TSMC's secret, New experience curve, Second mountain
Weekly I/O #92: Experience Curve, Two Types of Experience, Second Mountain, Situation and Capabilities, Van Gogh Can't Do Yet
Hi friends,
Hope yall are doing lovely! Here's your weekly dose of I/O :)
Input
Here's a list of what I learned this week.
1. Experience Curve: Manufacturers can and should price their products unprofitably low because the cost of making one thing decreases as they produce more and gain more experience.
Podcast: TSMC Founder Morris Chang: The Complete History and Strategy
Doing more often costs less. This is precisely what happens in business according to a BCG famous theory.
This principle, known as the experience curve, held that a company's unit production costs would fall by a predictable amount (around 20% to 30%) every time their cumulative production doubled. In other words, the cost of making it goes down as you make more of one thing.
That's why it's also called experience curve. When you gain more experience, you become more efficient almost predictably.
TSMC uses the experience curve as a fundamental principle in its strategy. In Morris Chang's words, "he is a serious student of experience curve". Because TSMC knows the cost will eventually decrease when they gain high production volume, they can start with lower prices, even if initially unprofitable, to attract more customers and increase production volume rapidly. The goal is to crowd out competitors and become the dominant player, enabling economies of scale and cost advantages.
2. The New Experience Curve: To maintain a competitive edge, companies must balance and switch effectively between experience in fulfilling demand and experience in shaping demand.
Article: BCG Classics Revisited: The Experience Curve
While the original experience curve states that your unit cost will go down as you gain more experience in production, companies today might need an additional kind of experience to create and sustain competitive advantage.
Experience in fulfilling demand is the classic experience curve. This type of experience is the ability to produce existing products more cheaply and deliver them to a broader audience. This process is critical in stable, cost-sensitive, and production-intensive industries such as hard disk drives and laser diodes. Fulfilling demand experience is acquired through a logical deductive process involving capturing and analyzing cost data, identifying opportunities for improvement, implementing changes, and iterating, a process marked by repetition and incremental enhancements.
Experience in shaping demand focuses on creating markets for new products and services. This experience is characterized by successive "jumps" across experience curves, reflecting a company's ability to transition from one product generation to the next.
Shaping demand experience is acquired through an inductive process that involves sampling consumer behaviors, formulating hypotheses on unmet needs or possibilities enabled by new technologies, testing these hypotheses with new offerings, and iterating based on empirical results. This type of experience can be gauged by a company's product-introduction "clock speed" or by the percentage of sales derived from new products or services. Companies like ARM Holdings, Facebook, and Netflix exemplify successful demand shaping.
While both types of experience have always been necessary, the required speed of switching between the two has increased dramatically. The ability to develop and leverage existing and new product knowledge concurrently or to switch between them effectively over time is referred to as ambidexterity and has become more critical in today's rapidly changing markets.
3. There are two mountains to climb in life. The first mountain is for freedom. The second mountain is for commitment. On the second mountain, life moves from self-centered to other-centered.
Book: The Second Mountain: The Quest for a Moral Life
I like how David Brooks presents life as a journey in the Second Mountain as two distinct phases. The first mountain symbolizes the pursuit of personal success, individual freedom, and self-fulfillment. However, upon reaching the summit, many find the view unsatisfying and they go back down into a valley of introspection and often suffering.
The second mountain represents a transformative shift toward commitment and community. This phase involves dedicating oneself to causes beyond personal and sacrificing freedom. Life moves from self-centered to other-centered on the second mountain, and oftentimes, true joy and fulfillment are found on this second mountain.
This reminds me of something I always remind myself: Optionality is the inverse of compounding. Keeping decisions open has real costs.
4. How you see a situation depends on what you are capable of doing in a situation.
Book: How to Know a Person
This explains why different people can react so differently to the same event. In the author's words:
"People in different life circumstances construct very different realities. It's not only that they have different opinions about the same world; they literally see different worlds."
"People with heavy backpacks see steeper hills than people without backpacks, because it is harder for people with backpacks to walk up them. People who have listened to sad music (Mahler's Adagietto) see steeper hills than people who have listened to happy music. Overweight people see distances as longer than people who are not overweight. Baseball players on a hot streak see bigger balls coming at them than they do when they're in a slump."
As Dennis Proffitt and Drake Baer wrote in another book Perception: "We project our individual mental experience into the world, and thereby mistake our mental experience to be the physical world, oblivious to the shaping of perception by our sensory systems, personal histories, goals, and expectations."
5. "I keep on making what I can’t do yet in order to learn to be able to do it." — Vincent van Gogh
Quote
From Van Gogh's letter To Anthon van Rappard.
Recap
Try answering these five simple questions to review and reinforce what you've learned:
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Looking forward to learning from you.
Cheers,
Cheng-Wei
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