The Economic Context for
Strategy
McCombs School of Business
PRODUCT LIFE-CYCLE
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Sales
Sales Volume Over Time
Embryonic Growth Mature Decline
Time
Profits
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Continued Growth
Sales Rejuvination
Embryonic Growth Mature Decline
Time
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The Product Life Cycle
Introduction Growth Maturity Decline
Sales Volume
Investment Recovery
Profits
0
Time
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Variations on Business Life
Cycle
$ $ $
$
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Market Segments in Business
Life Cycle
Composite PLC
$
M30 M40
M10 M20
Time M10 M30
M20
McCombs School of Business
Products in Business Life Cycle
--Warner-Lambert Company
I II III IV
Introduction Growth Mature Decline
6 7
8
5 9
4
3
2
1
1 Dispos- 3 E.P.T. Plus 6 Listerine 8 Norlestrine
able razor 4 Bubblicious 7 Surgical 9 Bromo-Seltzer
2 Easprin 5 Angiocath II Gloves
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EXPERIENCE CURVE
McCombs School of Business
Experience Curve
Based on observations of cost of manufacturing aircraft.
For every doubling in volume produced, X% of cost was reduced.
Ct = C0 (Pt /P0)-a
Where Ct is cost at time t
Pt is production volume at time t.
a is an industry constant
McCombs School of Business
Experience Curve
Cost
Accumulated Volume
McCombs School of Business
Experience Curve
Log-Log
Cost
$30.00
$10.00
$1.00
$0.50
1 10 100 1000
Accumulated Volume
McCombs School of Business
Experience Curve Examples
McCombs School of Business
Experience Curve
Integrated Circuits 1964-74
Cost
1964 1966 1970 1974
$30.00
$10.00
70% Slope
$1.00
$0.50
1 10 100 1000
Accumulated Volume
(millions of units)
McCombs School of Business
Experience Curve
3-ton Split System Air Conditioners 1957-74
Cost
1957 1960 1968 1974
$1000
$800
80% Slope
$400
$200
1 10 100 1000
Accumulated Volume
(millions of units)
McCombs School of Business
INTEL #2716--A 16K EPROM
Price
Price
Index
1-79
1-80
Cost
Index
1-79 1-80
(on
different 1-81
scales)
Cost
3-81
Cumulative Experience
McCombs School of Business
Cost Experience for Steam
Turbine Generators
70% slope
COST/ 200 MW 87% slope
Megawatt units
Steam Turbine 400 MW
Generators units
600 MW
units
Log Industry
Cumulative Megawatts
of Generators Delivered
McCombs School of Business
McCombs School of Business
McCombs School of Business
Price Experience Curves for
Japanese Motorcycles
(1959 to 1974)
126-250 cc
Slope 76%
51-125 cc
Average 100
Price 80
( 000 <50 cc
1965) 60 Slope 81%
40
Slope 88%
20
1 10
Cumulative Volume (million units)
McCombs School of Business
Photovoltaic modules, 1976-1992
(William and Terzian 1993).
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McCombs School of Business
McCombs School of Business
Experience Curve Components
McCombs School of Business
Experience Curve Components
Learning
Specialization of Labor
Product & Process Improvements
Methods & Systems Rationalizations
Economies of Scale
Know-How
McCombs School of Business
GROWTH/SHARE MATRIX
Product Life Cycle Meets the
Experience Curve
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BCG Growth/Share Matrix
Relative Market Share
High Low
Relative Market Growth
High Rising Star Problem Child
Low Cash Cow Dog
McCombs School of Business
BCG Growth/Share Matrix
(Top Executive Version)
Relative Market Share
High Low
Relative Market Growth
High Problem Child
Low
McCombs School of Business
BCG Growth/Share Matrix
Development Path
Relative Market Share
High Low
Relative Market Growth
High Rising Star Problem Child
Low Cash Cow Dog
McCombs School of Business
BCG Growth/Share Matrix
Cash Flow
Relative Market Share
Relative Market Growth High Low
High Rising Star Problem Child
$
$
$
$
$ $
Low Cash Cow $ Dog
McCombs School of Business
BCG Matrix
Mark II
McCombs School of Business
BCG Matrix II
Many Fragmented Specialization
Number of
Approaches to
Achieve
Advantage
Stalemate Volume
Few
Small Large
Size of the Advantage
McCombs School of Business
BCG Matrix II
Fragmented Specialization
ROI ROI
Many
Number of
Approaches
to Achieve Share Share
Advantage
Stalemate Volume
ROI ROI
Few
Share Share
Small Large
Size of the Advantage
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Industry Value Chain
Manufacturing
Product and service flow
Production Sales &
R&D Engineering & Marketing Service Disposal
Distribution
Manufacturing
Administrative & other
Indirect Value Added
McCombs School of Business Professor Robert R. Wiggins 34
The Experience Curve &
The Value Chain
Production
R&D & Subassembly Marketing Sales & Retailing
Manufacturing Distribution
95% 75% 70% 90% 85% 95%
McCombs School of Business Professor Robert R. Wiggins 35
THE
END
THE
END
McCombs School of Business
McCombs School of Business