Breaking with Experience

Innovation involves breaking with the past to create something even more remarkable

Innovation Experience

(Source: Flickr)

THE traditional Experience Curve focuses on increasing production experience which leads to predictable cost reductions.

This kind of experience is relevant in industries that are relatively stable, competitive, and production-intensive.

Experience Curve Example

(Source: Wikipedia)

But what about high tech and creative industries where the lifecycle of a new product is only a couple of years? And what about pretty much every industry nowadays from music distribution to taxi services, which are open to disruption from fast moving well-funded digital entrepreneurs?

In many industries production experience is becoming less important than innovation experience, the track record of being able to consistently break with the past to create something even more remarkable.

To highlight the distinction between “production experience” and “innovation experience” you only need to look at Apple.

Under the leadership of Steve Jobs the company created a string of amazing products which opened up entirely new product categories: the iPod, the iPhone, the iPad. Apple’s strength does not rest on its production experience and, in fact, the company outsources much of its production to Foxconn, a Taiwanese electronics contract manufacturing company.

What about you and your business?

Are you learning how to break with the past, or focusing on creating more of the same but cheaper?

Shifting Time

THE wonderful thing about humans is our ability to move through time and space, without going anywhere at all.

The ability to think about the past allows us to reflect on experiences, our own or those of others, and to learn from them.

Your author used to wonder at length during his high school history classes about the value of studying history. This was perhaps due to the long lists of dates that he was forced to remember, which were meaningless then and have now been permanently forgotten.

History has nothing to do with memorising dates, and instead has everything to do with the experiences of other people, and the lessons we can learn from them. Easier to remember, much more important, but less often taught.

History is a kind of memory that doesn’t die when people do.

This is pretty remarkable, and if our ability to remember and reflect on the past was the extent of our powers then it would probably be amazing enough. But it goes further.

We can also travel forwards in time.

Our ability to imagine the future allows us to think of things that could happen, and act accordingly. If we foresee disaster, we can prepare in advance. If we imagine being the CEO, the market leader in the industry, or the world’s leading CD distributor, then we can set out to achieve it.

But there is a catch (and you might have guess it).

If shifting through time is our super power, our Kryptonite is that we sometimes get stuck there.

Hatred and anger can lead us to constantly replay a past event. Not because we are trying to find the lesson, but because we are simply stuck in time. Stuck in time. Stuck in time.

While getting stuck in the past is counterproductive, it can be even more disasterous to hold on to an impossible future.

Why would anybody do this you ask?

We’re not sure, but it happens all the time. An example from the early Internet days is Napster and the record industry. By its very existence, Napster proved that peer-to-peer file sharing was possible, and not just possible but popular with consumers.

This changed everything.

The future that many firms had imagined evaporated, but many held on to it. In fact, instead of changing their view of the future, many firms launched law suits to try and protect their CD distribution business.

A few years later, Apple launched the iTunes Music Store, and the rest, as they say, is history.

Persistence

The night is darkest before the dawn. Keep moving. You’re closer than you think.

“You will make mistakes. Are you going to be able to get up off the ground when you get smacked down, and keep driving. Persistence and resilience are very important, and there are going to be very difficult trade-offs to make, fundamental trade-offs in terms of how you’re running your business, and you’re going to have to make them very quickly without all of the data.”
~ Dominic Barton

“The majority of men meet with failure because of their lack of persistence in creating new plans to take the place of those which fail.”
~ Napoleon Hill

“The most interesting thing about a postage stamp is the persistence with which it sticks to its job.”
~ Napoleon Hill

“Success is never final and failure is seldom fatal, it’s courage that counts.”
~ Winston Churchill

“If you’re going through hell, keep going.”
~ Winston Churchill

“The real glory is being knocked to your knees and then coming back. That’s real glory. That’s the essence of it.”
~ Vince Lombardi

 “Continuous effort – not strength or intelligence – is the key to unlocking our potential.”
~ Winston Churchill

“A river cuts through rock, not because of its power, but because of its persistence.”
~ Jim Watkins

“It does not matter how slowly you go as long as you do not stop.”
~ Confucius

“Unless commitment is made, there are only promises and hopes; but no plans.”
~ Peter F. Drucker

“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan Press On! has solved and always will solve the problems of the human race.”
~ Calvin Coolidge

“Never, never, never give up.”
~ Winston Churchill

Experience Curve

The Experience Curve captures the relationship between increasing production experience and declining costs

Experience Curve

(Source: Flickr)

Background

The Learning Curve, the concept which predates the Experience Curve, was first described by German psychologist Hermann Ebbinghaus in 1885 as part of his studies into human memory.

