Companies are struggling to drive growth, but they also need to improve margins. How can they achieve both goals simultaneously?
One answer lies in design-to-value (DTV), an integrated approach to product development that considers multiple perspectives:
- what customers want
- what competitors are offering
- what it costs to manufacture and distribute an end product
Through DTV, companies can identify the product features that consumers value most, as well as those that generate little market interest. With this knowledge, they can redesign their products, adding features that promote sales while eliminating unnecessary attributes that only serve to drive costs. DTV also helps companies optimize efficiency in product design and manufacture by highlighting areas for improvement.
We have applied DTV to hundreds of products across multiple industries, including automotive and assembly, high tech, telecom, consumer goods, and electronics. Our comprehensive DTV reviews helped our clients create a set of actionable strategies to increase margin while decreasing product cost.
A systematic, fact-based approach
During the DTV process, all product development decisions are based on facts— hard data from consumer research, clean-sheet-based cost models, and competitive intelligence from teardowns—which ensures objectivity. The approach allows companies to improve multiple aspects of product development simultaneously by focusing on the following activities.
- Developing a robust and deep understanding of value drivers and quantifying their worth—in other words, determining how much consumers are willing to pay for specific product features
- Conducting “teardowns” by disassembling key products next to those of competitors to document technical and functional differences and identify strategies for reducing costs or optimizing features
- Clean sheet modeling, which involves determining the detailed “should cost” for each product and developing strategies to reduce expenses, either by redesigning products or processes or by negotiating differently with suppliers
- Compiling and prioritizing a list of specific and pragmatic ideas that companies can implement to increase customer value while reducing product costs
Improving margin and product cost
By using the DTV methodology, many companies have optimized their product portfolios and uncovered significant savings—often in unexpected areas.
For instance, a teardown revealed that a medical device client was using seven circuit boards in its product, while its competitors used one single integrated board. By changing the product’s architectural design and reducing the number of boards, we helped the client to decrease both complexity and product costs.
Similarly, in the case of an advanced industries client, one of our clean sheet analyses revealed that it was paying about 80 percent more than expected for a product component, indicating that it needed to find a new supplier.
Across sectors, DTV stimulates growth, improves customer satisfaction, and optimizes brand positioning by keeping the focus on product features that customers value. This results in impressive financial benefits—on average, our clients achieve a 10 to 40 percent increase in gross margin and a 10 to 40 percent reduction in product and supply chain cost. DTV also helps products reach consumers faster by reducing design complexity and time-to-market, and the improved positioning typically helps them gain additional market share as well.
Gaining an advantage in emerging markets
As global trade patterns continue to shift, DTV will become even more important. Worldwide, consumer spending is increasing fastest in emerging markets such as Brazil and China, with much of the growth coming from newly middle-class consumers—a segment that wants their products to have many of the same features as those in developed markets but at a much lower price. DTV is the ideal approach for creating products that meet their expectations.
Moreover, some of the low cost, high value products that succeed in emerging markets may eventually find a niche in developed countries as well. Some widely known examples of this trend have already been seen in several industries, with products ranging from ultrasound machines to consumer beverages.
DTV can also help companies develop new products with innovative features that will have great appeal in emerging markets. For instance, we suggested that an appliance manufacturer consider adding some unusual features to its emerging market offerings, such as emergency lights. While these features might not attract customers in developed markets, our research showed that they could drive strong sales in emerging countries.
A wealth of DTV capabilities
McKinsey has invested significant time and resources into DTV over the last decade, and we now have many proprietary, cutting-edge assets to assist clients. These include:
- A database of over 400 sanitized clean sheets that show labor rates, material costs, and machine costs and timing for products and commodities across nearly every industry
- A library of linear performance pricing models to help clients identify when the cost of commodities and standard parts, such as batteries, motors, or raw materials, appears to be excessive
- A network of global design labs in Chicago, Munich, Taiwan, Chennai and New Delhi
- Proprietary software that allows clients to track and manage their innovative product improvement ideas from creation to implementation and financial validation
Working directly with clients to build capabilities
We have a pool of over 300 experts and consultants who are trained in DTV techniques, many of whom have deep technical knowledge and several years of industry experience in relevant fields. On a daily basis, they lead workshops for cross-functional client teams composed of a general manager and staff from marketing, engineering, operations, and other groups. As the team members collaborate to tackle product development challenges, they learn to compromise and appreciate the perspective of other groups.
We hold workshops at client sites or in one of our global design labs. When requested, we help clients create their own in-house design labs.