Polyvinylchloride

1955 1968

1,000 10,000 INDUSTRY TOTAL ACCUMULATED VOLUME (MILLIONS OF POUNDS)

100,000

FIGURE 18-11. Representative price-experience curves (each dot represents one year). Source: Perspectives on Experience, The Boston Consulting Group, Boston, Massachusetts, 1968, pp. 72, 85.

The main determinant of our growth is the effectiveness of our new product programs. . . . Anyone can build market share, and if you set your price low enough, you can get the whole damn market. But I will tell you it won't get you anywhere around here.6

From a project management perspective, learning curve pricing can be a competitive weapon. As an example, consider a company that is burdened at $60/hour and is bidding

6. "Hewlett-Packard: When Slower Growth Is Smarter Management," Business Week, June 9, 1975, pp. 5D-58.

on a job to produce 500 units. Let us assume that the data in Table 18-1 apply. For 500 units of production, the cumulative total hours are 51,704, giving us an average rate of 103.4 hours per unit. The cost for the job would be 51,704 hours X $60/hour, or $3,102,240. If the target profit is 10 percent, then the final bid should be $3,412,464. This includes a profit of $310,224.

Even though a 10 percent profit is projected, the actual profit may be substantially less. Each product is priced out an average of 103.4 hours/unit. The first unit, however, will require 812 hours. The company will lose 708.6 hours X $60/hour, or $42,516, on the first unit produced. The 100th unit will require 120 hours, giving us a loss of $996 (i.e., [120 hours - 103.4 hours] X $60/hour). Profit will begin when the 150th unit is produced, because the hours required to produce the 150th unit are less than the average hour per unit of 103.4.

Simply stated, the first 150 units are a drain on cash flow. The cash-flow drain may require the company to "borrow" money to finance operations until the 150th unit is produced, thus lowering the target profit.

During competitive bidding, it is important to know where the competitors sit on the learning curve. Consider the situation shown in Figure 18-12, where three firms are competing for a new production contract. All three firms are performing on the same experience curve. Firm A has an advantage over firm B and a superior advantage over firm C. Firm C is also performing at a higher cost than the current market price. If firm C submits a bid at the current market price, then a substantial loss will occur. Therefore, it is not advisable for firm C to bid the job.

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.

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