In 1936, T.P. Wright described the effect of learning on production costs in the aircraft industry showing that required labour time dropped by 10 to 15 percent with every doubling of production experience.

In 1966, Bruce Henderson and the Boston Consulting Group conducted research for a major semiconductor manufacturer, in which they introduced the concept of the Experience Curve and revealed that unit production costs fell by 20 to 30 percent every time production experience doubled.

In essence, the Learning Curve and the Experience Curve capture the same big idea: performance improves with experience in a fairly predictable way.

How do the two curves differ?

In his 1968 article, Bruce Henderson distinguished the Experience Curve from the Learning Curve by explaining that the Learning Curve relates only to labour and production inputs, while the Experience Curve focuses on total costs.

On the surface his explanation sounds reasonable, but when you think about it what he was really saying is that the Experience Curve is the same as the Learning Curve, just with a slightly broader focus.

Henderson’s distinction was a clever conceit, and his trick allowed the Boston Consulting Group to take credit for an idea that had been in circulation for more than 80 years.

Legitimate or not, the rebranding exercise was effective and has meant that since 1966 the concept has been widely known in management and business circles as the Experience Curve with due credit going to Bruce and the Boston Consulting Group.

This article is entitled “Experience Curve”. We didn’t want to rock the boat.

Experience Curve Explained

The Experience Curve captures the relationship between a firm’s unit production costs and production experience. Research has shown that a firm’s costs typically fall by a predictable amount for every doubling of production experience.

Experience Curve Example(Source: Wikipedia)

Unit production costs tend to decline at a consistent rate as a firm gains production experience, however the rate will typically vary from firm to firm and from one industry to another.

The interesting thing about the Experience Curve is not that a firm’s performance improves with experience, we would expect as much, but instead that performance tends to improve with experience at a predictable rate.

This is surprising. What could explain such consistency?

Learning from Experience

In his 1968 article, Bruce Henderson noted that:

“… reductions in costs as volume increases are not necessarily automatic. They depend crucially on a competent management that seeks ways to force costs down as volume expands. Production costs are most likely to decline under this internal pressure. Yet in the long-run the average combined cost of all elements should decline under the pressure for the company to remain as profitable as possible. To this extent the [Experience Curve] relationship is [one] of normal potential rather than one of certainty … ”

While falling costs may not be inevitable, the Experience Curve effect is pervasive and so declining costs must result from some kind of innate human and organisational factors rather than from, say, the brilliance of a rock star management team or the well power pointed recommendations of a top consulting firm.

Where do the reduced costs come from?

While by no means an exhaustive list, factors that may contribute to the Experience Curve effect include:

  1. Labour efficiency – As employees at all levels of the organisations gain more production experience they gain skills, learn shortcuts, and find ways to produce more with less.
  2. Standardisation – Over time processes and product parts may become standardised allowing for more streamlined production.
  3. Specialisation – As production volume increases a firm is likely to hire more employees, allowing each of them to specialise in a narrower range of tasks.
  4. Optimised Procurement – As a firm gains production experience it will learn about its suppliers and what they have to offer, which will allow it to optimise its procurement practices.
  5. Product Refinement – A firm may engage in significant R&D and marketing prior to and during its initial product launch, but as it learns more about the product and its customers it will be able to refine the product for the requirements of the market. This may allow a firm to reduce ongoing R&D and marketing costs.
  6. Automation – Increased production volume may lead to the adoption of more automated and advanced production technology and IT systems.
  7. Capacity Utilisation – If a firm has incurred large fixed costs, then increasing production will allow it spread these costs across a larger number of units.
  8. Equipment Upgrades – Higher production volumes may justify investment in more advanced equipment.

