Driving Growth Through Ultra-Low-Cost Product Development

The rules of traditional product development are rapidly changing. Companies seeking growth can no longer afford to ignore the millions of customers demanding high quality and performance at ultra-low costs. In order to succeed, companies must quickly adapt their strategies to penetrate these high-growth segments. Leading firms have adopted an ultra-low-cost product development (ULCPD) strategy to be competitive in this new environment.

Ultra-low-cost products are not just a phenomenon for emerging markets but a major trend for developed markets, given the current economic situation. Across many industries, we find examples of ultra-low-cost products creating new growth opportunities:

• Automotive: The recently introduced Tata Nano (at $2,200, an ultra-low-cost car) or the low-cost Dacia Logan (which achieved nearly half a million units in sales within three years) are stellar examples of ultra-low-cost cars that have taken the world by storm. The low-cost car market is the largest growing segment in the automotive industry and is projected to grow 500% by 2020.
• Computers: The $100 XO computer from the One Laptop per Child Foundation created a new high-growth market for ultra-low-cost "netbook" computers.
• Cell Phones: Ultra-low-cost handsets sold for under $35 are expected to grow to 300 million units annually by 2013.
• Medical Devices: Low-cost MRI equipment, such as the Siemens Essenza, provide small clinics and rural hospitals access to quality healthcare services at a fraction of the cost of standard MRI equipment.
• Consumer Goods: Ultra-low-cost products sold in dollar stores are gaining significant market penetration in these challenging economic times. The functionality and reliability of these products are often comparable to products from much more expensive big-box retail outlets. For example, the $1 pregnancy test kits sold in dollar stores offer the same accuracy and often better readability than comparable kits costing five to 10 times as much.

ULCPD is more than just lowering the cost of engineering and product development. It is about delivering high quality, innovative products in aggressively short timeframes with ultra-low development costs. This study explores how firms can employ ULCPD strategies to radically improve their cost structure, time to market and innovation capability, leading to a sustainable competitive advantage.

10 Imperatives for Ultra-Low-Cost Product Development

Based on our extensive research, A.T. Kearney has identified 10 key imperatives for ULCPD (see figure 1). Our research has shown that these ULCPD strategies are not isolated to any specific industrial sector; rather, they are all employed with a high level of consistency across multiple industries. Our findings are based on primary interviews and secondary research conducted with 30 firms across multiple industries (automotive, aerospace and defense, consumer goods, electronics, IT and software, medical devices) and countries. We identified leading practices for ULCPD by profiling companies with a proven track record of innovative, low-cost development.

1. Real-time Voice of Customer Insight

A key hallmark of ultra-low-cost development is to focus intensely on what customers need and integrate it into the development process in real time. Leveraging customer insight is not new. All companies use customer needs assessment and customer insight during conceptual design and early phase development. However, a key hallmark of ULCPD is the intense focus on identifying unmet customer needs and identifying lowest cost and innovative methods to meet those needs. Companies use novel research techniques like anthropological discovery (assessment of unmet needs through observation, rather than traditional focus groups) as well as leverage Web 2.0 techniques like crowdsourcing and open innovation to identify features and capabilities that customers need. In addition to discovering specific customer requirements that need to be fulfilled, these techniques also allow the manufacturer to secure rapid feedback on product ideas. Dell's innovative use of crowdsourcing through its IdeaStorm platform, where customers nominate, rank and vote upon new product ideas, resulted in the development of an entirely new product line (laptops bundled with Linux-based operating systems). BMW is leveraging a public-domain competition to crowdsource a new motorcycle design. Procter & Gamble has innovated a large number of products through its open innovation portals. All these examples leverage the voice of the customer in real time to identify specific unmet needs and develop products to meet those functional requirements in a cost-efficient manner.

2. Flexible Product Development (PD) Process:

Most companies have well-established product-development processes that are highly rigorous with fixed tollgates, multiple interim milestones, and reviews to ensure that product development is on track and on budget. This approach, while inherently sound, contributes to a lot of inefficiency and lack of speed while adding additional cost elements. To develop an ultra-low-cost product while meeting aggressive time-to-market goals, companies should develop and deploy a flexible product-development process that eliminates much of the intermediate reviews and all but the major tollgates. The process should instead require more frequent cross-functional engineering reviews. This ensures timely cross-functional engineering input into the development process while minimizing the amount of post-design-freeze engineering changes. It is well known that over 70% of product cost is determined during the development phase and a substantial amount of additional costs are caused by engineering changes that happen late in the product development process.

3. White Sheet Engineering

4. Challenging the Paradigms of Manufacturing

With most products, the cost of manufacturing is a significant component and all manufacturers constantly strive to reduce manufacturing/conversion costs. In ULCPD, design for low-cost manufacturing takes on additional importance, and organizations often challenge fundamental paradigms in manufacturing to develop new manufacturing processes that simultaneously allow for maximum manufacturing efficiency at the lowest possible cost. To facilitate this process, product-development teams need to design components/products with a focus on total cost, including the cost of manufacturing, not just manufacturability. This requires the product-development team to have a clear understanding of the impact of the design on the manufacturing process, early integration with manufacturing engineering teams and the flexibility to change the design to achieve the overall lowest-cost solution.

