Experience curve effects are most pronounced when economies of scale are achievable. As a firm moves down the experience curve and builds market share, scale effects kick in.
In our practice at ALCG, we model an industry’s experience curve using price as a proxy for cost. From the resulting curve it is easy to see the potential for lowering cost through accumulated experience.
Experience curve effects are most pronounced in new industries or new technologies. Early entrants may be able to rapidly move down the curve, building share and achieving hard-to-imitate cost positions. In mature industries or technologies, the gains to be achieved from experience effects can be much less pronounced.
Cost advantages can be built up in other ways than through the experience curve. Value chains which are tailored and configured differently than rivals can enjoy significant cost advantages. In fact, value chain design and configuration is the preferred approach to obtaining a cost advantage over rivals in a competitive industry. In such value chains, experience effects contribute to cost efficiency but are not the primary driver of cost advantage.