Designing products for value
Learn
how leading companies combine insights about customers, competitors, and costs
to develop more innovative and cost-effective products.
A rising tide of prosperity in
developing economies is reshaping the nature of competition among global
product makers, offering both the promise of new markets and the perils of
having to face nimble, innovative, and highly ambitious rivals. In fact, the
speed of newcomers (unencumbered by legacy issues) makes still more problematic
an insidious challenge large manufacturers everywhere face when they try to
innovate: insular thinking and functional disconnectedness that, if unchecked,
can gum up product-development processes, drive up costs, and distract
companies from paying attention to competitors—and, ultimately, customers.
Recognizing the challenges of the
new environment, a few product makers in industries as varied as appliances,
automotive, consumer packaged goods, high tech, and medical devices are taking
a different approach. By encouraging more focused collaboration among multiple
functional groups (notably marketing and sales, operations,
engineering/R&D, and procurement), these leaders are combining deep
insights about customers, competitors, and supply bases to strip out costs and
amplify what customers truly value. The results—including better products,
happier customers, higher margins, and, ultimately, a stronger ability to
innovate—should serve these organizations well in years to come.
In this article, we’ll look at three
such companies. Their experiences offer insights for any product maker hoping
to improve its competitiveness.
Case
1: Appliance maker
The
challenge
Senior executives at a large,
low-cost manufacturer of appliances and white goods were concerned about the
sluggish performance of the company’s household fan business. It had long been
among the top leading players in the company’s home country—an emerging
market—but was now losing domestic share in two important, and fiercely
competitive, product categories.
The company’s leaders suspected that
a stagnant product portfolio was partly to blame; they had been focusing a
considerable amount of attention on operations and had neglected to revisit fan
designs for a couple of years. Meanwhile, an innovative upstart, also from an
emerging market, had begun competing with the manufacturer, both at home and in
developed markets. The threat served as a wake-up call: establishing a stronger
platform for growth, the executives realized, would require the company to step
up its product-development capabilities while maintaining—or even improving
upon—its low-cost edge.
Focus
on the customer
The company started by conducting
focus groups and ethnographic research aimed at identifying unmet needs among
middle-income (and aspiring middle-income) families in emerging markets. As
these approaches started generating concepts for new products, the company ran
surveys that forced consumers to choose between various product features and
price points and then used conjoint analysis to discern how much customers were
willing to pay for various options.
Its results were intriguing. For
example, the ethnographers observed that middle-class aspirants in urban areas
hated how dirty the blades of typical ceiling fans became after prolonged use.
Conjoint analysis showed that some of these consumers would pay a premium for
models that were easier to clean.
Similarly, the work identified
profitable niches for fans with built-in, rechargeable batteries (to be used in
case of power outages), as well as portable models for families that wanted one
fan to serve several purposes—say, venting cooking odors in the kitchen and
personal use elsewhere in the house. The company began actively pursuing these
and other designs, including concepts tailored for consumers in developed
countries.
Study
the competition
Next, the executives brought
together a group of designers, purchasers, marketers, product engineers, and
others to conduct a series of product teardowns involving the company’s—and the
competitor’s—fans. By seeing how different models stacked up, the executives
hoped to spark fresh thinking in the team that would improve the new designs
and also to help determine whether competing products had unexpected cost or
technological advantages.
The exercise helped the company to
meet both its goals. Purchasers and product engineers, for instance, believed
that it was already striking the right balance between quality and price in its
materials and components. Yet the teardown showed that as compared with
competitors, the company was “overbuilding” its products significantly and that
identical—or even better—product performance was possible at a lower cost if
the team was willing to rethink its design approaches.
Some of the resulting design changes
were quite straightforward and even, in retrospect, obvious. Yet the team
acknowledged that the new ideas didn’t click until the teardown, when the
evidence was spread out on the table for discussion. By modifying the cover of
one type of household fan, for example, the team made it unnecessary to include
an internal bracket assembly that had supported the original cover—a savings of
7 percent per unit. This change, like most cost-saving opportunities the team
identified, was invisible to customers and didn’t matter to them .
Many of the individual cost-saving
opportunities the team identified were small. But the collective impact was
huge—helping the company to reduce the total cost of manufacturing its fans by
more than 10 percent, against a cost base that was already quite competitive.
Meanwhile, consumers received the new designs well, and that contributed to a
50 percent jump in operating profit in the first year of their introduction and
helped elevate the company to the number two spot in the market (up from number
three) over that time span.
Case
2: Medical-capital-equipment maker
The
challenge
A large manufacturer of medical
devices and capital equipment was losing market share to an Asian-based entrant
offering lower prices for a key product. The manufacturer’s R&D team was
perplexed. By its estimates, the competitor’s costs to make the product should
be about 20 to 25 percent higher than the company’s costs for its own
product. A head-to-head comparison of product characteristics clearly indicated
that the attacker’s was inferior on many dimensions, including quality. The
consensus of the R&D group was to stay the course—the competitor, they
grumbled, was selling below cost to grab market share and would eventually have
to raise its prices.
