I’ve written before about the importance of the experience curve for cost management and the importance to manage it actively rather than hoping that more experience automatically leads to lower costs.
The Impact Of The Experience Curve On Innovation & Differentiation
I’ve never discussed its impact on differentiation and how focusing on getting the most benefits from the experience curve can undermine customer facing innovation.
Process innovation lies at the heart of the experience curve. As you or your team do something repeatedly, then you find better or quicker ways to do it and especially if it is a task that you know will be repeated many times.
The first task is to standardise processes so that as much variation in outputs from the system are eliminated as possible and then, once the process is in control, you improve it.
The logic is impeccable and your costs should reduce.
Standardising Outputs Kills Customer Facing Innovation
But standardising outputs (either products or services) so that you can standardise processes kills customer facing innovation.
If you’re following a low cost reduction strategy using the experience curve, you don’t want to hear
“John I’ve got an idea. I think our customers would love it if we just…”
This is a conflict between getting costs lower and pleasing the customer and shows why Michael Porter was right when he warned of the dangers of getting stuck in the middle – caught between a low cost strategy and a differentiation strategy.
What Should You Do About The Experience Curve?
I certainly don’t think you should ignore it. The cost benefits are much too important to leave to chance.
The Experience Curve And A Low Cost Strategy
A business following a low cost strategy must use the experience curve rigorously and set clear targets for efficiency improvements and cost reduction. The aim remains to produce a good enough product and sell it for a low price. Differentiated niche players will bring out improved products and services will will either move along the value curve or even shift it. The competitive response of a low cost competitor who has exploited the experience curve effects is to reduce prices. Yes you have to give up some of your hard fought margins but this is the nature of competition.
The Experience Curve And Differentiation Strategy
I also believe that a business following a differentiation strategy needs to pay attention to managing for the experience curve cost savings and in particular standardising systems and processes so that important customer benefits are delivered consistently and reliably.
But the differentiator needs to actively manage the trade-off between keeping an eye on costs and either losing a differentiation advantage it already has or letting a competitor create a new key success factor which has the potential to transform the market.
Sometimes it will be better to make small, frequent, incremental changes which put the experience curve back to stage 1. Other times it will better to harvest cost savings for a while and then take a bigger, step change in product or service functionality.
It’s hard to generalise for differentiators because it depends on what competitors are doing, how customer needs are changing, the change in the product or service and the ability of the business to manage change and speed down the early stages of the experience curve.
Using The Value Disciplines As A Guide To Innovation
Michael Treacy and Fred Wiersema’s ideas on value disciplines are useful to fall back on when thinking about balancing innovation and the experience curve.
If you’re following an Operation Excellence strategy, the idea is to provide reliable products at a competitive price. You’re going to want to concentrate on extracting a lot of benefits from the experience curve and when you do change products, you’ll hope that your process excellence will give you a cost advantage provided you’re drawing on well established capabilities.
If you’re following a Customer Intimacy strategy, then your focus is very much on how much of an impact any innovation in product or service can have on customers. You’ll already have developed skills at customising products and services to meet the specific needs of particular customers. If customer benefits are high, then you’re likely to change quickly.
If you’re following a Product Leadership strategy, then the temptation to keep changing will be high because the reputation of the business relies on having products that are hot, preferably red hot. However there is a trade-off since you may be prepared to put off small incremental changes to make bigger “next generation” leaps that create so much publicity. Apple is a very good example of a Product leader business.
The Experience Curve & Innovation
Strategy is about making the right call on the big decisions. Sometimes it’s not easy which is why the rewards of getting the decision right are so big and why many companies find themselves stuck in the middle.
My purpose is to help you make the conscious decision.
Although my main interest is on differentiation to create unique customer value, you can’t shy away from managing costs professionally. The experience curve must not be ignored.
Paul Simister is the business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.
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