Limits of the Learning Curve                           by William J. Abernathy and Kenneth Wayne   Mr. Abernathy is associ...
Hard Strategic QuestionsEvidence on cost decreases in a wide range of products, including semiconductors, petrochemicals,a...
over larger volume, reducing inventory costs as the process becomes more rational and throughputtime drops, cutting labor ...
Exhibit II shows volume and average prices of the Ford line for some 60 years in an experience-curveformat. (The scale of ...
the least expensive Ford car was priced at $850 and tires alone cost more than $60 a set, Henry Fordannounced plans to sel...
increased the weight; between 1915 and 1925 the weight of the car actually gained by nearly 25%,while engine power remaine...
technology, and management that it consumed nearly a year in model development and changeover.As an illustration of its sp...
out these problems, he transfers process technology following the thrust into backward integration,and a third peak of act...
some cases these forces and consequences are evident when a rapid rate of product change retards theinauguration of the le...
Standardization increases, models change less frequently, and the product line offers less diversity. Asthe implementation...
In analyzing the difficulties of Ford and other companies, we are not arguing that the pursuit of a cost-minimization stra...
Very little is known about how to plan for this type of technological change. But we can point to twocourses of action tha...
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  1. 1. Limits of the Learning Curve by William J. Abernathy and Kenneth Wayne Mr. Abernathy is associate professor of Mr. Wayne is a research assistant and business administration at the Harvard doctoral student at the school. With support Business School, where he teaches production from HBS and a grant recently received from management and is involved in the school’s the National Science Foundation, they are new doctoral and research programs on the continuing their study of innovation in relation management of technology. to production strategy in the auto and other industries.Many companies have built successful marketing and production strategies around the learningcurve—the simple but powerful concept that product costs decline systematically by a commonpercentage each time that volume doubles. The learning-curve relationship is important in planningbecause it means that increasing a company’s product volume and market share will also bring costadvantages over the competition.However, other results that are not planned, foreseen, or desired may grow out of such a marketpenetration cost reduction progression. Reduced flexibility, a loss of innovative capability, and higheroverhead may accompany efforts to cut costs.A manager failing to consider the possible outcome of following a cost-minimizing strategy may findhimself with few competitive options once he reaches the point where decelerating volume expansionprevents him from obtaining further significant cost reduction.But if he can identify the likely consequences in advance, he can either anticipate them in his plans orchoose an alternative strategy. In this article we analyze those consequences and conclude thatmanagement cannot expect to receive the benefits of cost reduction provided by a steep learning-curveprojection and at the same time expect to accomplish rapid rates of product innovation andimprovement in product performance. Managers should realize that the two achievements are the fruitsof different strategies.Proponents of the learning curve have developed the relationships between volume growth and costreduction through the use of two distinct but related approaches:1. The learning curve (also called the progress function and start-up function) shows thatmanufacturing costs fall as volume rises. It has typically been developed for standardized products likeairframes and cameras.2. The experience curve traces declines in the total costs of a product line over extended periods oftime as volume grows. Typically, it includes a broader range of costs that are expected to drop thandoes the learning curve, but disregards any product or process design changes introduced during theperiod of consideration. Gas ranges and facial tissues are two major product lines on which experiencecurves have been developed.The two approaches are sufficiently similar for many purposes of planning and analysis. As we shalldemonstrate in due course, however, changes in pricing policy and product design can createsignificant discrepancies. Care must be exercised in choosing between the two related approaches. Collected by: Maudud Ahsan Pallab  Page 1   
