The Economist praises a dangerous and obsolete management concept

The Economist just published a short article in praise of the experience curve. Even the first sentence is wrong . Here’s their lead-in.

The more experience a firm has in producing a particular product, the lower its costs

The experience curve is an idea developed by the Boston Consulting Group (BCG) in the mid-1960s.

Actually, no. The experience curve, known as the learning curve, goes back to the aircraft industry before World War II. (An excellent review of the history and application to management up to 1980 is J.M. Dutton, A. Thomas, J.E. Butler, “The history of progress functions as a managerial technology,” Business History Review 58 (2) (1984). )

Here’s my comment on the Economist article:

It’s sad to see such an obsolete and downright dangerous theory get this favorable write-up. BCG (and later Bain) ruined numerous businesses by persuading them to blindly follow “the experience curve.”

The danger in the Experience Curve concept is that it claims that improvement is _inevitable_ and _ the same for everyone in an industry_. Neither of these is remotely correct. If it were correct, the biggest firm would be able to reduce its costs faster than everyone else, and would become unassailable. This was exactly the theory behind BCG’s matrix, and it’s WRONG. General Motors was bigger than Toyota until 2008, but Toyota had lower costs, and faster declining costs, since at least 1965 or 1970. For decades GM claimed this was due to lower labor costs, but that was refuted in the book The Machine That Changed the World, which showed that Toyota (and others) were much more efficient than US auto makers per labor hour.

It’s certainly true that, properly managed, experience can facilitate improvement. But there’s been 25 years of research now showing that improvement requires deliberate effort, and that the improvement process takes careful management. Toyota, through JIT and “The Toyota Production Process,” essentially invented a system for making more rapid improvement – hence it surpassed GM and everyone else, while a fraction of their size. The semiconductor industry had its own epiphany about the folly of the experience curve, when a major research project run out of Berkeley surveyed a variety of fabs and found vastly different performance that had little  to do with scale or cumulative experience.

Even BCG no longer claims the experience curve is valid, as far as I know. (I’d be happy to hear from others who have experienced BCG’s views in the last 5 years.)

I could go on and on (and I did, in stuff I wrote 20 years ago on this topic)!  We need to drive a stake through the heart of this idea. It’s not that it’s totally and utterly wrong, because the learning curve  has some ex post validity. But it has little predictive power, and even less as a normative theory of how to manage learning!

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One thought on “The Economist praises a dangerous and obsolete management concept

  1. Hmm… not sure I completely agree. The experience curve was never supposed to be the ‘single law’ that ruled all laws. It suggested that over time (and with experience) the corporation had the opportunity to become more efficient. It didn’t mandate that ALL of them did.

    Coupling the experience curve with other issues (GM’s union problems,etc.) is a bit of a red herring. In addition, the experience curve was fundamentally about ‘learning’ (such as what Toyota did with JIT).

    Just my humble opinion…
    Jeff

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