Implications for Strategy

The Experience Curve effect shows that a firm’s production costs decline in a fairly predictable way as it gains production experience.

What are the implications for corporate strategy?

In 1968, in light of BCG’s research, Bruce Henderson took the view that a firm should price its products as low as would be necessary to dominate their market segment, or else it should probably stop selling them. The same year BCG also developed its now famous growth share matrix, a framework that recommends allocating resources within a firm towards products that are, or are going to become, market leaders.

The clear and resounding message from Henderson and BCG was “dominate the market or don’t bother”.

The thinking behind this rather clear-cut view was that a company with market share leadership would be able to gain production experience more quickly than its rivals and so would be able to achieve a self-sustaining cost advantage.

As it turns out though, pursuing market share leadership will not always be beneficial. There are four countervailing forces that can neutralise the benefits of this strategy.

Firstly, market share may not confer a cost advantage since firms can learn not just from production experience but also from books, courses, formal training, conferences, reverse engineering, talking to suppliers and consultants, and by poaching staff from the competition.

Secondly, if multiple firms pursue market share leadership at the same time then this can create intense rivalry and destroy industry profitability.

Thirdly, new entrants can often avoid going head to head with the market leader by creating more advanced products or using more efficient production technology. This can allow new players to leap frog the competition and force existing firms to play catch up by investing heavily in R&D, forming strategic alliances or acquiring the upstarts for a princely sum.

Fourthly, even if market share leadership does confer a cost advantage there are other ways to compete effectively. Firms can gain an edge by creating unique products or by focusing on niche segments of the overall market (see Porter’s Generic Strategies).

So, where does this leave us?

Well, a firm that aims to be the cost leader within its industry will probably want to pursue market share leadership since the Experience Curve effect and economies of scale will allow it to reduce costs.

On the other hand, a firm that aims to compete by providing a unique offering or by serving a market niche may find the pursuit of market share leadership detrimental. A firm that provides unique or targeted products will generally be able to charge higher prices and this will limit potential sales volume. If it makes its products more generic in an attempt to appeal to the mass market, then this could destroy the “je ne sais quoi” which made the firm successful in the first place (see “Stuck in the Middle”).

Market share leadership can work, but it will not be the correct strategy in every situation.

Stretching the Mind

The mind is a muscle, and meditation is a form of stretching

MOST PEOPLE wouldn’t find it strange if you told them to stretch their muscles before running a race.

Stretching limbers up the muscles, increases performance, and reduces the risk of injury.

And yet, and yet, every day people around the world turn up for work and run a mental race in which it never occurs to them to stop and stretch.

The mind is a muscle, and meditation is a form of stretching.

The problem with meditation is that many people believe it’s not for them. Meditation is for hippies and prayer is for religious folk, the thinking goes, and if you don’t fall into one of those buckets then you are likely to dismiss these practices altogether.

In the cut and thrust of the corporate world, meditation is often seen as a soft idea, the kind that may get you ridiculed or fired, the province of bohemians and tree hugging pinko lefties.

Easy, easy, there is no need for name calling. While it may be true that meditation is warmly embraced by creative types, that may just be because it actually works.

Your author is no hippie. A former lawyer with his fair share of war wounds and battle scars, he is also open to new ideas.

And so, and so, to see whether meditation may have anything of value to offer, we have been trialing it for the last two weeks using a very simple book of Chinese origin called The I Ching

The results are nothing but positive.

By taking 10 minutes out at the start of your day, 10 minutes before starting back after lunch, and 10 minutes before going to bed, you can relax the mind, reduce stress, increase productivity, and decrease the number of hours you need to sleep each night.

It is working for us.

Try it for yourself. There are lots of free meditation resources available online. We are interested to hear how you get on.

Report back with your results, and share your experiences in the consulting forum.

Building An Asset

Or just getting paid?

IF you continue with your current line of work, will you be more capable, better known and have a stronger network in 12 months time?

Or will you just be one year older, one pay grade higher, and one step closer to that “promised” promotion? Financially richer, yet one year poorer at the same time.

