Page 3 - Portfolio Analysis

BCG tried to identify the key determinants of low cost levels and noted that there was usually a relationship between the total cost of manufacturing and distributing a product and cumulative production volume. FIGURE 1 THE EXPERIENCE CURVE COSTS a b x y VOLUME It has been shown that each time the accumulated experience of manufacturing a particular product doubles (See figure 1) so the total costs of making it tend to decline by a characteristic percentage - usually between 20 and 30 per cent. Since the experience curve effect applies to all value added it subsumes economies of scale and specialisation effects. In addition cost savings will occur through learning by doing. The BCG suggest various reasons for the experience curve effect. a) THE LEARNING FUNCTION: Labour (and management) learns by repetition. Consequently, anyone doing a job does it more and more efficiently over time. This should lead to a reduction in labour costs which should decline by between 10-15 per cent each time cumulative experience doubles.