In the aerospace industry, like in many other industries, we have always heard managers talking about the importance of being the leader of their markets. If they are not, they will do everything to become number one. In the aerospace industry, people witness strong battles between giants to get on the podium…and stick there. Show So why market share matters so much? Isn’t a number two good enough to survive decently? In this essay, I will try to answer that question, from my perspective. Experience curve (not to be confused with the learning curve) In the mid-1960s, Bruce D. Hunderson, founder of the Boston Consulting Group explained a very tricky phenomenon: the firms improve by doing, which means, the more their cumulative output is, the lower their direct cost per unit produced. The experience curve has therefore a downward convex slope. Why we should not confuse learning and experience curves? Experience curve is a broader concept, taking into consideration all cost components, and related to the total output of a given function, while the experience curve considers only the time of production, in other words, only labor skill improvement by doing. The experience curve nicely explains the collapse of the microchips prices. Here I invite you to read the related business case of Texas instruments. Now that we understand what the experience curve is, it is clear that this concept will have some direct implications on the market dynamics: if direct cost decrease as the cumulative output increase, a firm with long record of accomplishment will enjoy low production cost (that new comers do not) and thus dominate the market. This is true to some extend! In fact, here where the importance of distinguishing experience and learning curves resides. Given the experience curve is a broader phenomenon that concerns the overall output, some companies, aware of their lack of experience, but willing to enter the market; will succeed by shaping their own experience curve. There is not one, but many experience curves. Market share concept Would you be happy if your company has 30% or 20% market share? The answer may seem an obvious 30%, but here is the true answer is: It depends. If your market share is 30%, but your competitor enjoys a 50% market share, there is a good chance you are actually losing money, but if you enjoy a 20% market share while all other competitors have less than that number, you are probably the only one making profit. Market share is a key concept; it is one of the cornerstones of corporate strategy. Although the concept of the “absolute market share” is very important, it can also be very tricky, not to say misleading actually. It is important to consider the “relative market share” figure, as a first approach instead. Is your market share 1.5x, 0.9x or 0.2x vs the leader? The answer will make the whole difference in terms of the strategy your leadership will probably be willing to put in place in order to keep up leading the market, or to choose to exit it. The BCG matrix is probably one of the most popular tools in corporate strategy. It is very helpful to understand the importance of relative market share in corporate strategy, and why being number two could be dangerous, sometimes, to the firm. Having, to a certain extent, a lower market share than the leader in a fast-growing market would result in the so-called “dilemmas” or “question marks” products or businesses. Those products/businesses could either become “stars” and later on “cash cows” or otherwise remain cash-traps, as they are in a constant need of burning cash, hoping to become a “star”. Some companies just decide to get rid of them, by risk aversion. Others, less risk averse, would succeed in making them “Stars”, and some would go bankrupt as they keep burning cash on something, not necessarily bad, but simply that is not able to grab market share (sometimes because the rival is simply good). The beauty in corporate strategy is to realize when you have a “cash cow”, a “star”, a “Dilemma” or a “deadweight”, and how to deal with each situation. Market share and experience curve At a given price, some firms may sell equivalent products at profit or at loss, depending on where they are located in their experience curve. A company that stands downward the curve will enjoy high margins, while a company that is upward the curve, will sell the equivalent product at very low profit margin, not to say at loss. Moving downward the experience curve may allow a company to sell its product at lower price vs the competition, and thus gain market share, if their strategy is price penetration based. Gaining market share will inevitably improve the experience curve and place a given firm in a good situation to lead its market later on and make profit... and vice versa. Startup, at their launch, burn massive amounts of borrowed cash every year, in a race to gain market share. Airlines expand their networks to grow their market share, and go down the experience curve. The airline industry is growing fast, and the airlines know that growing their market share accordingly not only allows them to move their businesses to the left side of the BCG matrix, but also lowers their direct costs and consequently improves their margins. Limits of the experience curve Out of the Fortune 500 companies, only 60 left between 1955 and 2019. In other words, fewer than 12% of the Fortune 500 companies were still on the list 64 years later. Fortunately, the experience curve does not explain everything; otherwise, there would be no room for innovative start-ups. Today, the cost leadership is not the only effective strategy. Our paths should not be limited only to the concepts discussed previously. I do not like to talk about limits of the experience curve because there is always a good takeaway in this concept, so I would like to emphasize, as we discussed earlier, that there is not one single experience curve, but every firm can make its own experience curve and then take “experience shortcuts”. This in line with Porter’s concept of Generic Strategies, where he mentioned alternatives to cost leadership, such as product differentiation and market segmentation. Economists like John Sterman highlighted that running only after the experience curve could be disastrous, like when companies choose not to lower their product price because of cost decrease, which may encourage many competitors to enter the market triggering steep price decline and market collapse. Is experience curve and learning curve same?The learning curve model posits that for each doubling of the total quantity of items produced, costs decrease by a fixed proportion. Generally, the production of any good or service shows the learning curve or experience curve effect.
What is meant by the experience curve?What is the Experience Curve? Introduced by the Boston Consulting Group, Experience Curve is a concept that states that there is a consistent relationship between the cumulative production quantity of a company and the cost of production.
What is an example of an experience curve?Examples of the Experience Curve
Perhaps the most well-known example of the Experience Curve can be seen in the development of the Model T Ford. With the benefit of 11 years of assembly experience, Ford cut production costs of the Model T and increased its market share from 10% to 55%.
What are the 4 types of learning curves?Here are four common types of a learning curve and what they mean:. Diminishing-Returns Learning Curve. The rate of progression increases rapidly at the beginning and then decreases over time. ... . Increasing-Returns Learning Curve. ... . Increasing-Decreasing Return Learning Curve (the S-curve) ... . Complex Learning Curve.. |