  2. 2. Hard Strategic QuestionsEvidence on cost decreases in a wide range of products, including semiconductors, petrochemicals,automobiles, and synthetic fibers, supports the notion that total product costs, as well as manufacturingcosts, decline by a constant and predictable percentage each time volume doubles. Because thisvolume/cost relationship is reliable and quantifiable, it has appeal as a strategic planning tool for usein marketing and financial planning, as well as in production. Moreover, a strategy that seeks thelargest possible market share at the earliest possible date can gain not only market penetration but alsoadvantages over competitors who have failed to reach equal volume.Examples of the economic effects of the learning curve can be found everywhere. The price offerromagnetic memory cores for computers plunged from 5 cents per bit (unit of memory) in 1965 toless than a half cent in 1973, thereby significantly reducing the costs of computers. In less than twodecades of production DuPont reduced the cost of rayon fiber from 53 cents a pound to 17 cents(values not adjusted for inflation). Airframe costs can drop more than 50% per pound during the threeto five years of a high-volume production run if the manufacturer can control the rate of modificationand sustain volume production.In considering examples of independent action by one corporation, the most important is that of theFord Motor Company in its early years. (The Ford example actually shows an experience curve, butthe point it makes is equally valid for a learning-curve situation.) During an initial period of less thantwo years, the average price of a Ford automobile was reduced from more than $5,000 to about $3,000through the introduction of a dominant product, the Model T. Then, as Exhibit I shows on alogarithmic scale, the company cut the price of the Model T to less than $900 following an 85%experience curve. (To underline the contrasts in price, all the figures are translated into 1958 dollars.)During this time span wages were increased more than threefold, the working day reduced by fiat fromten hours to eight, the moving assembly line invented, and one of the nation’s largest industrialcomplexes (River Rouge) created entirely out of retained earnings. We shall return to the Ford caseshortly.The frequency with which this cost reduction/ volume increase pattern is found in practice sometimesleads to the incorrect impression that the learning-curve effect just happens. On the contrary, productdesign, marketing, purchasing, engineering, and manufacturing must be carefully coordinated andmanaged. The producer cuts costs with a combination of effects; these include spreading overheadCollected by: Maudud Ahsan Pallab  Page 2  
  3. 3. over larger volume, reducing inventory costs as the process becomes more rational and throughputtime drops, cutting labor costs with process improvements, achieving greater division of labor, andimproving efficiency through greater familiarity with the process on the part of the work force andmanagement. The impetus toward lower costs and higher volume is fragile, however, and if any one ofthe necessary conditions is removed, a discontinuous return to higher costs may result.The question management must ask in undertaking such a strategy is whether it fully anticipates ordesires the implications that accompany results or that follow execution of the strategy. After thestartup phase, doubling of volume has tremendous implications for the organization. Not all thechanges it undergoes may be desirable. Management must anticipate the consequences so that it canplan for them, or else it should reject the strategy from the beginning. Some of the questions that itmust ask itself are: • What is the practical limit to volume/cost reduction? Much of the empirical evidence that has been presented in support of the experience and learning curves ignores their limits, implicitly suggesting that cost reductions go on forever. How long can benefits be expected? • What pattern of changes in the organization accompanies progress along the learning curve? Clearly, a long sequence of cost reduction has implications for the organization. How must it be changed to bring such cost reductions about? What happens to overhead, the rate of innovation, manufacturing technology, inventory, the work force, and the investment in plant and equipment? • What happens when the practical limits of cost reduction are reached? At this point, can the organization change its strategy from cost minimizing to product-performance maximizing? Or has the organization so changed itself that it loses the vitality, flexibility, and capability for innovation it needs for quick response? In more specific terms, have the quality of the manufacturing technology, the fixed and variable cost structures, and the innovative powers of the work force and management deteriorated so much that the organization cannot make a strategy change?To explore these questions, we shall consider Ford’s early experience, particularly with the Model T.Then we shall examine other manufacturing cases—such as TV picture tubes, electronic components,and office equipment. The evidence suggests that with those products whose performance can beimproved significantly—typically involving complex manufacturing processes such as use ofelectronic equipment machinery—the incidence of product innovation establishes the limit to thelearning curve.The consequence of intensively pursuing a cost-minimization strategy is a reduced ability to makeinnovative changes and to respond to those introduced by competitors—although the amount of lossseems to depend on the degree to which the manufacturer follows such a strategy, and its intensity.The problem of strategy choice, then, is balancing the hoped-for advantages from varying degrees ofcost reduction against a consequent loss in flexibility and ability to innovate.From Model T to Model AAt Ford, the experience curve did not continue indefinitely; it governed only the Model T era. ThenFord abandoned it for a performance-maximizing strategy by which the company tried to improveperformance year by year at an ever higher product price. The product was the Model A. However,Ford’s long devotion to the experience-curve strategy made the transition to another strategy difficultand very costly.Collected by: Maudud Ahsan Pallab  Page 3  
