Strategic Significance

The strategic significance of the experience curve is clear. Moving down the experience curve allows a firm to reduce its cost of creating value. The firm that moves down the experience curve most rapidly will have a cost advantage vis-à-vis its competitors. Thus, Firm A in Figure 12.2, because it is further down the experience curve, has a clear cost advantage overFirm B.

Many of the underlying sources of experience-based cost economies are plant based. This is true for most learning effects as well as for the economies of scale derived by spreading the fixed costs of building productive capacity over a large output. Thus, the key to progressing downward on the experience curve as rapidly as possible is to increase the volume produced by a single plant as rapidly as possible. Since global markets are larger than domestic markets, a firm that serves a global market from a single location is likely to build accumulated volume more quickly than a firm that serves only its home market or that serves multiple markets from multiple production locations. Thus, serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position. In addition, to get down the experience curve rapidly, a firm must price and market very aggressively so demand will expand rapidly. It will also need to build sufficient production capacity for serving a global market. Also, the cost advantages of serving the world market from a single location will be all the more significant if that location is the optimal one for performing the particular value creation activity.

Once a firm has established a low-cost position, it can act as a barrier to new competition. An established firm that is well down the experience curve, such as Firm A in Figure 12.2, can price so that it is making a profit while new entrants, which are further up the curve, such as Firm B in the figure, are suffering losses.

One firm that has excelled in the pursuit of such a strategy is Matsushita. Along with Sony and Philips, Matsushita was in the race to develop a commercially viable videocassette recorder in the 1970s. Although Matsushita initially lagged behind Philips and Sony, it got its VHS format accepted as the world standard and reaped enormous experience-curve-based cost economies. This cost advantage constituted a formidable barrier to new competition. Matsushita's strategy was to build global volume as rapidly as possible. To ensure it could accommodate worldwide demand, the firm increased its production capacity 33-fold from 205,000 units in 1977 to 6.8 million units by 1984. By serving the world market from a single location in Japan, Matsushita realized significant learning effects and economies of scale. These allowed Matsushita to drop its prices 50 percent within five years of selling its first VHS-formatted VCR. As a result, Matsushita was the world's major VCR producer by 1983, accounting for approximately 45 percent of world production and enjoying a significant cost advantage over its competitors. The next largest firm, Hitachi, accounted for only 11.1 percent of world production in 1983.¹³