e.
Q)
(.)
'&
OJ
C:
GI
en
GI
OJ
Ill
Q)
~
1,0
L....~.L-~.L-~L....---Ji..........1..____.'--
......
~--'100K
0 2 4 6 8 10 12 14
Yea s (No malised)
Figu e
S Silicon de ice p ice ends ela ed o compu ing
cos s
• lK -bi Dynamic RAM
X A e age IC
<>
Di used silicon ansis o
C High pe o mance compu e cos s
down he cu e o a ious easons:9'17
Di e en companies may ha e sub ly di e en
ma kelS,
ano he mani es a ion
o
he
ma ke de ini ion
p o-
blem,
o
di e en ma e ials
o
cons uc ion such
as
plas ic e sus s eel pipes.
Di e en in e na ional economic cycles and o eign
ex-
change a e a ia ions will cloud he pic u e.
Cos componen s, because
o
di e en ma e ials o
cons uc ion, design di e ences
o
p oduc ion
and
o he
unc ional ac i i ies, may a y in beha iou
owing
o
he ac
ha
he
compe ing p oduc s may
no
be iden ical.
Common supplie s lead
o
a sha ing
o
expe ience
wi h
compe i o s due
o
he
supplie s' expe ience cu e
be-
ing a d i ing e ec .
Access
o
echnology om componen manu ac u e s
o
e en p oduc ion equipmen manu ac u e s and
ou le channels educes he compe i i e edge
o
he
dominan p oduce .
Pa en
and
o he
p o ec ion,
and
con ol o e
aw
ma e ial sou cing, a ec cos s. .
Published
and
o he
sou ces
o
knowledge, including
ques ionable p ac ices such
as
espionage, na ow he
expe ience gap.