Operations And Supply Chain Management

Limits of the Learning Curve

by William J. Abernathy and Kenneth Wayne
From the Magazine (September 1974)

Many companies have built successful marketing and production

strategies around the learning curve—the simple but powerful
concept that product costs decline systematically by a common
percentage each time that volume doubles. The learning-curve
relationship is important in planning because it means that
increasing a company’s product volume and market share will
also bring cost advantages over the competition.

However, other results that are not planned, foreseen, or desired

may grow out of such a market penetration cost reduction
progression. Reduced flexibility, a loss of innovative capability,
and higher overhead may accompany efforts to cut costs.

A manager failing to consider the possible outcome of following a

cost-minimizing strategy may find himself with few competitive
options once he reaches the point where decelerating volume
expansion prevents him from obtaining further significant cost
reduction.

But if he can identify the likely consequences in advance, he can

either anticipate them in his plans or choose an alternative
strategy. In this article we analyze those consequences and
conclude that management cannot expect to receive the benefits
of cost reduction provided by a steep learning-curve projection
and at the same time expect to accomplish rapid rates of product
innovation and improvement in product performance. Managers
should realize that the two achievements are the fruits of different
strategies.

Proponents of the learning curve have developed the

relationships between volume growth and cost reduction through
the use of two distinct but related approaches:

1. The learning curve (also called the progress function and start-
up function) shows that manufacturing costs fall as volume rises.
It has typically been developed for standardized products like
airframes and cameras.

2. The experience curve traces declines in the total costs of a

product line over extended periods of time as volume grows.
Typically, it includes a broader range of costs that are expected to
drop than does the learning curve, but disregards any product or
process design changes introduced during the period of
consideration. Gas ranges and facial tissues are two major product
lines on which experience curves have been developed.

The two approaches are sufficiently similar for many purposes of

planning and analysis. As we shall demonstrate in due course,
however, changes in pricing policy and product design can create
significant discrepancies. Care must be exercised in choosing
between the two related approaches.

Hard Strategic Questions

Evidence on cost decreases in a wide range of products, including
semiconductors, petrochemicals, automobiles, and synthetic
fibers, supports the notion that total product costs, as well as
manufacturing costs, decline by a constant and predictable
percentage each time volume doubles. Because this volume/cost
relationship is reliable and quantifiable, it has appeal as a
strategic planning tool for use in marketing and financial
planning, as well as in production. Moreover, a strategy that seeks
the largest possible market share at the earliest possible date can
gain not only market penetration but also advantages over
competitors who have failed to reach equal volume.

Examples of the economic effects of the learning curve can be

found everywhere. The price of ferromagnetic memory cores for
computers plunged from 5 cents per bit (unit of memory) in 1965
to less than a half cent in 1973, thereby significantly reducing the
costs of computers. In less than two decades of production
DuPont reduced the cost of rayon fiber from 53 cents a pound to 17
cents (values not adjusted for inflation). Airframe costs can drop
more than 50% per pound during the three to five years of a high-
volume production run if the manufacturer can control the rate of
modification and sustain volume production.

In considering examples of independent action by one

corporation, the most important is that of the Ford Motor
Company in its early years. (The Ford example actually shows an
experience curve, but the point it makes is equally valid for a
learning-curve situation.) During an initial period of less than two
years, the average price of a Ford automobile was reduced from
more than $5,000 to about $3,000 through the introduction of a
dominant product, the Model T. Then, as Exhibit I shows on a
logarithmic scale, the company cut the price of the Model T to less
than $900 following an 85% experience curve. (To underline the
contrasts in price, all the figures are translated into 1958 dollars.)
Exhibit I Price of Model T. 1909–1923 (Average List Price in 1958
Dollars)

During this time span wages were increased more than threefold,
the working day reduced by fiat from ten hours to eight, the
moving assembly line invented, and one of the nation’s largest
industrial complexes (River Rouge) created entirely out of
retained earnings. We shall return to the Ford case shortly.

