The Experience Curve
As earlier mentioned, Hamel and Prahalad consider the experience curve to be a reasonable concept. The curve addresses the empirical relationship that exists between changes in direct manufacturing costs and the accumulated volume of production. It is, as a result, considered by many managers to be a key tool by which to formally analyse the competitive cost structure of a given industry. In short, the cost reduction due to experience effects is believed to be caused by issues like learning, specialisation and redesign of labour tasks, product and process improvements, methods and systems rationalisation, economies of scale, and know-how. High market share is thus a result of high-accumulated volume, which again is caused by a low unit cost. This is evidently related to the earlier discussed low-cost generic strategy, but a few additional comments need to be made.
Hamel and Prahalad take care to emphasise the limits of the experience curve, in particular that the curve is reliant on a competitor's failure to appreciate market share or the future growth of a market. While the strategy proved successful to many Japanese companies, it makes a decent argument to say that companies have learnt from the past. To emphasise this point, the authors mention the semiconductor industry as having the capacity to serve a market twice as big as the actual size. Interestingly enough, the persistence of over capacity in the semiconductor market has persisted until today, and the automobile industry is a similar example. Companies understand that they need to grow at the rate of the market just to maintain market share, and the risk of failure at this is perceived as greater than the risk of overproduction. The Internet boom is a another example of an industry growing at several times the actual demand, and investors in Amazon.com are hoping the company's high market share will lead to high future profits. Consequently, the authors argue that "an organisation's capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all". Presently, while less competitive benefit can be derived from the experience curve than what used to be the case, new advantages need to be built to create leverage. Thus, rather than disputing the validity of the experience curve, Hamel and Prahalad argue that the positive effect derived from it has been diluted with time.