  4. 4. Exhibit II shows volume and average prices of the Ford line for some 60 years in an experience-curveformat. (The scale of the top part is chronological; the bottom part is logarithmic.) Data on retail pricetrends, displayed by the two curves, are related to both product-line diversity and the rate of productchange. Data on the variety of wheel bases and engines, the horsepower range offered, and the averagevehicle weight illustrate how the number of options expanded, contracted, and expanded again. Anindicator of the changes in models appears at the top of the exhibit. Taking these three types ofinformation together—product line diversity, the rate of model change, and price trends—one can seethat they changed concurrently, whether price is defined on a per-vehicle basis (the upper trend line)or on a per-pound basis (the lower).Because manufacturing costs vary directly with weight, a comparison of the two trend lines indifferent periods is revealing. After the Model T was discontinued in 1927, Ford raised the price of itscar from year to year, in contrast to the earlier period. The increases were due mainly to designchanges which were made to enhance comfort, performance, and safety, but which required more andmore expensive materials and caused the price per pound to rise steadily. Considered over a number ofyears, these systematic annual changes represent a tradeoff in favor of size, weight, and performance,as opposed to price.As the exhibit shows, after an initial period in which several models were offered at the same time, theproduct line was consolidated in 1909 to the Model T. Ford’s objective was to reduce the price of theautomobile and thereby increase volume and market share. Before the Model T was conceived, whenCollected by: Maudud Ahsan Pallab  Page 4  
  5. 5. the least expensive Ford car was priced at $850 and tires alone cost more than $60 a set, Henry Fordannounced plans to sell autos at $400—although, he told reporters, “It will take some time to figurewhat we can do.”By 1907, after the death of the former company president and the expulsion of dissident stockholder-managers who advocated high-priced cars, attention turned to product cost reduction. The companyfelt confident in taking this step because of its success with the relatively inexpensive Model N in1907 and later with the Model T, which was clearly a superior product.1The company accomplished savings by building modern plants, extracting higher volume from theexisting plant, obtaining economies in purchased parts, and gaining efficiency through greater divisionof labor. By 1913 these efforts had reduced production throughput times from 21 days to 14. Later,production was speeded further through major process innovations like the moving assembly line inmotors and radiators and branch assembly plants. At times, however, labor turnover reportedly ran ashigh as 40% per month.2Up to this point, Ford had achieved economies without greatly increasing the rate of capital intensity.To sustain the cost cuts, however, the company embarked on a policy of backward and further forwardintegration in order to reduce transportation and raw materials costs, improve reliability of supplysources, and control dealer performance. The rate of capital investment showed substantial increasesafter 1913, rising from 11 cents per sales dollar that year to 22 cents by 1921. The new facilities thatwere built or acquired included blast furnaces, logging operations and saw mills, a railroad, weavingmills, coke ovens, a paper mill, a glass plant, and a cement plant.Throughput time was slashed to four days3 and the inventory level cut in half, despite the addition oflarge raw materials inventories. The labor hours required of unsalaried employees per 1,000 pounds ofvehicle delivered fell correspondingly some 60% during this period, in spite of the additions to thelabor force resulting from the backward integration thrust and in spite of substantial use of Fordemployees in factory construction.Constant improvements in the production process made it more integrated, more mechanized, andincreasingly paced by conveyors. Consequently, the company felt less need for management inplanning and control activities. The percentage of salaried workers was cut from nearly 5% of totalemployment for 1913 to less than 2% by 1921; these reductions in Ford personnel enabled thecompany to hold in line the burgeoning fixed-cost and overhead burden.The strategy of cost minimization single-mindedly followed with the Model T was a spectacularsuccess. But the changes that accompanied it carried the seeds of trouble that affected theorganization’s ability to vary its product, alter its cost structure, and continue to innovate.Cost of transitionIn its effort to keep reducing Model T costs while wages were rising, Ford continued to invest heavilyin plant, property, and equipment. These facilities even included coal mines, rubber plantations, andforestry operations (to provide wooden car parts). By 1926, nearly 33 cents in such assets backed eachdollar of sales, up from 20 cents just four years earlier, thereby increasing fixed costs and raising thebreak-even point.In the meantime, the market was changing. In the early 1920s, consumer demand began shifting to aheavier, closed body and to more comfort. Ford’s chief rival, General Motors, quickly responded tothis shift with new designs. Ford’s response was to add features to the Model T which graduallyCollected by: Maudud Ahsan Pallab  Page 5  