The frequency with which this cost reduction/ volume increase

pattern is found in practice sometimes leads to the incorrect
impression that the learning-curve effect just happens. On the
contrary, product design, marketing, purchasing, engineering,
and manufacturing must be carefully coordinated and managed.
The producer cuts costs with a combination of effects; these
include spreading overhead over larger volume, reducing
inventory costs as the process becomes more rational and
throughput time drops, cutting labor costs with process
improvements, achieving greater division of labor, and improving
efficiency through greater familiarity with the process on the part
of the work force and management. The impetus toward lower
costs and higher volume is fragile, however, and if any one of the
necessary conditions is removed, a discontinuous return to
higher costs may result.
The question management must ask in undertaking such a
strategy is whether it fully anticipates or desires the implications
that accompany results or that follow execution of the strategy.
After the startup phase, doubling of volume has tremendous
implications for the organization. Not all the changes it
undergoes may be desirable. Management must anticipate the
consequences so that it can plan for them, or else it should reject
the strategy from the beginning. Some of the questions that it
must ask itself are:

What is the practical limit to volume/cost reduction? Much of the

empirical evidence that has been presented in support of the
experience and learning curves ignores their limits, implicitly
suggesting that cost reductions go on forever. How long can
benefits be expected?
What pattern of changes in the organization accompanies
progress along the learning curve? Clearly, a long sequence of
cost reduction has implications for the organization. How must it
be changed to bring such cost reductions about? What happens
to overhead, the rate of innovation, manufacturing technology,
inventory, the work force, and the investment in plant and
equipment?
What happens when the practical limits of cost reduction are
reached? At this point, can the organization change its strategy
from cost minimizing to product-performance maximizing? Or has
the organization so changed itself that it loses the vitality,
flexibility, and capability for innovation it needs for quick
response? In more specific terms, have the quality of the
manufacturing technology, the fixed and variable cost structures,
and the innovative powers of the work force and management
 deteriorated so much that the organization cannot make a
strategy change?
To explore these questions, we shall consider Ford’s early
experience, particularly with the Model T. Then we shall examine
other manufacturing cases—such as TV picture tubes, electronic
components, and office equipment. The evidence suggests that
with those products whose performance can be improved
significantly—typically involving complex manufacturing
processes such as use of electronic equipment machinery—the
incidence of product innovation establishes the limit to the
learning curve.

The consequence of intensively pursuing a cost-minimization

strategy is a reduced ability to make innovative changes and to
respond to those introduced by competitors—although the
amount of loss seems to depend on the degree to which the
manufacturer follows such a strategy, and its intensity. The
problem of strategy choice, then, is balancing the hoped-for
advantages from varying degrees of cost reduction against a
consequent loss in flexibility and ability to innovate.

From Model T to Model A

At Ford, the experience curve did not continue indefinitely; it
governed only the Model T era. Then Ford abandoned it for a
performance-maximizing strategy by which the company tried to
improve performance year by year at an ever higher product
price. The product was the Model A. However, Ford’s long
devotion to the experience-curve strategy made the transition to
another strategy difficult and very costly.

Exhibit II shows volume and average prices of the Ford line for
some 60 years in an experience-curve format. (The scale of the
top part is chronological; the bottom part is logarithmic.) Data on
retail price trends, displayed by the two curves, are related to both
product-line diversity and the rate of product change. Data on the
variety of wheel bases and engines, the horsepower range offered,
and the average vehicle weight illustrate how the number of
options expanded, contracted, and expanded again. An indicator
of the changes in models appears at the top of the exhibit. Taking
these three types of information together—product line diversity,
the rate of model change, and price trends—one can see that they
changed concurrently, whether price is defined on a per-vehicle
basis (the upper trend line) or on a per-pound basis (the lower).

Exhibit II The Ford Experience Curve (in 1958 Constant Dollars)

Because manufacturing costs vary directly with weight, a

comparison of the two trend lines in different periods is revealing.
After the Model T was discontinued in 1927, Ford raised the price
of its car from year to year, in contrast to the earlier period. The
increases were due mainly to design changes which were made to
enhance comfort, performance, and safety, but which required
more and more expensive materials and caused the price per
pound to rise steadily. Considered over a number of years, these
systematic annual changes represent a tradeoff in favor of size,
weight, and performance, as opposed to price.

