Learning Curve Limitations

There are limitations to the use of learning curves, and care must be taken to avoid erroneous conclusions. Typical limitations include:

• The learning curve does not continue forever. The percentage decline in hours/ dollars diminishes over time.

• The learning curve knowledge gained on one product may not be extendable to other products unless there exist shared experiences.

• Cost data may not be readily available in order to construct a meaningful learning curve. Other problems can occur if overhead costs are included with the direct labor cost, or if the accounting codes cannot separate work packages sufficiently in order to identify those elements that truly demonstrate experience effects.

• Quantity discounts can distort the costs and the perceived benefits of learning curves.

• Inflation must be expressed in constant dollars. Otherwise, the gains realized from experience may be neutralized.

• Learning curves are most useful on long-term horizons (i.e., years). On short-term horizons, benefits perceived may not be the result of learning curves.

• External influences, such as limitations on materials, patents, or even government regulations, can restrict the benefits of learning curves.

• Constant annual production (i.e., no growth) may have a limiting experience effect after a few years.

The last element requires further comment. Consider the example shown in Figure 18-8. With a constant production rate of 100 units per year for a ten-year horizon, and using a 75 percent learning curve, the percentage of cost decline goes from 25 percent in the first year to 1.7 percent in the tenth year. But with a 15 percent annual growth rate, the percentage of cost reduction goes from 27 percent the first year to 2.2 percent the tenth year.

Figure 18-8 also shows the competitive advantage of the 15 percent growth rate. The competitor with a 15 percent growth rate could have a competitive advantage of 30 percent or more after ten years. The moral here is that learning curves could indicate the necessity to exit a business if the company cannot match the competitor's growth rate.

100 1,000 10,000 TOTAL PRODUCTION (UNITS)

FIGURE 18-8. The effect of production growth on annual cost decreases using a 75 percent experience curve. Source: John S. Hammond and Gerald B. Allan, "Note on the Use of Experience Curves in Competitive Bidding," Boston: Harvard Business School Case 175-174. Copyright © 1975 by the President and Fellows of Harvard College. Reprinted by permission.

100 1,000 10,000 TOTAL PRODUCTION (UNITS)

FIGURE 18-8. The effect of production growth on annual cost decreases using a 75 percent experience curve. Source: John S. Hammond and Gerald B. Allan, "Note on the Use of Experience Curves in Competitive Bidding," Boston: Harvard Business School Case 175-174. Copyright © 1975 by the President and Fellows of Harvard College. Reprinted by permission.

Prices and Experience

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