  6. 6. increased the weight; between 1915 and 1925 the weight of the car actually gained by nearly 25%,while engine power remained the same.But the rate of product improvement halted the steady reduction of costs. Nevertheless, to maintainmarket growth Ford further cut the list price along the experience-curve formula. This created a severemargin squeeze, particularly when unit sales began falling after 1923. As the rate of design changesaccelerated and wage levels continued to rise, manufacturing costs loomed ever larger in the retailprice. In 1926, the manufacturing costs of some models reached 93% of list price, and some modelswere actually sold to dealers at prices below costs. (See Exhibit III for sales, manufacturing, and otherdata on Ford during the critical two decades.) Ford, unbeatable at making one product efficiently, wasvulnerable to GM’s strategy of quality and competition via superior vehicle performance. As AlfredSloan, architect of GM’s strategy, later wrote:“Mr. Ford...had frozen his policy in the Model T,...preeminently an open-car design. With its lightchassis, it was unsuited to the heavier closed body, and so in less than two years [by 1923] the closedbody made the already obsolescing design of the Model T noncompetitive as an engineering design...“The old [GM] strategic plan of 1921 was vindicated to a ‘T,’ so to speak, but in a surprising way as tothe particulars. The old master had failed to master change... His precious volume, which was thefoundation of his position, was fast disappearing. He could not continue losing sales and maintain hisprofits. And so, for engineering and market reasons, the Model T fell... In May 1927...he shut downhis great River Rouge plant completely and kept it shut down for nearly a year to retool, leaving thefield to Chevrolet unopposed and opening it up for Mr. Chrysler’s Plymouth. Mr. Ford regained salesleadership again in 1929, 1930, and 1935, but, speaking in terms of generalities, he had lost the lead toGeneral Motors.”4A company that had developed and introduced eight new models during a four-year period, beforeundertaking the cost-minimization strategy, had subsequently so specialized its work force, processCollected by: Maudud Ahsan Pallab  Page 6  
  7. 7. technology, and management that it consumed nearly a year in model development and changeover.As an illustration of its specialization, in the course of the model change Ford lost $200 million,replaced 15,000 machine tools and rebuilt 25,000 more, and laid off 60,000 workers in Detroit alone.So we see that when costs could not be reduced as fast as they were added through design changes, theexperience-curve formula became inoperative. While this sequence should give pause to managerswho wish to apply the experience curve to make product-line changes, it does not invalidate theprinciple of the learning curve, which assumes a standardized product.Decline of InnovationThe sequence of evolutionary development in product and process during the period of the cost-minimization strategy and the subsequent strategy transition is paralleled in the pattern of major Fordinnovations. Exhibit IV plots the frequency and significance of Ford-initiated innovations by type ofapplication: product innovation, process innovation, and transfer of process technology to or fromassociated industries. The new methods and designs are those claimed by Ford. For our analysis, fourindependent industry experts evaluated the importance of each one and rated it on a scale of 1 to 5.The innovations range in significance from the introduction of the plastic steering wheel (indexaverage of 1) in 1921 to the invention of the power-driven final assembly line (index of 5) in 1914.The vertical axis in Exhibit IV provides a sum of the average points assigned to significantdevelopments by two-year intervals in Ford’s history.The exhibit indicates that the intensity of innovative activity is closely related to major events in theunfolding of the cost-minimization strategy. During the Model T period the activity shows a rippleeffect. Installation of new product applications occurs in clusters with new model development andthen declines in frequency as the design is standardized, efficiency is refined, and the process isintegrated into operations. Process innovations rise to a peak after the period of product innovation, asthe manufacturer rationalizes the process and reduces costs. (Compare the peak designated circled 1with the peak designated squared 1, circled 2 with squared 2, and so on.) As the manufacturer worksCollected by: Maudud Ahsan Pallab  Page 7  
