Strategic Implications of the Learning Curve Concept

What makes the learning curve phenomenon important for competitive strategy is its possible contribution to achieving and maintaining a dominant position in a given market. By virtue of their large relative volume, dominant firms have greater opportunity for learning than do smaller, nonleading firms. In some instances, the market share leader is able to drive down its average cost curve faster than its competitors, underprice them, and permanently maintain a leadership position. Nonleading firms face an important and perhaps insurmountable barrier to relative improvement in performance. Where the learning curve advantages of leading firms are important, it may be prudent to relinquish nonleading positions and redeploy assets to markets in which a dominant position can be achieved or maintained.

A classic example illustrating the successful use of the learning curve concept is Dallas-based Texas Instruments (TI). Tl's main business is producing semiconductor chips, which are key components used to store information in computers and a wide array of electronic products. With growing applications for computers and "intelligent" electronics, the demand for semiconductors is expanding rapidly. Some years ago, TI was one of a number of leading semiconductor manufacturers. At this early stage in the development of the industry, TI made the decision to price its semiconductors well below then-current production costs, given expected learning curve advantages in the 20 percent range. TI's learning curve strategy proved spectacularly successful. With low prices, volume increased dramatically. Because TI was making so many chips, average costs were even lower than anticipated; it could price below the competition; and dozens of competitors were knocked out of the world market. Given a relative cost advantage and strict quality controls, TI rapidly achieved a position of dominant leadership in a market that became a source of large and rapidly growing profits.

To play an important role in competitive strategy, learning must be significant. Cost savings of 20 percent to 30 percent as cumulative output doubles must be possible. If only modest effects of learning are present, product quality or customer service often plays a greater role in determining firm success. Learning is also apt to be more important in industries with an abundance of new products or new production techniques rather than in mature industries with well-known production methods. Similarly, learning tends to be important in industries with standardized products and competition based on price rather than product variety or service. Finally, the beneficial effects of learning are realized only when management systems tightly control costs and monitor potential sources of increased efficiency. Continuous feedback of information between production and management personnel is essential.

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