As the exhibit shows, after an initial period in which several

models were offered at the same time, the product line was
consolidated in 1909 to the Model T. Ford’s objective was to
reduce the price of the automobile and thereby increase volume
and market share. Before the Model T was conceived, when the
least expensive Ford car was priced at $850 and tires alone cost
more than $60 a set, Henry Ford announced plans to sell autos at
$400—although, he told reporters, “It will take some time to
figure what we can do.”

By 1907, after the death of the former company president and the
expulsion of dissident stockholder-managers who advocated
high-priced cars, attention turned to product cost reduction. The
company felt confident in taking this step because of its success
with the relatively inexpensive Model N in 1907 and later with the
Model T, which was clearly a superior product.1

The company accomplished savings by building modern plants,

extracting higher volume from the existing plant, obtaining
economies in purchased parts, and gaining efficiency through
greater division of labor. By 1913 these efforts had reduced
production throughput times from 21 days to 14. Later, production
was speeded further through major process innovations like the
moving assembly line in motors and radiators and branch
assembly plants. At times, however, labor turnover reportedly ran
as high as 40% per month.2

Up to this point, Ford had achieved economies without greatly

increasing the rate of capital intensity. To sustain the cost cuts,
however, the company embarked on a policy of backward and
further forward integration in order to reduce transportation and
raw materials costs, improve reliability of supply sources, and
control dealer performance. The rate of capital investment
showed substantial increases after 1913, rising from 11 cents per
sales dollar that year to 22 cents by 1921. The new facilities that
were built or acquired included blast furnaces, logging operations
and saw mills, a railroad, weaving mills, coke ovens, a paper mill,
a glass plant, and a cement plant.

Throughput time was slashed to four days3 and the inventory

level cut in half, despite the addition of large raw materials
inventories. The labor hours required of unsalaried employees per
1,000 pounds of vehicle delivered fell correspondingly some 60%
during this period, in spite of the additions to the labor force
resulting from the backward integration thrust and in spite of
substantial use of Ford employees in factory construction.

Constant improvements in the production process made it more

integrated, more mechanized, and increasingly paced by
conveyors. Consequently, the company felt less need for
management in planning and control activities. The percentage
of salaried workers was cut from nearly 5% of total employment
for 1913 to less than 2% by 1921; these reductions in Ford
personnel enabled the company to hold in line the burgeoning
fixed-cost and overhead burden.

The strategy of cost minimization single-mindedly followed with

the Model T was a spectacular success. But the changes that
accompanied it carried the seeds of trouble that affected the
organization’s ability to vary its product, alter its cost structure,
and continue to innovate.

Cost of transition
In its effort to keep reducing Model T costs while wages were
rising, Ford continued to invest heavily in plant, property, and
equipment. These facilities even included coal mines, rubber
plantations, and forestry operations (to provide wooden car
parts). By 1926, nearly 33 cents in such assets backed each dollar
of sales, up from 20 cents just four years earlier, thereby
increasing fixed costs and raising the break-even point.

In the meantime, the market was changing. In the early 1920s,

consumer demand began shifting to a heavier, closed body and to
more comfort. Ford’s chief rival, General Motors, quickly
responded to this shift with new designs. Ford’s response was to
add features to the Model T which gradually increased the weight;
between 1915 and 1925 the weight of the car actually gained by
nearly 25%, while engine power remained the same.

But the rate of product improvement halted the steady reduction

of costs. Nevertheless, to maintain market growth Ford further
cut the list price along the experience-curve formula. This created
a severe margin squeeze, particularly when unit sales began
falling after 1923. As the rate of design changes accelerated and
wage levels continued to rise, manufacturing costs loomed ever
larger in the retail price. In 1926, the manufacturing costs of some
models reached 93% of list price, and some models were actually
sold to dealers at prices below costs. (See Exhibit III for sales,
manufacturing, and other data on Ford during the critical two
decades.) Ford, unbeatable at making one product efficiently, was
vulnerable to GM’s strategy of quality and competition via
superior vehicle performance. As Alfred Sloan, architect of GM’s
strategy, later wrote:
Exhibit III Ford Vital Statistics, 1910–1931 Sources: Ford Archives;
Federal Trade Commission, Report on the Motor Vehicle Industry,
76th Congress, First Session (1940), House Document 468.
Missing figures are not available.