  8. 8. out these problems, he transfers process technology following the thrust into backward integration,and a third peak of activity occurs (triangled 2, triangled 3, and so on).The exhibit suggests not only that the nature of innovation changes, but also that the intensity ofinnovative activity diminishes. Ford produced only one new product application or process techniqueduring the seven years after 1932 that rated as high on the scale as 4—the development of transfermachines. This step toward further automation took place in 1937.The changes introduced to trim costs altered the innovative activity in two ways. First, after 1926 thetypes of innovation peaked coincidentally. As operations became more elaborate and systemslike,product and process change developed intimate linkages; many different elements had to be alteredsimultaneously to introduce change. This relationship implies a high cost of change. Secondly, thenature of product innovation shifted. In the early years, a new model meant a complete transformationinvolving major innovation. Later, model change became an annual affair, and innovation centered onnew features available across model lines rather than on new models. For instance, the V-8 engine,whose development appears as a substantial cluster of innovations in Exhibit IV, was producedwithout substantial alterations for 18 years.Not surprisingly, the third class of innovation, technology transfers, increased in frequency through theperiod under consideration. This class had particularly long-term value at Ford since it improved themanufacturing capability. Many of these transfers were accomplished in Ford’s newly integratedfeeder operations, such as one where technology was applied to produce plate glass continuously.Ford’s experience demonstrates the important link between innovation and strategy. Innovation is notthe pacing element; it is part of the strategy. Ford’s choice of strategy made innovation more costlyand a more serious organizational problem. Unfortunately, the cost-cutting drives also led toweakening of the resources (the salaried employees) needed to initiate and carry out innovation. It isnot surprising that the company took nearly a year to change over to the Model A.With its new model, Ford rose again. Combining the old philosophy of cost reduction with the appealof an entirely new car boasting demonstrably high performance, the company wrestled the majormarket share from GM in 1930. But its market share fell once more. Indeed, Chrysler, a distinct thirdamong auto makers during the 1920s, held second place ahead of Ford during most of the Depression.As it turned out, the company’s highly specialized production process lacked the balance to handle thenew product; for example, the company had overcapacity in wood (the Model T had many woodenparts) but undercapacity in glass and body parts manufacturing. Moreover, as indicated by the data inExhibit III, Ford never regained the high levels of labor and capital productivity of its heyday. Despiteextensive investments in new plant and equipment, even in the highest volume year for the Model A(1929), 40 cents in plant and equipment assets were required per dollar of sales, and nearly 80 hours ofdirect labor were required per vehicle.Ford did not improve on these figures until the late 1940s, when new management restructured thecompany and made heavy plant investments. From the time it introduced the Model A, Ford wascompelled to compete on the basis of product quality and performance—a strategy in which it was notskilled.Airframes, Computers, and so onThe Ford case provides a spectacular example of one company’s action in pursuing a cost-minimization strategy to its end. Although this is an extreme case in terms of strategy choices andinvestment magnitudes, the same forces and consequences can be found at stake in other industries. InCollected by: Maudud Ahsan Pallab  Page 8  
  9. 9. some cases these forces and consequences are evident when a rapid rate of product change retards theinauguration of the learning curve, and in other cases the difficulties terminate the downward trend.Consider: • Douglas Aircraft, once an extremely successful, high-volume aircraft manufacturer, was forced into a merger in 1967 with the McDonnell Company by financial problems whose roots lay in poor control of airframe production costs under a fast-shifting conditions. On the assumption that it could reduce the costs of its new jet model following a learning-curve formula, Douglas had made certain commitments on delivery dates and prices to airline customers. But continued modification of its plans disrupted, as Fortune put it, “the normal evolution of the all-important learning curve.”5 • International Business Machines’ schedules to deliver its new 360 series of computers a decade ago were thrown out of kilter. IBM’s 1965 annual report described the situation this way: “Although our production of System/360 is building up rapidly and equipment shipped has been performing well, we had problems... As a result we found it necessary in October to advise customers of delays from our originally planned delivery schedules. The basic building blocks in the System 360 circuitry are advanced new microelectronic circuit modules requiring totally new manufacturing concepts.” The snag was attributable to the company’s efforts to attain high-volume production while it was undertaking major product innovation. • The price of TV picture tubes followed the experience-curve pattern from the introduction of television in the late 1940s until 1963, the average unit price dropping from $34 to $8 (in terms of 1958 dollars). The advent of color TV ended the pattern, as the price for both black-and- white and color TV tubes shot up to $51 by 1966. Then the experience curve reasserted itself; the price dropped to $48 in 1968, $37 in 