Cost leadership strategy and experience curves

Investing in cost leadership by rapidly riding down the experience curve is a common way to establish a firm's competitive advantage. Its success depends, in part, on the factors that underlie the experience curve. In this paper we make the distinction between cost declines that occur at any point in time and cost declines that may occur over time. This leads us to consider a revised experience concept in which the dynamic interrelationship between a firm's production rate, cumulative production and unit cost is explicitly considered. We provide a detailed analysis of various scale-learning relationships and their strategic implications for establishing competitive advantage through an investment in cost leadership. We also prove analytically that such investment should take place only in the presence of learning.