Listen to the full episode on iTunes (and please leave a rating to help the podcast reach more people): E29: The Experience Curve – How to Plan Your Career Better
The more experience you have in a concentrated field of expertise, the more you can produce per unit of effort.
The experience curve applies to both individuals within companies and companies as a whole.
On the individual level, workers become more:
- Dexterous as their experience increases.
- Confident which leads to less time spent second guessing themselves.
- Efficient by coming up with shortcuts that management didn’t think of.
On the company level we will see increased standardisation, specialisation and automation.
- Standardisation: Streamlining products and using fewer platforms.
- Specialisation: Each person does the task they’re best at.
- Increased automation: Use of information technology and robots to automate the production or service process.
Overall, unit costs reduce with 20-30% each time accumulated experience doubles.
Example of the experience curve applied to a company: A car manufacturer that has produced 10,000 cars has 20% lower unit costs compared to one who has produced 5,000 cars.
In other words for every doubling of units produced, the car manufacturer becomes 20% more effective.
Example of the experience curve applied to an individual within a company: An accounting employee that has worked for 10 years at a car factory can produce a yearly report for a wage that’s 20% lower compared to an accounting employee with just 5 years of experience.
In other words, even though the experienced employee charges more money per hour, the decreased amount of time he needs to complete the yearly report results in a 20% lower cost for the company.
The experience curve can be used to plan out your career.
The question you want to think of is: How strong is the experience curve for the industry or activity you are planning to work in?
Ideally you will work in a new, fast-growing industry that consciously applies the experience curve and which fits your talents and interests.
Examples of new, fast-growing industries include:
- Financial technology (fintech): New technology and innovation that aims to compete with traditional financial models.
- Biotechnology: Use of living systems to develop or make products.
Most new fast-growing industries are in the intersection of science, finance, marketing and online.
Given that you have the talent to succeed in one of those fields and you work hard for many years, there’s a bigger potential for making a lot of money.
Be critical when analysing specific companies to work for:
- Is the company growth sustainable? Or is it a company that just grows quickly because the market grows quickly?
Also, keep in mind that while new industries have a stronger experience curve, there’s a big threat from higher competition.
On the individual level: If you aren’t talented enough for your field of choice, you may get replaced fast by someone who is.
On the company level: Competitors grow faster, therefore if your company doesn’t grow and adapt at a fast enough rate, it may get pushed out of the market.
Examples of applying the experience curve to investing and self-improvement:
Investing: When you research a company you should look at it from 2 sides:
- How much better can things get because of the experience curve?
- How much progress can we realistically expect in a given time-frame?
Keep in mind that it can take a long time for the experience curve to kick in, however when it does progress can happen at an exponential rate.
Self improvement: If you aren’t improving yourself at a fast enough rate then you need to question yourself about whether you spend enough time learning and exposing yourself to certain practices that push you to improve?
The human nature is to do what we like, but chances are that you have most likely milked the experience curve’s effects in the things you like the most because you’ve done them so much.
You should try to identify if there’s a weaker link in the chain of your self-improvement and then work on those things.
On future projections: When you make future projections you want to assume that you become exponentially better because the experience curve is similar in strength to compounded interest.
For example, many famous investors struggled financially during their first 10 years of investing and then they became billionaires over the next 30 years.