“Mr. Ford…had frozen his policy in the Model T,…preeminently an

open-car design. With its light chassis, it was unsuited to the
heavier closed body, and so in less than two years [by 1923] the
closed body made the already obsolescing design of the Model T
noncompetitive as an engineering design…

“The old [GM] strategic plan of 1921 was vindicated to a ‘T,’ so to

speak, but in a surprising way as to the particulars. The old master
had failed to master change… His precious volume, which was the
foundation of his position, was fast disappearing. He could not
continue losing sales and maintain his profits. And so, for
engineering and market reasons, the Model T fell… In May 1927…he
shut down his great River Rouge plant completely and kept it shut
down for nearly a year to retool, leaving the field to Chevrolet
unopposed and opening it up for Mr. Chrysler’s Plymouth. Mr. Ford
regained sales leadership again in 1929, 1930, and 1935, but,
speaking in terms of generalities, he had lost the lead to General
Motors.”4

A company that had developed and introduced eight new models

during a four-year period, before undertaking the cost-
minimization strategy, had subsequently so specialized its work
force, process technology, and management that it consumed
nearly a year in model development and changeover. As an
illustration of its specialization, in the course of the model change
Ford lost $200 million, replaced 15,000 machine tools and rebuilt
25,000 more, and laid off 60,000 workers in Detroit alone.

So we see that when costs could not be reduced as fast as they

were added through design changes, the experience-curve
formula became inoperative. While this sequence should give
pause to managers who wish to apply the experience curve to
make product-line changes, it does not invalidate the principle of
the learning curve, which assumes a standardized product.

Decline of Innovation
The sequence of evolutionary development in product and
process during the period of the cost-minimization strategy and
the subsequent strategy transition is paralleled in the pattern of
major Ford innovations. Exhibit IV plots the frequency and
significance of Ford-initiated innovations by type of application:
product innovation, process innovation, and transfer of process
technology to or from associated industries. The new methods
and designs are those claimed by Ford. For our analysis, four
independent industry experts evaluated the importance of each
one and rated it on a scale of 1 to 5. The innovations range in
significance from the introduction of the plastic steering wheel
(index average of 1) in 1921 to the invention of the power-driven
final assembly line (index of 5) in 1914. The vertical axis in Exhibit
IV provides a sum of the average points assigned to significant
developments by two-year intervals in Ford’s history.

Exhibit IV Innovation and Process Change at Ford

The exhibit indicates that the intensity of innovative activity is

closely related to major events in the unfolding of the cost-
minimization strategy. During the Model T period the activity
shows a ripple effect. Installation of new product applications
occurs in clusters with new model development and then declines
in frequency as the design is standardized, efficiency is refined,
and the process is integrated into operations. Process innovations
rise to a peak after the period of product innovation, as the
manufacturer rationalizes the process and reduces costs.
(Compare the peak designated circled 1 with the peak designated
squared 1, circled 2 with squared 2, and so on.) As the
manufacturer works out these problems, he transfers process
technology following the thrust into backward integration, and a
third peak of activity occurs (triangled 2, triangled 3, and so on).
The exhibit suggests not only that the nature of innovation
changes, but also that the intensity of innovative activity
diminishes. Ford produced only one new product application or
process technique during the seven years after 1932 that rated as
high on the scale as 4—the development of transfer machines.
This step toward further automation took place in 1937.

The changes introduced to trim costs altered the innovative

activity in two ways. First, after 1926 the types of innovation
peaked coincidentally. As operations became more elaborate and
systemslike, product and process change developed intimate
linkages; many different elements had to be altered
simultaneously to introduce change. This relationship implies a
high cost of change. Secondly, the nature of product innovation
shifted. In the early years, a new model meant a complete
transformation involving major innovation. Later, model change
became an annual affair, and innovation centered on new
features available across model lines rather than on new models.
For instance, the V-8 engine, whose development appears as a
substantial cluster of innovations in Exhibit IV, was produced
without substantial alterations for 18 years.

