What's experience got to do with it? Sources of cost reduction in a large specialty chemicals producer

Conventional learning curves relating unit cost to measures of production e xperience are estimated for 221 specialty chemicals produced by a Fortune 5 00 company. Detailed records on cost and R&D coupled with insights from com pany personnel are used to explain the variation across products in the rat e of cost reduction. Products that exhibited the strongest relationship bet ween unit cost and measures of production experience were subject to specif ic initiatives, particularly process R&D. The R&D was not, however, general ly motivated or informed, by production experience. However, cumulative pas t output, the most commonly used measure of production experience, was rela ted to expected future output, which conditioned the expected future return s from R&D and the choice of R&D projects. Thus, cumulative output was conn ected to unit costs through its role in conditioning incentives to undertak e process R&D rather than as a proxy for production experience. This sugges ts that the strong relationship commonly found between unit cost and measur es of production experience may reflect incentives to reduce cost as much a s learning from production experience.