Overcoming the cost crisis: The experience curve for optimizing the cost structure in corporations and medium-sized companies

Corporations and small and medium-sized businesses are facing enormous challenges: In addition to the weakening economy, rising energy prices, high material costs, and a persistent shortage of skilled workers are putting a strain on cost structures. According to a 2024 DIHK economic survey [1], two-thirds of companies see costs as a threat to their competitiveness. In this blog post, I will examine the current cost structure of companies and their approaches to addressing this challenge. You will learn how to use the experience curve to gain clarity about your company's untapped cost-cutting potential.

Challenges posed by the cost situation

The cost structure of German companies is characterized by high energy prices (42% of industrial companies cite this as the main burden), material costs (46% share since 2006), and labor costs (average €43.40 per hour worked, of which 42% are non-wage labor costs in Germany in 2024). In addition, there are regulatory requirements such as the EU Sustainable Development Directive (CSRD) and the shortage of skilled workers, which affects 55–58% of companies [2]. These factors are forcing companies to structure their costs more efficiently. To remain competitive in the cost crisis, companies are implementing various measures: Manual processes in the supply chain are being replaced with the help of AI and automation, with the aim of saving personnel costs. High energy costs are being reduced through energy-efficient technologies. To counteract wage costs, flexible working time models are used to stabilize them.

While the measures mentioned are important approaches to cost optimization in companies' current cost situation and address key cost areas such as energy and personnel, they are nevertheless insufficient to sustainably and strategically optimize the cost structure because they do not include the entire costs of the value chain (e.g., production processes, material usage). They also lack a comparative analysis of the cost position of competitors and suppliers, which can be crucial for long-term competitiveness.

A company can rely on supply chain automation, energy-efficient machinery, and flexible working models to reduce costs. However, the overall savings potential remains unclear. By calculating the experience curve, it can determine how much it could reduce costs across the entire value chain through increased expertise and economies of scale. Without this analysis, the cost optimization potential remains opaque, and the resulting competitive disadvantages remain apparent.

Experience curve analysis: The key to sustainable cost reduction

The experience curve offers a holistic perspective that covers all value-creating processes. It enables the identification of cost-cutting potential throughout the organization, including areas that are not directly addressed by automation, energy efficiency, or flexible working models (e.g., optimization of production processes or material usage). Therefore, professional, holistic, and therefore sustainable cost management first and foremost involves determining the company's current strategic cost situation. This is where the experience curve comes in: It can be used to calculate how much cost-cutting potential a company has in its individual product or service segments. This tool provides the answer to the question of how much unhealthy fat is present in the organization. The experience curve is the basis for deriving realistic, long-term cost-cutting or efficiency-enhancing potential. Furthermore, knowledge of one's own experience curve, as well as that of suppliers and competitors, is a valuable foundation for effective strategic decisions. The use of the experience curve as an analytical tool for the strategic cost situation offers the following benefits:

• Determining the starting point (cost position) The experience curve allows you to precisely determine your company's current cost position for specific products or services. This forms the basis for all further analyses and decisions, as it provides clarity about where the company stands in terms of costs and efficiency.

  
  

• Identifying Cost Reduction Potential The experience curve answers the question: "How much unhealthy fat is present in the organization?" Calculating it reveals the potential for cost reductions resulting from inefficient processes or excessive costs. Typically, this potential amounts to 20–30% for every doubling of production volume over the entire product and/or service life cycle.

  
  

• Basis for realistic goal setting The experience curve serves as the basis for deriving realistic, long-term cost reduction and efficiency improvement goals. Without an initial calculation, the data basis for defining feasible goals is missing, which can lead to unrealistic or ineffective strategies.

  
  

• Avoiding False Assumptions The learning curve effect doesn't occur automatically. A calculation helps understand which factors (e.g., learning processes, economies of scale) promote the effect and which factors (e.g., inefficient processes) can destroy it. Without this analysis, managers run the risk of making false assumptions about the company's cost development.

  
  

• Preparing strategic decisions: The experience curve provides valuable information about your own cost position, that of your suppliers (Lopez effect), and competitors (industry analysis). This data is essential for strategic decisions such as price negotiations, make-or-buy decisions, or the development of pricing strategies for market entry. Calculating the experience curve provides the basis for these decisions.

  
  

• Relevance across the product life cycle The experience curve effect affects the entire product life cycle. Early calculation allows for early planning of cost trends over the available time and the implementation of targeted measures to secure long-term competitive advantages.

  
  

• Avoiding Competitive Disadvantages: Calculating the experience curve protects against the risk that competitors will achieve a better cost position through greater experience (larger production volumes). This allows companies to take targeted measures to strengthen their own position.

  
  

• Basis for pricing and market entry strategies The experience curve forms the basis for intelligent pricing strategies for market entry. If the expected future experience curve is not calculated, companies could set prices that are either uncompetitive or unnecessarily reduce margins. The future analysis ensures an optimal starting position for all possible price developments.

Conclusion

The cost situation for companies requires professional, holistic, strategic cost management. The experience curve analysis, as described in detail in my practical book "Strategy Tools from Practice - Analyzing the Strategic Starting Position Using a Practical Example," offers a sound method for systematically analyzing the cost position, identifying cost potential, making strategic decisions, and deriving realistic goals. Its application secures competitive advantages and helps achieve sustainable cost reductions across the entire product life cycle.

The ready-to-use Excel tool available here helps you calculate and display the experience curve effectively and efficiently. This application provides insight into the untapped cost-cutting potential within your company. Combining it with digitalization measures can significantly strengthen and increase your company's competitiveness.

Sources:

[1] DIHK (2024): Deutsche Wirtschaft verliert den Anschluss. Abgerufen von https://www.dihk.de/resource/blob/123312/d6fd9a406d4de6d478388e633b5ad9ea/konjunktur-dihk-konjunkturumfrage-herbst-2024-data.pdf.

[2] Statista