1970, and $36 in 1972. The transition was less traumatic than is sometimes the case because the innovation was foreseen and the new product was sufficiently similar to the old one that manufacturers could apply their established techniques and facilities in making the color tube. • In some cases radically new technology or the cost of transition has forced many of the “old” manufacturers out of the business. Such has been the case in the shift from vacuum tubes to transistors, from manual to electric typewriters, and from mechanical calculators to electronic machines. The major producers of textile machinery for rug manufacturing, like Lansdowne and Crompton & Knowles, found their markets taken from them by the advent of the new tufting technology in carpets.The contrary relationship between product innovation and efficiency exists not only in instances wherethe impetus for change comes about after a long and successful production run, as in the Ford case andin that of Volkswagen more recently. It can also be found when the change is an unintendedcontinuation of uncertainty following new model introduction, as happened in the foregoing airframeand computer examples.Common Elements of ChangeTo consider the sort of changes that can accompany a cost-minimizing strategy, it is useful to abstractthat aspect of the Ford case. The kinds of changes that took place can be grouped into six categories—product, capital equipment and process technology, task characteristics and process structure, scale,material inputs, and labor.Product:Collected by: Maudud Ahsan Pallab  Page 9  
  10. 10. Standardization increases, models change less frequently, and the product line offers less diversity. Asthe implementation of the strategy continues, the total contribution improves with acceptance of lowermargins accompanying larger volume.Capital Equipment and Process Technology:Vertical integration expands and specialization in process equipment, machine tools, and facilitiesincreases. The rate of capital investment rises while the flexibility of these investments declines.Task Characteristics and Process Structure:The throughput time improves and the division of labor is extended as the production process isrationalized and oriented more toward a line-flow operation. The amount of direct supervisiondecreases as the labor input falls.Scale:The process is segmented to take advantage of economies of scale. Facilities offering economies ofscale, such as engine plants, are centralized as volume rises, while others, like assembly plants, aredispersed to trim transportation costs. Spreading the higher overhead over larger volume gainssavings.Material Inputs:Through either vertical integration or capture of sources of supply, material inputs come under control.Costs are reduced by forcing suppliers to develop materials that meet process needs and by directlyreducing processing costs.Labor:The heightening rationalization of the process leads to greater specialization in labor skills and mayultimately lessen workers’ pride in their jobs and concern for product quality. Process changes alterthe skills requirements from the flexibility of the craftsman to the dexterity of the operative.The same pattern of change in the six categories that characterizes the Ford history also describesperiods of major cost reduction in other industries. For example, as light-bulb manufacturingprogressed from a manual process to an almost entirely automated one, a similar pattern of productdevelopment, process elaboration, increase in capital intensity, and so on, was evident.6 In areas asdiverse as furniture manufacturing and commercial building construction, the problems of improvingproductivity and achieving innovation often hinge on changes similar in thrust to those at Ford. Life-cycle studies of international trade in many products, such as chemicals and petrochemicals,demonstrate a coordinated pattern of change involving product characteristics, scale, and pricecompetition that is consistent with the Ford case.Studies of manufacturing technology yield a common finding for electronics, chemical, andmetalworking companies, among others, that certain conditions in a company, like its supervisorystructure, product-line diversity, and utilization of technology, relate to characteristics of themanufacturing process. More specifically, manufacturers with more efficient line flows have differentratios of supervisory personnel to the work force, different levels of authority, less product diversity,and greater product standardization than manufacturers with more flexible production processstructures.Risks of SuccessCollected by: Maudud Ahsan Pallab  Page 10  
