Info

If the competitive marketplace is stable, then as cost decreases as a function of the learning curve experience, prices will decrease similarly. This assumes that profit margins are expressed as a percentage of price rather than in absolute dollar terms. Therefore, the gap between selling price and cost will remain a constant, as shown in Figure 18-9.

Unfortunately, price and cost will most likely follow the relationship shown in Figure 18-10. Companies that use learning curves develop pricing policies based on either an industry average cost or an average cost based on a target production volume. In phase A, new product prices are less than the company cost, because the market would probably be reluctant to purchase the first few items at the actual production cost. As the company enters phase B, profits begin to materialize as the experience curve takes hold. Fixed costs are recovered. Price may remain firm because of market strategies adopted by the market leader.

The longer one remains in phase B, the greater the profits. Unfortunately, phase B is relatively unstable. One or more competitors will quickly drop their prices, because if the profit potential were too large, new entrants into the highly profitable marketplace would soon occur. In phase C, prices drop faster than costs, thus forcing a shakeout of the marketplace where marginal producers exit the market. The shakeout phase ends when prices begin to follow industry costs down the experience curve. This is phase D, which represents a stable market condition. Figure 18-11 shows examples for the semiconductor and chemical industries.

[Image not available in this electronic edition.]

FIGURE 18-9. An idealized price-cost relationship when profit margin is constant. Source: Derek F. Abell and John S. Hammond, Strategic Market Planning, Prentice-Hall, © 1979, p. 115. Reprinted by permission of Pearson Education, Upper Saddle River, NJ.

[Image not available in this electronic edition.]

FIGURE 18-10. Typical price-cost relationships. Source: Derek F. Abell and John S. Hammond, Strategic Market Planning, Prentice-Hall, © 1979, p. 116. Reprinted by permission of Pearson Education, Upper Saddle River, NJ. Adapted from Perspectives on Experience, The Boston Consulting Group, 1972, p. 21.

The average cost of the dominant market producers virtually regulates the industry. Whatever learning curve the industry leader uses, the competitors must match it. If the competitors' costs or volume cannot match the industry leader, then the slower rate of cost reductions will force profits to decrease or disappear, thus eliminating these competitors from the marketplace (i.e., Figure 18-8).

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook


Post a comment