Not surprisingly, the third class of innovation, technology

transfers, increased in frequency through the period under
consideration. This class had particularly long-term value at Ford
since it improved the manufacturing capability. Many of these
transfers were accomplished in Ford’s newly integrated feeder
operations, such as one where technology was applied to produce
plate glass continuously.

Ford’s experience demonstrates the important link between

innovation and strategy. Innovation is not the pacing element; it
is part of the strategy. Ford’s choice of strategy made innovation
more costly and a more serious organizational problem.
Unfortunately, the cost-cutting drives also led to weakening of the
resources (the salaried employees) needed to initiate and carry
out innovation. It is not surprising that the company took nearly a
year to change over to the Model A.

With its new model, Ford rose again. Combining the old
philosophy of cost reduction with the appeal of an entirely new
car boasting demonstrably high performance, the company
wrestled the major market share from GM in 1930. But its market
share fell once more. Indeed, Chrysler, a distinct third among
auto makers during the 1920s, held second place ahead of Ford
during most of the Depression.

As it turned out, the company’s highly specialized production

process lacked the balance to handle the new product; for
example, the company had overcapacity in wood (the Model T
had many wooden parts) but undercapacity in glass and body
parts manufacturing. Moreover, as indicated by the data in
Exhibit III, Ford never regained the high levels of labor and
capital productivity of its heyday. Despite extensive investments
in new plant and equipment, even in the highest volume year for
the Model A (1929), 40 cents in plant and equipment assets were
required per dollar of sales, and nearly 80 hours of direct labor
were required per vehicle.

Ford did not improve on these figures until the late 1940s, when
new management restructured the company and made heavy
plant investments. From the time it introduced the Model A, Ford
was compelled to compete on the basis of product quality and
performance—a strategy in which it was not skilled.

Airframes, Computers, and so on

The Ford case provides a spectacular example of one company’s
action in pursuing a cost-minimization strategy to its end.
Although this is an extreme case in terms of strategy choices and
investment magnitudes, the same forces and consequences can
be found at stake in other industries. In some cases these forces
and consequences are evident when a rapid rate of product
change retards the inauguration of the learning curve, and in
other cases the difficulties terminate the downward trend.
Consider:

Douglas Aircraft, once an extremely successful, high-volume

aircraft manufacturer, was forced into a merger in 1967 with the
McDonnell Company by financial problems whose roots lay in
poor control of airframe production costs under a fast-shifting
conditions. On the assumption that it could reduce the costs of
its new jet model following a learning-curve formula, Douglas had
made certain commitments on delivery dates and prices to airline
customers. But continued modification of its plans disrupted, as
Fortune put it, “the normal evolution of the all-important learning
curve.”5
International Business Machines’ schedules to deliver its new
360 series of computers a decade ago were thrown out of kilter.
IBM’s 1965 annual report described the situation this way:
“Although our production of System/360 is building up rapidly
and equipment shipped has been performing well, we had
problems… As a result we found it necessary in October to advise
customers of delays from our originally planned delivery
schedules. The basic building blocks in the System 360 circuitry
are advanced new microelectronic circuit modules requiring
totally new manufacturing concepts.” The snag was attributable
to the company’s efforts to attain high-volume production while it
was undertaking major product innovation.
The price of TV picture tubes followed the experience-curve
pattern from the introduction of television in the late 1940s until
1963, the average unit price dropping from $34 to $8 (in terms of
 1958 dollars). The advent of color TV ended the pattern, as the
price for both black-and-white and color TV tubes shot up to $51
by 1966. Then the experience curve reasserted itself; the price
dropped to $48 in 1968, $37 in 1970, and $36 in 1972. The
transition was less traumatic than is sometimes the case because
the innovation was foreseen and the new product was sufficiently
similar to the old one that manufacturers could apply their
established techniques and facilities in making the color tube.
In some cases radically new technology or the cost of transition
has forced many of the “old” manufacturers out of the business.
Such has been the case in the shift from vacuum tubes to
transistors, from manual to electric typewriters, and from
mechanical calculators to electronic machines. The major
producers of textile machinery for rug manufacturing, like
Lansdowne and Crompton & Knowles, found their markets taken
from them by the advent of the new tufting technology in carpets.
The contrary relationship between product innovation and
efficiency exists not only in instances where the impetus for
change comes about after a long and successful production run,
as in the Ford case and in that of Volkswagen more recently. It can
also be found when the change is an unintended continuation of
uncertainty following new model introduction, as happened in
the foregoing airframe and computer examples.

