I just read an article on the site “Strategy + Business” called Building Cars by Design. It caught my eye for two reasons. First, the fact that a strategy site would deign to talk about engineering concepts was a pleasant surprise. Second, the article discussed Design-to-Cost and Design-to-Value.
If we strip off the automotive context, the main premises of the article from a Product Cost Management point of view are as follows:
- Design-to-Cost means designing a car to a specific absolute cost
- Design-to-Cost is bad because it does not take into account “value”
- Design-to-Value needs to be used instead of Design-to-Cost, i.e. the product company needs to think about what features that customers value and then deliver these.
I applaud the authors for opening up a discussion on these topics. However, I feel this article is incomplete and does not tell the whole story about these concepts. It also doesn’t really say how to do any of these things or point the reader to somewhere he can further learn how. Here’s my specific suggestions for improvement.
- Define Design-to-Cost properly, please – Maybe this is just a bit of nomenclature nit-picking, but I have never thought Design-to-Cost means designing a product to a specific cost. That is what “Targeting Costing” advocates. Design-to-Cost is about considering cost as a design parameter in your product development activities. I.E. the design engineer balances cost with other goals (performance, quality, etc.) with the goal of delivering any group of features at the lowest cost possible.
- Define How to Calculate “Value” to the Customer – The authors say [paraphrasing] that a company should *just* find out what the customers value and then design a product that delivers those things. I am sure most companies do want to do this, but they don’t know HOW. I realize that how to calculate value is too complex for the article, but the authors don’t even provide a resource for the reader to learn more. For example, I studied under Dr. Harry Cook and I am a friend and business colleague of Dr. Luke Wissmann. At very least, the authors could have pointed the reader to a book on the subject, such as the one Wissmann and Cook wrote: Value Driven Product Planning and Systems Engineering.
- What if the Customer Can’t Afford the Value? – It’s difficult to know what the authors mean (even theoretically) by design-to-value. Regardless, the authors seem to assume that the customer can always afford this value, but I don’t believe this is true, especially in the a second or third world context, which is the focus of the article.
Regarding the last point, I will do my best to illustrate the problem. Take a look at the figure below in which I graph the value the customer gets from the product versus the price the customer pays for the product. Presumably, the authors in the article are saying that customers would be willing to pay up to the point that the slope of the value/price decreases substantially (the curve flattens). But, that assumes the customer has the money to spend – kind of a Field of Dreams Strategy, i.e. “If you build in value, they will pay.”
But, what if the customer truly does value a set of features, but he just doesn’t have the funds to purchase all of the value? In this case, we have to concede that there is a Minimum Viable Product (MVP) needed for the customer to purchase. This term, MVP, is most often used in software development and start-ups. It is the minimum set of features and functionality that a product must have to have ANY value to the customer. If you can’t master design-to-cost in your product so that it both includes the MVP features the customer needs and allows you make adequate profit under the price ceiling of your customer, the product will not be successful.
If the customer has less funds than the MVP to deliver in your product, they can’t afford it. Similarly, even if the customer has more funds than the MVP requires, but less than when the value/cost curve flattens, you cannot employ a blind strategy of maximizing value to the flattening point of the curve and price near it. You are still going to have to set your price below your customer’s funds to succeed.
So, are the authors of the article talking about design-to-value to the point that the value/price flattens or to the point where the price ceiling of the customer intersects the curve?