Experience and value effects - Marketing Strategy

Perhaps it is to state the obvious to say experience and ability to create value are closely linked and a major factor in successful marketing strategy. In considering these factors, two useful models are presented here.

The experience curve denotes a pattern of decreasing cost as a result of cumulative experience of carrying out an activity or function. Essentially,it shows how learning effects (repetition and accumulated knowledge) can be combined with volume effects (economy of scale) to derive optimum benefits (see Figure below). With experience, the organization should produce better and lower cost products. The main influence of experience effects has been to promote a high volume/low cost philosophy aiming at a reduction in unit cost.

However, in today’s competitive business world,organizations cannot simply rely on a ‘big is beautiful’ strategy based on economy of scale and market share. It is vital to recognize the importance of learning effects on factors such as product quality and service levels. Such factors hold the key to future success and greatly influence the ability to ‘add value’to product offerings. Eventually, cost and learning effects will display diminishing returns and an optimum level is reached. However, the process never stops. The advent of new technologies may mark a shift in experience and offer new challenges.For example, the large monolithic market leader could be in danger as newer, more forward-thinking competitors readily embrace new technology and the subsequent benefits it brings to today’s business environment.

The concept of a value chain, developed by Porter (1980), categorizes the organization as a series of processes generating value for customers and other stakeholders.By examining each value-creating activity, it is possible to identify sources of potential cost leadership and differentiation.

The value chain splits activities into:

  1. primary activities :in-bound logistics, operations, outward logistics, marketing/ sales and service, and
  2. secondary activities :infrastructure, human resource management, technology development and procurement. These secondary activities take place in order to support the primary activities.

For example, the firm’s infrastructure (e.g. management, finance and buildings) serves to support the five primary functions. While each activity generates ‘value’, the linkages between the activities are critical. Consider the interface between in-bound logistics and operations. A Just-in-time logistics system, supported by computerized stock ordering(technology development – secondary activity) could reduce stock costs and enhance the quality of products manufactured in the operations phase of the chain, thus enhancing the overall value generated by the process. The value generated is shown as the ‘margin of value’ in Figure below.

The value chain provides an additional framework to analyses competitive advantage. It helps identify the key skills, processes and linkages required to generate success. Additionally, the concept can link organizations together. A Series of value chains can be analysed as one overall process. For example, the value chains of a component manufacturer and equipment manufacturer could be merged into one system, with common support activities. This could have the effect of reducing overall costs and improving co-ordination between the companies.

The value chain

The value chain

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