What is the effect of the experience?
Experience effect is a concept which was advocated by Boston Consulting Group (B.C.G). Generally, human beings learn in depth while accumulating the experience. In the process, their proficiency continuous to increase. Even in the industrial operation, the accumulation of experience plays a very important role in the reduction of cost.
Whatever has been discussed so far, was something very obvious. However, B.C.G. has proved with substantial evidence that the unit cost for the production and sale of a product reduces in percentage, everytime the accumulated production quantity in a particular product field doubles.
B.C.G. has conducted surveys in various fields ranging from automobiles, I.C, electric shaver, chicken broiler and wide ranging products and services. According to their survey, it was found that the percentage decrease in the cost should normally be ranging between 10% to 30% everytime the cumulative production quality doubles.
Why such an experience effect is seen? It is considered to be due to the involvement of factor given below.
· Improvement in working capability (as the individuals gain experience in different professions, their proficiency level increases, displaying the effect) .
· Specialisation of professions (normally this happens as a result of division of labour).
· Improvement of production process and the reforms (improvement in operation method etc.)
· Upgradation of production equipment (improvement of existing production equipment and automation etc.).
· Improvement in product design.
· Improvement in yield and bad product ratio.
The effect of experience probably can be considered as the effect obtained by a combination of all these factors.
However, there is no basis for determining whether the clear relationship. Rationally considering, any industry would like to take up only those aspects in the beginning in which cost can be reduced effectively with little efforts normally there are more opportunities of reducing the cost also. On the other hand, the experience curve can probably be understood as an index at the time of determining the cost or while planning target for the cost reduction.
The cumulative production quality expands rapidly when the scale is bigger. Therefore, the profit of experience effect and the scales act simultaneously more often. As a result, there is a tendency to pick up the two simultaneously. However, the two should be treated independently as the concepts. The experience effect is directly proportional to cumulative production quality from the past upto the current state, whereas the economy of scale is proportional to the current production quality.
1. Share Expansion Strategy
Whenever cost forms an important factor in an industry. And it is possible to except the cost reduction thought experience effect, having larger share of cumulative production quantity as compared to other companies in the industry, gives an edge for forming the resource of competition power.
Let us try to understand this fact through example. There are three companies ‘a’, ‘b’ and ‘c’ which have the major share in a particular industry and they all are above a particular experience curve. The cumulative production quantity and cost for these three companies at the present stage is shown by the three points on the broken line corresponding the strength line. The industrial cost follows the lower line as the experience of the overall industry accumulative for the sake of competition. However, at this point, the industrial cost is the going cost as expressed in the figures. The margin of the three companies is expressed by the difference in the cost of an enterprise and the going cost. The company ‘A’ which has the maximum cumulative production quantity shows the maximum margin, whereas the company ‘C’ which has little cumulative production quality has a deficit.
Under such conditions, the fight for the market share in most cases tends to spread over. Larger the shares, higher the sales quantity and better is profit rate per unit of the product. As a result, the company can have a beneficial position from the point of view of relative rate of share. Further, the company in question will enjoy the profit of scale also, the difference in share keeps on widening further with the passage of time.
With such being the prevalent conditions, there is possibility that the companies may appear which resort to dumping and try to capture the shares at a low cost beyond the future projected reduced cost. Further, if tendency prevails, there is a danger of sluggish cost competition.
Experience effect is a concept which was advocated by Boston Consulting Group (B.C.G). Generally, human beings learn in depth while accumulating the experience. In the process, their proficiency continuous to increase. Even in the industrial operation, the accumulation of experience plays a very important role in the reduction of cost.
Whatever has been discussed so far, was something very obvious. However, B.C.G. has proved with substantial evidence that the unit cost for the production and sale of a product reduces in percentage, everytime the accumulated production quantity in a particular product field doubles.
B.C.G. has conducted surveys in various fields ranging from automobiles, I.C, electric shaver, chicken broiler and wide ranging products and services. According to their survey, it was found that the percentage decrease in the cost should normally be ranging between 10% to 30% everytime the cumulative production quality doubles.
Why such an experience effect is seen? It is considered to be due to the involvement of factor given below.
· Improvement in working capability (as the individuals gain experience in different professions, their proficiency level increases, displaying the effect) .
· Specialisation of professions (normally this happens as a result of division of labour).
· Improvement of production process and the reforms (improvement in operation method etc.)
· Upgradation of production equipment (improvement of existing production equipment and automation etc.).
· Improvement in product design.
· Improvement in yield and bad product ratio.
The effect of experience probably can be considered as the effect obtained by a combination of all these factors.
However, there is no basis for determining whether the clear relationship. Rationally considering, any industry would like to take up only those aspects in the beginning in which cost can be reduced effectively with little efforts normally there are more opportunities of reducing the cost also. On the other hand, the experience curve can probably be understood as an index at the time of determining the cost or while planning target for the cost reduction.
The cumulative production quality expands rapidly when the scale is bigger. Therefore, the profit of experience effect and the scales act simultaneously more often. As a result, there is a tendency to pick up the two simultaneously. However, the two should be treated independently as the concepts. The experience effect is directly proportional to cumulative production quality from the past upto the current state, whereas the economy of scale is proportional to the current production quality.
1. Share Expansion Strategy
Whenever cost forms an important factor in an industry. And it is possible to except the cost reduction thought experience effect, having larger share of cumulative production quantity as compared to other companies in the industry, gives an edge for forming the resource of competition power.
Let us try to understand this fact through example. There are three companies ‘a’, ‘b’ and ‘c’ which have the major share in a particular industry and they all are above a particular experience curve. The cumulative production quantity and cost for these three companies at the present stage is shown by the three points on the broken line corresponding the strength line. The industrial cost follows the lower line as the experience of the overall industry accumulative for the sake of competition. However, at this point, the industrial cost is the going cost as expressed in the figures. The margin of the three companies is expressed by the difference in the cost of an enterprise and the going cost. The company ‘A’ which has the maximum cumulative production quantity shows the maximum margin, whereas the company ‘C’ which has little cumulative production quality has a deficit.
Under such conditions, the fight for the market share in most cases tends to spread over. Larger the shares, higher the sales quantity and better is profit rate per unit of the product. As a result, the company can have a beneficial position from the point of view of relative rate of share. Further, the company in question will enjoy the profit of scale also, the difference in share keeps on widening further with the passage of time.
With such being the prevalent conditions, there is possibility that the companies may appear which resort to dumping and try to capture the shares at a low cost beyond the future projected reduced cost. Further, if tendency prevails, there is a danger of sluggish cost competition.