Common Elements of Change

To consider the sort of changes that can accompany a cost-
minimizing strategy, it is useful to abstract that aspect of the Ford
case. The kinds of changes that took place can be grouped into six
categories—product, capital equipment and process technology,
task characteristics and process structure, scale, material inputs,
and labor.
Product:
Standardization increases, models change less frequently, and the
product line offers less diversity. As the implementation of the
strategy continues, the total contribution improves with
acceptance of lower margins accompanying larger volume.

Capital Equipment and Process Technology:

Vertical integration expands and specialization in process
equipment, machine tools, and facilities increases. The rate of
capital investment rises while the flexibility of these investments
declines.

Task Characteristics and Process Structure:

The throughput time improves and the division of labor is
extended as the production process is rationalized and oriented
more toward a line-flow operation. The amount of direct
supervision decreases as the labor input falls.

Scale:
The process is segmented to take advantage of economies of scale.
Facilities offering economies of scale, such as engine plants, are
centralized as volume rises, while others, like assembly plants, are
dispersed to trim transportation costs. Spreading the higher
overhead over larger volume gains savings.

Material Inputs:
Through either vertical integration or capture of sources of
supply, material inputs come under control. Costs are reduced by
forcing suppliers to develop materials that meet process needs
and by directly reducing processing costs.

Labor:
The heightening rationalization of the process leads to greater
specialization in labor skills and may ultimately lessen workers’
pride in their jobs and concern for product quality. Process
changes alter the skills requirements from the flexibility of the
craftsman to the dexterity of the operative.

The same pattern of change in the six categories that

characterizes the Ford history also describes periods of major cost
reduction in other industries. For example, as light-bulb
manufacturing progressed from a manual process to an almost
entirely automated one, a similar pattern of product
development, process elaboration, increase in capital intensity,
and so on, was evident.6 In areas as diverse as furniture
manufacturing and commercial building construction, the
problems of improving productivity and achieving innovation
often hinge on changes similar in thrust to those at Ford. Life-
cycle studies of international trade in many products, such as
chemicals and petrochemicals, demonstrate a coordinated
pattern of change involving product characteristics, scale, and
price competition that is consistent with the Ford case.

Studies of manufacturing technology yield a common finding for

electronics, chemical, and metalworking companies, among
others, that certain conditions in a company, like its supervisory
structure, product-line diversity, and utilization of technology,
relate to characteristics of the manufacturing process. More
specifically, manufacturers with more efficient line flows have
different ratios of supervisory personnel to the work force,
different levels of authority, less product diversity, and greater
product standardization than manufacturers with more flexible
production process structures.
Risks of Success
In analyzing the difficulties of Ford and other companies, we are
not arguing that the pursuit of a cost-minimization strategy is
inappropriate. The failure of many companies, particularly small,
innovative ones, can be traced to their inability to make the
transition to high volume and cost efficiency. Nevertheless,
management needs to recognize that conditions stimulating
innovation are different from those favoring efficient, high-
volume, established operations.

While there must be a theoretical limit to the amount by which

costs can ultimately be reduced, a manufacturer reaches the
practical limit first. However, the practical limit is not reached
because he has exhausted his means of cutting costs; it is rather
determined by the market’s demand for product change, the rate
of technological innovation in the industry, and competitors’
ability to use product performance as the basis for competing.

In determining how the learning-curve strategy should be

pursued, management must realize that the risk of misjudging the
limit rises directly with the successful continuation of the
strategy. There are two reasons for this seemingly paradoxical
development: first, the market becomes increasingly vulnerable
to performance competition and second, attempts to continue
reducing costs diminish the organization’s ability to respond to
this kind of competition.