When your author was an undergraduate student people used to joke about corporate jobs and “selling out”. It wasn’t entirely clear what that meant at the time or what was so bad about earning a wonderfully high salary. After all, isn’t that why people work? To become wealthy?

The problem is an insidious one, and easy to miss if you’re busy, or ambitious, or afraid.

The situation at work, in your industry and in the broader economy may change. In fact, it is constantly changing, evolving and improving.

But are you?

Constant personal and professional growth should be the norm, but all too often it becomes the exception.

How does this happen?

Well, take a bright eyed graduate fresh out of university, for her securing a job at a reputable firm is a great opportunity. The firm offers training, a nice salary, opportunities to network, and there is a lot to learn. So far so good.

In the second year, she is loving the corporate life. Her salary has never been higher and her expenses are low, there is still a lot of training, she is getting a good handle on her role, and she now knows lots of people at work which is fun. Life couldn’t be better.

In year three, our bright eyed graduate has now become a battle hardened grunt, she is in the thick of it. She knows her role and is incredibly busy with work. There is no time to attend training sessions, and besides these are mostly for the junior staff. Her pay is high but not nearly high enough to cover her mortgage and car payments and she hopes for a raise at the next salary review. She has no time to meet new people and barely time to see the ones she already knows.

A slippery slope.

Nobody plans on becoming a sell out, and it doesn’t happen overnight. But if you’re not expanding your capabilities, reputation and network, then it may be time for a change.

A new project, a new opportunity, or a new way to solve a problem for people who care.

Are you building an asset, or just getting paid?

Acceptance

Making the most of right now

ANGER and hatred result from clinging to past experiences.

By refusing to accept things you cannot change, you lose your peace of mind, waste mental energy, and remain trapped by events which didn’t kill you yet leave you permanently diminished.

Better to let the bad stuff go.

Ambition and anxiety result from restlessly anticipating the future.

By racing ahead of yourself you can become unbalanced, envying the success of others, and making decisions that provide you with immediate signs of progress but which are not aligned with what comes naturally to you or what you really care about. This can exact a heavy toll over time.

By making the most of your situation and the opportunities which present themselves, you can avoid reliving past battles and work in a more positive spirit to lay a foundation upon which future success can be built.

You are here now, and many things are possible.

Prize Inside

HAVE you ever wondered why cereal boxes often contain a free toy, prize or collectible?

The answer is simpler than you might think.

The children are the target audience, while the parents fund the purchase. The kids want the toy, while the parents want cereal for their children but are largely indifferent about which sort of cereal because they’re not going to eat it themselves.

Cereal companies sell toys, and throw in the cereal for free.

Are you an aspiring consultant? If so, then we have a wonderful box of cereal that you might like to try.

The HUB is a new exclusive consulting community. A place where you can connect with other aspiring consultants, and share ideas to help you break into the consulting industry. A delicious box of cereal.

But we can hear the child in you asking the obvious question, where is the toy?

Well, there are multiple toys. Don’t get too excited.

The HUB contains a wide selection of FREE resources including case interview guidebooks, application guidebooks, template cover letters, CVs, and more. They are all free for you as a member of The HUB.

Free templates don’t do it for you?

If you are one of the first 20 new members to sign up to The HUB and introduce yourself in the “Consulting Cabaret” forum today, then we will send you the book of your choice from the Bookshelf. Lots of great books to choose from. Sign up as a member, post in the “Consulting Cabaret” forum, and we will send you the book of your choice.

Wholesome cereal. Prize inside. (Sign up now.)

Chasing The Trend

Is Not A Strategy

MANY FIRMS and many people live their lives by chasing the trend.

They ask themselves questions like, what’s popular? What are other people doing? What’s the “it” thing?

They then chase the trend in an attempt to ride the wave of prosperity and capture some of the growth, glory and profits for themselves.

This may work for you, and it may work more than once.

A key problem though with “chasing the trend” as a way of thinking and as an approach to business is that it is fundamentally unbalanced. It allows goals to be set by reference to external events, by the whims of the crowd, or a passing fancy. You risk becoming a moth to the flame.

Chasing is not a strategy.

The alternative is to look internally, and to do the hard work of figuring out who you are as an organisation or as a person.

