Experience Curve

In 1966 BCG devised learning curve concept based on available academic literature including HBR article by Prof Hirschmann and its own work for some clients.

After studying various industries for 4-5 years, BCG concluded that with each doubling of experience, costs and prices should typically decline by 15 to 25%

Francis Lucier, executive from Black & Decker got fascinated with this concept when he read about experience curve in BCG perspectives. He wanted Bruce Henderson (BCG founder) to work on this for Black & Decker. Bruce declined but sent his best man for the assignment – Bill Bain (who later founded Bain & Company).

B&D was one of the very first companies to apply experience curve. To build volumes and increase market share it reduced prices by almost half. It convinced dealers what it was trying to do as their commission took hit in the short term. It was a great success in the end. Lucier became CEO of B&D, first CEO outside of Black and Decker families.

In another industry, in late 1970s, soft lens manufacturer Bausch & Lomb behaving like a firm believer in experience curve slashed prices to gain market share. It did gain market share. But this led its competitors to desperation. One by one all of its competitors got sold out. And who were the buyers? Revlon and J&Js of the world, all of them more powerful and bigger than Bausch & Lomb.

With infusion of capital to its competitors, Bausch & Lomb now had a serious fight to contend with. Bausch & Lomb converted good competitors in to bad ones. 

(Based in excerpts from 'Lords of Strategy' and Competitive Advantage by Michael Porter)