  11. 11. In analyzing the difficulties of Ford and other companies, we are not arguing that the pursuit of a cost-minimization strategy is inappropriate. The failure of many companies, particularly small, innovativeones, can be traced to their inability to make the transition to high volume and cost efficiency.Nevertheless, management needs to recognize that conditions stimulating innovation are differentfrom those favoring efficient, high-volume, established operations.While there must be a theoretical limit to the amount by which costs can ultimately be reduced, amanufacturer reaches the practical limit first. However, the practical limit is not reached because hehas exhausted his means of cutting costs; it is rather determined by the market’s demand for productchange, the rate of technological innovation in the industry, and competitors’ ability to use productperformance as the basis for competing.In determining how the learning-curve strategy should be pursued, management must realize that therisk of misjudging the limit rises directly with the successful continuation of the strategy. There aretwo reasons for this seemingly paradoxical development: first, the market becomes increasinglyvulnerable to performance competition and second, attempts to continue reducing costs diminish theorganization’s ability to respond to this kind of competition.The market becomes more vulnerable to performance competition because the company must stakeout an ever-larger market share to maintain a constant, significant rate of cost cutting. Demand mustbe doubled each time in order to realize the same proportional cost reduction. As the market expands,it becomes harder to hold together and the competition is better able to segment it “from the top,” witha superior product or customized options. Once this action is taken, the company on the learning curvemust either abandon the all-important volume bases of scale or introduce a major productimprovement. Either step, or both, ends the cost-reduction sequence.The unfortunate implication is that product innovation is the enemy of cost efficiency, and vice versa.To make the learning curve evolve successfully, the manufacturer needs a standard product. Underconditions of rapid product change, he cannot slash unit output costs.Managing TechnologyThe role expected of technology is critical in the formulation of manufacturing strategy. Many acompany has sailed into the unknown, trailing glowing reports about the R&D under way in itslaboratories and the new products it is developing. Yet too often the promises in annual reports tostockholders and in news releases are never realized. The problem hinges on difficulties in recognizingthat a shift in strategy has a pervasive effect across the organization’s functional areas. The productiondepartment cannot follow a program of cost reduction along the learning curve at the same time thatR&D or the marketing people are going full steam ahead into new ventures that change the nature ofthe product.When a new product born of technology fails, management is often chided because it assertedlymarketed the product poorly. The problem may have come, however, from management’s failure torealize that its capabilities to handle innovation had weakened. Foresight is a matter of judging thechallenge in terms of altered capabilities as well as technological changes and market forces. In theFord case the difficulties arose as much from what the organization did to itself as from GM’s actions.The ability to switch to a different strategy seems to depend on the extent to which the organizationhas become specialized in following one strategy and on the magnitude of change it must face. Anextreme in either factor can spell trouble.Collected by: Maudud Ahsan Pallab  Page 11  
  12. 12. Very little is known about how to plan for this type of technological change. But we can point to twocourses of action that some major companies have followed in avoiding the problems we havedescribed. One is to maintain efforts to continue development of the existing high-volume productlines. This requires setting the industry pace in periodically inaugurating major product changes whilestressing cost reduction via the learning curve between model changes. This course of action—whichIBM has followed in computers—is obviously a costly option which only companies with largeresources should undertake. It amounts to a decision to maintain comparatively less efficientoperations overall.The second course of action is to take a decentralized approach in which separate organizations orplants in the corporate framework adopt different strategies within the same line of business. Severalcorporations in high-technology industries have taken this approach with success. One organization inthe company will pursue profits with a traditional product, like rayon, to the limit of the experiencecurve. At the same time a new, different organization will undertake the development of innovative(perhaps even competitive) products or processes, such as nylon. In taking this tack, some companieshave shut down old plants and started up new ones instead of mingling different capabilities that are atvarious stages of their development.7Neither of these courses of action will suit the needs of every organization, but some means of dealingwith the issue of technological change and strategy transitions should be included in strategicplanning.1. Allan Nevins, Ford: The Times, the Man, the Company (New York, Scribner, 1954), Chapter XII.2. Keith Sward, The Legend of Henry Ford (New York, Rinehart, 1948), p. 51.3. See Factory Facts From Ford (Detroit, Ford Motor Company, 1924).4. Alfred P. Sloan, Jr., My Years With General Motors (New York, Doubleday, 1964), pp. 162–163.5. John Mecklin, “Douglas Aircraft’s Stormy Flight Plan,” Fortune, December 1966, p. 258.6. See James R. Bright, Automation and Management (Boston, Division of Research, HarvardBusiness School, 1958).7. For more on this approach, see Wickham Skinner, “The Focused Factory,” HBR May–June 1974, p.113. Collected by: Maudud Ahsan Pallab  Page 12  

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