5. Global Standardization with Local Market Customization

Designing global products while meeting local market needs is a difficult balancing act. In fact, a one-size-fits-all solution for all global markets is usually not a viable strategy. Take, for example, the attempts of automakers to develop a true "world car." Meeting local safety, emissions, homologation and customer requirements often requires extensive modifications to the basic design. So the "world car" concept often became a unique product tailored for each market and lost the economies of scale from a common design. The fundamental question is how to design for local market needs using a global standard without adding unnecessary cost, features, weight or sacrificing performance and value. Leaders in ULCPD have a clear strategy of designing for a majority of global standards, while enabling local market customization.

6. An Emerging-Market Product-Development Office

For many years, companies have been offshoring manufacturing to emerging markets to take advantage of low labor costs and high growth opportunities, but only recently have leading firms started locating R&D centers in emerging markets. This trend is driven by several factors:

• the need to better understand local customer requirements and purchase decisions;
• the need to tailor global products for local market requirements in a cost- and time-effective manner;
• the increased technical workforce and infrastructure in the emerging market economy;
• strengthened intellectual property rights (IPRs) and patent laws in emerging markets (e.g. Korea and Taiwan adopted stronger IPRs in the 1980s and early 1990s, and China and India in the late 1990s and early 2000s).

The shift toward emerging market R&D offices is a logical trend, given the considerable cost, time-to-market, flexibility, and market growth opportunities. Hence, the emerging-market product-development office is a key element of a ULCPD strategy. Additionally, a key aspect of the emerging-market product-development office is the "low-cost" mindset. Engineers and researchers in emerging markets often have a very different way of thinking about cost and have an entirely different perception of low cost. This results in radically different designs than those that are conceived or delivered in developed markets. As Carlos Ghosn, CEO of Renault-Nissan, said, "There is a fundamental difference in attitude to cost savings between Western companies and Indian companies, and this is why we need to develop an ultra-low-cost car." Other automotive manufacturers understand this as well and have rushed to establish development capabilities in countries like India, which has a vast pool of engineering talent.

7. Robust Supplier Collaboration

Understanding customer requirements and supplier capabilities is critical to launching successful ULC products. In order to achieve breakthrough product-development costs, companies must fundamentally rethink the design and functional requirements with supplier capabilities in mind. Key suppliers must be integrated early into the product-development process to influence the design to achieve ultra-low cost objectives. For complex products where a significant amount of engineering is outsourced to suppliers, robust collaboration is required throughout the product-development process. To successfully execute this level of collaboration requires a significant cultural change for most organizations. OEMs must redefine the roles and responsibilities given to suppliers, and suppliers must improve their costs and capabilities to ensure successful execution.

8. Black Box Supplier Design

Outsourcing of development and engineering to suppliers requires that suppliers be given leeway to develop their own designs while operating to meet defined functional objectives and packaging constraints. This is usually referred to as "black box" design. A ULCPD mindset requires that suppliers be allowed to develop black box designs and solutions without significant engineering, material and testing requirements being imposed by the OEMs, which often drive significant additional cost with no additional benefit. OEMs need to avoid "over-engineering" products through excessive definition of detailed requirements.

9. Agile Development

Agile development methods are gaining traction in the high-tech/software development industry. Techniques like scrum, kanban, RUP, and extreme are the rage given that they help software development teams deliver orders-of-magnitude reductions in development costs and time-to-market. However, agile methods have broader applications for ultra-low-cost product development. Agile methods are well suited for complex products that can be broken down into smaller deliverables and basically require small teams working in short development sprints, focusing on discrete groups of tasks and managing backlog versus specific activities. Agile methods typically share the following principles: iterative and interactive development, partnership with business stakeholders, flexible teams and flexible requirements. Given their highly interactive development processes, agile approaches are well suited for new product development.

10. Open Architecture Standards

How to Make it Happen

ULCPD approaches are here to stay, and leading companies are gaining significant competitive advantage by leveraging these strategies to achieve breakthrough improvements in innovation, time-to-market, development costs and product costs. Companies should focus on three key areas to implement ULCPD quickly and effectively:

1. Have a robust ULCPD strategy. Develop and deploy a comprehensive ULCPD strategy. Rethink the product strategy from a "no-frills" customer perspective and understand which areas of the product portfolio you want to apply these approaches. Trying to force ULCPD approaches on a large (and often global) product-development organization can often lead to paralysis.
2. Focus on the culture and change management. Understand what the impact of a dedicated ULCPD effort will mean for the rest of the product-development organization. The change management issues and internal resistance will be significant; it is important to consider these issues in depth before embarking on this journey. Additionally, any ULCPD effort must be tailored to the culture of your organization.
3. Use pilots to gain traction. Pilot projects leveraging ULCPD approaches can showcase success and are the most effective way to gain traction within the larger product-development organization.

Joachim Ebert is a partner at A.T. Kearney and can be reached at [email protected]. Shiv Shivaraman is a principal and can be reached at [email protected]. Paul Carrannanto is a principal and can be reached at [email protected]