The market becomes more vulnerable to performance

competition because the company must stake out an ever-larger
market share to maintain a constant, significant rate of cost
cutting. Demand must be doubled each time in order to realize
the same proportional cost reduction. As the market expands, it
becomes harder to hold together and the competition is better
able to segment it “from the top,” with a superior product or
customized options. Once this action is taken, the company on
the learning curve must either abandon the all-important volume
bases of scale or introduce a major product improvement. Either
step, or both, ends the cost-reduction sequence.

The unfortunate implication is that product innovation is the

enemy of cost efficiency, and vice versa. To make the learning
curve evolve successfully, the manufacturer needs a standard
product. Under conditions of rapid product change, he cannot
slash unit output costs.

Managing Technology
The role expected of technology is critical in the formulation of
manufacturing strategy. Many a company has sailed into the
unknown, trailing glowing reports about the R&D under way in its
laboratories and the new products it is developing. Yet too often
the promises in annual reports to stockholders and in news
releases are never realized. The problem hinges on difficulties in
recognizing that a shift in strategy has a pervasive effect across
the organization’s functional areas. The production department
cannot follow a program of cost reduction along the learning
curve at the same time that R&D or the marketing people are
going full steam ahead into new ventures that change the nature
of the product.

When a new product born of technology fails, management is

often chided because it assertedly marketed the product poorly.
The problem may have come, however, from management’s
failure to realize that its capabilities to handle innovation had
weakened. Foresight is a matter of judging the challenge in terms
of altered capabilities as well as technological changes and
market forces. In the Ford case the difficulties arose as much from
what the organization did to itself as from GM’s actions. The
ability to switch to a different strategy seems to depend on the
extent to which the organization has become specialized in
following one strategy and on the magnitude of change it must
face. An extreme in either factor can spell trouble.

Very little is known about how to plan for this type of

technological change. But we can point to two courses of action
that some major companies have followed in avoiding the
problems we have described. One is to maintain efforts to
continue development of the existing high-volume product lines.
This requires setting the industry pace in periodically
inaugurating major product changes while stressing cost
reduction via the learning curve between model changes. This
course of action—which IBM has followed in computers—is
obviously a costly option which only companies with large
resources should undertake. It amounts to a decision to maintain
comparatively less efficient operations overall.

The second course of action is to take a decentralized approach in

which separate organizations or plants in the corporate
framework adopt different strategies within the same line of
business. Several corporations in high-technology industries have
taken this approach with success. One organization in the
company will pursue profits with a traditional product, like rayon,
to the limit of the experience curve. At the same time a new,
different organization will undertake the development of
innovative (perhaps even competitive) products or processes,
such as nylon. In taking this tack, some companies have shut
down old plants and started up new ones instead of mingling
different capabilities that are at various stages of their
development.7

Neither of these courses of action will suit the needs of every

organization, but some means of dealing with the issue of
technological change and strategy transitions should be included
in strategic planning.
1. Allan Nevins, Ford: The Times, the Man, the Company (New
York, Scribner, 1954), Chapter XII.

2. Keith Sward, The Legend of Henry Ford (New York, Rinehart,

1948), p. 51.

3. See Factory Facts From Ford (Detroit, Ford Motor Company,

1924).

4. Alfred P. Sloan, Jr., My Years With General Motors (New York,

Doubleday, 1964), pp. 162–163.

5. John Mecklin, “Douglas Aircraft’s Stormy Flight Plan,” Fortune,

December 1966, p. 258.

6. See James R. Bright, Automation and Management (Boston,

Division of Research, Harvard Business School, 1958).

7. For more on this approach, see Wickham Skinner, “The Focused

Factory,” HBR May–June 1974, p. 113.
ABusiness
version Review.
of this article appeared in the September 1974 issue of Harvard

WA
William J. Abernathy was a professor of
business administration at Harvard Business
School and a leading authority on the
automobile industry.

KW
Mr. Wayne is a research assistant and doctoral
student at the school. With support from HBS
and a grant recently received from the National
Science Foundation, they are continuing their
 study of innovation in relation to production
strategy in the auto and other industries.

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