What are you best at? What comes naturally to you? What can you bring to the table that others may find difficult?

You can then match your capabilities with market opportunities, and build your strategy from there.

After all is said and done, you may end up being part of the trend. But you will no longer be chasing.

Porter’s Generic Strategies

Three strategies to achieve above-average performance: cost leadership, differentiation, and focus

Porter's Generic Strategies

(Source: Flickr)

In order to understand Porter’s Generic Strategies, it is helpful to take a step back and examine the two things which determine a firm’s profitability in the long run.

The first is industry attractiveness, which is determined in any industry by the five competitive forces: the threat of entry by new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among existing firms.

Five Forces

Figure 1: Porter’s Five Competitive Forces that Determine Industry Profitability

It is the collective strength of these five forces that determine whether firms in an industry will be able to earn attractive rates of return. In industries where the five forces are favourable, such as the soft drink industry, many competitors have earned attractive returns for many decades. However, where one or more of the forces exerts strong pressure on industry profitability, such as in the airline industry, few firms ever do well for very long.

Understanding industry structure, as determined by the five forces, will inform a firm’s decision to enter or exit an industry, and will also be a key consideration for industry leaders who have the ability to mould industry structure for better or for worse. For example, Coca-Cola is a leader in the soft drink industry and could, if it wanted to, encourage the production and sale of generic unbranded soft drinks. Even if this would increase Coca-Cola’s profits in the short run, it would also threaten the industry structure. Generic cola may increase the price sensitivity of buyers, lead to aggressive price competition, and lower barriers to entry by enabling new competitors to enter the market without a large advertising budget.

In addition to industry attractiveness, the second thing which determines a firm’s profitability in the long run (and this is where Porter’s Generic Strategies comes in) is a firm’s relative position within the industry. That is, can a firm position itself to achieve above average performance within its industry? Or put differently, is it possible for a firm to establish and maintain a competitive advantage?

In his 1985 book Competitive Advantage, Michael Porter explains that there are two basic sources of competitive advantage that a firm can possess: cost leadership and differentiation. A firm can also narrow the scope of its activities to compete in niche segments of the market, and so there are three generic strategies that a firm can adopt to achieve above-average performance: cost leadership, differentiation, and focus.

Porter's Generic Strategies

Figure 2: Three Generic Strategies

Porter’s generic strategies are based on the idea that in order to achieve a competitive advantage a firm needs to make hard choices. Trying to be all things to all people will put a firm on the fast track to mediocrity, and so a firm needs to decide what kind of competitive advantage to pursue and which market segments it should target.

Cost Leadership

As the name suggests, a firm that pursues cost leadership aims to be the low cost producer in its industry. While the strategy involves a primary focus on cost reduction, the cost leader will still need to produce comparable products in order to maintain prices. If a firm can sustain cost leadership while at the same time charging prices at or near the industry average, then this strategy can allow a firm to achieve above average performance.

One danger of the cost leadership strategy is that if there is more than one aspiring cost leader then this can lead to intense competitive rivalry and ultimately destroy industry profitability. If a firm wants to be the cost leader, then its best bet is to get in first in order to deter the competition.

Differentiation

Differentiation is a strategy in which a firm sets out to provide unique value to buyers. This may be achieved in various ways including producing products with unique features, serving buyers through new or different distribution channels, or by creating perceived differences in the buyer’s mind through clever marketing.

If a firm is able to charge a price premium that exceeds the cost of sustaining its uniqueness, then the firm will be able to achieve above average returns. While the strategy involves a primary focus on “being different” the differentiator still needs to manage costs, and will want to reduce costs in any area that does not contribute to differentiation.

Focus

The focus strategy involves narrowing the scope of competition in order to serve certain niche segments within the overall market. By serving these target segments well, the focuser may be able to achieve a competitive advantage in its niche even though it does not enjoy a competitive advantage in the market overall.

Stuck in the Middle

So there you have it, three generic strategies for achieving above average performance: cost leadership, differentiation and focus.

Be warned though, a firm that dabbles in each of these strategies while failing to successfully pursue any of them faces the risk of becoming “stuck in the middle” and being perpetually outperformed by the cost leader, the differentiators and the focusers.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]