The BCG matrix and the experience curve

 

The BCG matrix and the experience curve are highly interrelated

The BCG matrix and the experience curve are highly interrelated. The BCG matrix relies upon the relative market share metric as its indicator of competitive strength. The greater market share advantage, then the greater the amount of profitability generated by the portfolio/firm.

What is the experience curve?

The experience curve is a concept used in large-scale manufacturing. It suggests that over time – primarily through the firm’s growing experience in manufacturing and logistics – that the firm will become more cost efficient with their production. Over time, the market leader – who has the greatest amount of production experience – will build a significant cost leadership advantage in the marketplace.

This cost leadership position enables the market leader to more aggressively compete on price OR to achieve greater profitability through increased margins.

The experience curve differs in concept from economies of scale. Economies of scale are generated when the firm has an increasing sales volume, which means that fixed costs are allocated across more units.

As you can see, both the experience curve (getting more efficient at production through experience) and economy of scale benefits (allocating fixed costs across more units) will result in much lower average unit costs.

Impact on the BCG matrix

The BCG matrix considers relative market share as the prime form of competitive advantage. This is because a high level of market share delivers the cost advantages from experience curve benefits and economies of scale.

This is why cash cows are significant generators of surplus cash that is then available for reinvestment in the business. It also explains why cash cows are relatively stable, as they have a financial advantage in the marketplace that allows them to compete more aggressively and win back any lost market share if required.

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