Skeptical company leaders decided to
investigate further. Many of the R&D team’s key personnel were longtime
company veterans who had been instrumental in the design and commercialization
of its product from day one. While they were stellar R&D performers, some
executives felt that the team didn’t have enough facts to support its
conclusion about the competitor and might even be too close to the situation
for an objective view.
Focus
on the customer
To get more information, the
company’s marketing experts analyzed the situation from a customer perspective.
By conducting surveys and in-depth interviews with current and prospective
customers, as well as channel partners and their sales staffs, the marketing
team began assembling a clearer picture of how the product looked from the
outside.
The picture wasn’t pretty. While the
manufacturer did enjoy a lead over the competitor in product quality, as the
R&D team had insisted, the gap was smaller than expected. Moreover, the
manufacturer slightly lagged behind its competitor on several other critical
attributes that mattered more to customers, despite investments it had made to
differentiate itself in these very ways (exhibit). The conclusion: the two
products were about equal in customers’ eyes—until the competitor’s lower price
tipped the balance in its favor.
Study
the competition
To gain further insights and
formulate a response, the company brought together a group of R&D product
engineers, marketers, procurement people, and finance specialists to dismantle
the competitor’s product and compare its features and components with those of
the company’s offering.
To the group’s surprise, the effort
uncovered technological differences between the two products—differences
suggesting that the competitor’s product cost less, not more, to manufacture
than the company’s did. What’s more, the nature of the differences suggested
that the competitor had considerable room to lower its costs further in the
future and thus to make its product even more attractive to customers.
Ultimately, the team determined that
just three components in its product accounted for most of the cost differences
it observed, and these components all involved aspects of the product’s
performance that weren’t important to customers. This conclusion was sobering: the
manufacturer’s product was better on these dimensions, though in a way that
drove up its costs, only marginally improved its performance, and ultimately
didn’t matter to customers.
In response, the company quickly
moved to close the cost gap, generating ideas that bridged 80 percent of the
cost disadvantage, without compromising features that users valued. The
exercise also gave the company’s marketers and sales personnel an important new
(and more targeted) set of customer-prioritized attributes to use in
differentiating their product.
Case
3: Medical-device manufacturer
The
challenge
An acquisition created big
expectations—and challenges—for the operations group of a medical-device maker.
The company’s leaders had set an aggressive cost reduction target of 15 percent
after examining the various operational synergies possible from the deal.
Hitting the target would require the company to, among other things,
rationalize its product portfolio while modifying how it designed and sourced
its products.
The merger had left two business
units making, in some cases, essentially the same product. The natural place to
start, the operations executives recognized, was therefore to redesign the
product with the highest degree of overlap. By bringing the two R&D teams together
to work on the effort, the executives hoped to generate new ideas that would
help the company meet its cost reduction targets, improve the product, and
strengthen the cohesiveness and culture of what was ultimately to become the
new R&D unit.
Putting
it all together
To ensure that the effort remained
grounded in customers’ needs, the new R&D team began by familiarizing
itself with the results of a series of customer and dealer interviews the
company’s marketers had conducted in a parallel effort. Armed with that
information, the team carried out a series of teardowns on three versions of
this kind of product: two of its own overlapping variations and one version
sold by a competitor.
In some instances, the customer
feedback led to minor design changes or none at all. For instance, customers
preferred one version of the company’s control mechanism, so it was selected
for the redesigned product with almost no changes. Similarly, interviews with
dealers revealed an opportunity to improve customer satisfaction by making a
simple ergonomically inspired addition.
In other instances, the consumer
insights work had identified design, feature, or functionality changes that
would not only cut the cost of manufacturing the new version of the company’s
product but also make customers more satisfied with it. For example, some
customers, particularly older ones, didn’t like the heft of either existing
version of the company’s product and asked for a lighter alternative that was
easier to set up. Substituting lighter, and cheaper, carbon steel for stainless
steel could meet this need and save about $15 a unit.
Similarly, some of the more advanced
electronic functions of the company’s products were seldom used and not valued
highly, much to the surprise of the team. It identified substantial
opportunities to save costs by eliminating these features and simplifying the
electronics of the new design.
Of course, not all of the
cost-saving design changes the team identified were as noticeable to customers.
Many involved subtle tweaks and manufacturing changes inspired by the
differences between the company’s two versions of the product. For example, the
team changed the specs of several parts to reduce the number of welds required
and simplified the packaging to reduce waste and lower costs.
A
new start
The teardown proved an important
milestone in the effort to meet the company’s goal of cutting costs by 15
percent, a target it ultimately realized—and exceeded. More important, the
effort helped the company’s R&D and procurement groups begin to work
together in a new, more collaborative way. “Instead of us working in our
‘silos’ on a day-to-day basis,” said one executive, he noticed “much more of a
propensity for people to be attacking a problem in packs rather than alone.”
By combining deep insights about customers, competitors, and
costs, a few leading companies are finding the “sweet spot” in product
development: lowering costs while designing better products that customers
value more. Along the way, these companies are strengthening organizational
capabilities that will help them thrive in an era of heightened global
competition. • Ananth Narayanan, Asutosh Padhi, and Jim Williams OCTOBER 2012
McKINSEY
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