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Learning Curves and Competitive Strategy
Learning curves enable managers to project the manufacturing cost per unit for any cumulative
production quantity. Firms that choose to emphasize low price as a competitive strategy
rely on high volumes to maintain profit margins. These firms strive to move down the
learning curve (lower labor hours per unit or lower costs per unit) by increasing volume. This
tactic makes entry into a market by competitors difficult. For example, in the electronics
component industry, the cost of developing an integrated circuit is so large that the first
units produced must be priced high. As cumulative production increases, costs (and prices)
fall. The first companies in the market have a big advantage because newcomers must start
selling at lower prices and suffer large initial losses.
However, market or product changes can disrupt the expected benefits of increased
production. For example, Douglas Aircraft management assumed that it could reduce the
costs of its new jet aircraft by following a learning curve formula and committing to fixed
delivery dates and prices. Continued engineering modification of its planes disrupted the
learning curve, and the cost reductions were not realized. The resulting financial problems
were so severe that Douglas Aircraft was forced to merge with McDonnell Company.
Managerial Considerations in the use of Learning Curves
Although learning curves can be useful tools for operations planning, managers should keep
several things in mind when using them. First, an estimate of the learning rate is necessary
in order to use learning curves, and it may be difficult to get. Using industry averages can be
risky because the type of work and competitive niches can differ from firm to firm. The
learning rate depends on factors such as process complexity and the rate of capital additions.
The simpler the process, the less pronounced the learning rate. A complex process
offers more opportunity than does a simple process to improve work methods and material
flows. Replacing direct labor hours with automation alters the learning rate, giving less
opportunity to make reductions in the required hours per unit. Typically, the effect of each
capital addition on the learning curve is significant.
Another important estimate, if the first unit has yet to be produced, is that of the time
required to produce it. The entire learning curve is based on it. The estimate may have to be
developed by management using past experiences with similar products.
Learning curves provide their greatest advantage in the early stages of new service or
product production. As the cumulative number of units produced becomes large, the learning
effect is less noticeable.
Learning curves are dynamic because they are affected by various factors. For example,
a short service or product life cycle means that firms may not enjoy the flat portion of the
learning curve for very long before the service or product is changed or a new one is introduced.
In addition, organizations utilizing team approaches will have different learning
rates than they had before they introduced teams. Total quality management and continual
improvement programs also will affect learning curves.
Finally, managers should always keep in mind that learning curves are only approximations
of actual experience.
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