Cost-Driven Innovation for Future Products With Top Margins

Real innovation has low costs and high prices

When it comes to consumer goods, we associate innovation with high prices. “Only what is expensive is good”. In innovation development, we also have to dig deeper into our pockets first. Because the innovation needs to be developed.

A good example from battery technology shows that innovation and low costs go hand in hand. When Elon Musk got involved in battery development, he noticed something:

• One kilowatt hour of battery storage capacity costs around 600 US dollars.
• However, the cost of what is inside this battery is likely to be only 60 US dollars according to world market prices.

Either something is damn inefficient. Or someone is making a lot of money. In fact, the former was the case. Battery production was a far cry from the efficient production we have now achieved. Why did we achieve it? Because we knew it was possible. That, in a nutshell, is the explanation of why and how cost-driven innovation works.

1. We understand how much something should cost (Should Costing & Target Costing)
2. We find out why these costs cannot yet be achieved today
3. We develop innovations that enable us to reduce costs radially.

This approach works in technology innovation as well as in the development of future products.

Cost-driven innovation – the first steps towards exceptional cost reduction!

What distinguishes cost-driven innovation from “classic” cost-cutting methods? How do I start and what do I need to pay attention to?

You probably know the scenario – the offer is too expensive, the price for the product or service is not accepted. The sales department approaches you and asks you to “You’re too expensive – do something! The competition is more efficient!” People want to pay less after Corona!

So – at best – a project is launched to reduce costs and make innovation more efficient. Often you just sit together – or a remote meeting starts these days – and think about how costs can be reduced? You collect a large number of ideas, evaluate them, work on them and then, with some effort, you have achieved the 5% reduction.

Cost-driven innovation differs in the idea phase – step 3 – and focuses on finding “non-typical” solutions. Such a solution is understood to be a solution concept that does not come to mind quickly, but requires a detailed analysis and therefore has greater potential.

How do I start now?

Step 1: These prerequisites for cost-driven innovation should be in place!

Before you start, use the following points to check whether all the prerequisites for a successful cost-driven innovation project are in place. We have compiled the 5 most important prerequisites:

1. Setting ambitious but realistic goals
2. Appointment of the project manager as the responsible project manager (the entire project) and the members of the team
3. Transparency in costs (in (sub)systems, cost categories, functions) and provision of information to all team members
4. Providing all necessary experts in workshops on cost-driven innovation
5. All team members know the process and the tools to make the project process efficient – ideally through prior training on the overall process and the methods used.

Our recommendation: If you have difficulties fulfilling these points, do not pursue the project. You do not need to pursue the project any further. It won’t work and there will only be losers!

Step 2: Target price, actual situation and baseline must be determined

The target price or cost reduction is often already set by the client – often -20%. This 20% is a figure that management often specifies, but it often makes no sense. A better approach is to use target cost analysis (should costing) to define the target.

Proceed as follows:

• Ask yourself: “What should or should not be the maximum cost of this component?”

To do this, take the bill of materials and start with a pragmatic backward calculation of the combined cost shares. This works very well with a team of experts. The team should be made up of representatives from the various functions to ensure a good estimate.

This target cost analysis helps you to define an achievable and challenging cost target.

Supported by a simple calculation, e.g. what should be the minimum cost of a steel plate with a surface area of 100 mm x 100 m and a weight of 500 grams? Google steel price, estimate processing type and production time -> determine estimated price.

The “Ideality” innovation concept will give you a further target definition by setting an “ideal” price. This common cost target should make you the cost leader!

Now to the actual situation:

• What are our current costs and how are they broken down?
• What is our cost structure?

The prerequisite for the next steps is that you understand your cost shares of your product/service in detail.

Take the calculation and your parts list again and create a chart. A Pareto chart is best. The Pareto principle says that, for example, 20% of your cost types cause approx. 80% of the total costs.

A graphic is always helpful – also to understand and communicate the initial situation.

Step 3: Understanding cost drivers

Now take a look at the main shares from your analysis:

• Why are the costs the way they are now?

Ask why up to 5 times to find out the cost drivers. List the cost drivers and look for solutions. If you recognize contradictions, define these contradictions more precisely. Now you can use the solution patterns from the TRIZ innovation method to find new, different solutions. TRIZ stands for the “Theory of Inventive Problem Solving” and provides directly applicable “standard solutions”. The poster of inventive principles with examples of technology provides a good overview.

Depending on the type of cost driver, different additional tools are used. If, for example, assembly costs are high, you need to reduce complexity. One lever can be the high number of parts. Consequently, you must try to reduce the number of parts.

The method to be used is “Design for Manufacturing and Assembly – DFMA”. The concept of “ideality” also helps here. The best component is the one that does not exist!

Step 4: Find good ideas

This comprehensive system analysis is now the basis for generating further good ideas. Innovation methods – among others – also include the application of the aforementioned inventive principles from the theory of inventive problem solving. These have been derived from patents over the years and help to find ideas.

Another helpful tool is the “network of solutions and problems”. You start with a problem and describe a possible solution. If the solution has further problems, go one step further and solve this problem. This problem-solving sequence usually leads to a satisfactory overall solution – by merging the partial solutions – and to amazing ideas for reducing costs.

Step 5: Evaluate, select and implement

Now you must all collected Evaluate and test ideas and validate possible cost reduction measures. This is achieved with classic project management and with an action plan to be worked through. Manche Ideen werden nicht umsetzbar sein, neue Ideas will be added. The situation must be monitored and documented.

Insight: Cost-driven innovation creates a unique position and competitive advantage

Sometimes the approaches to reducing costs are obvious. Then a quick brainstorming session is enough to see what needs to be worked on. However, classic brainstorming does not manage to go beyond what everyone already knows. More ambitious goals are better achieved with the right innovation methods. These methods help us to recognize where the cost potential lies. And they help us to leverage this potential. In this way, companies create a unique position on the market through better solutions for customers and higher margins for the company. A business case that pays off twice!

Rethink and innovate with TOM SPIKE to reduce costs

Cost-driven innovation helps you to innovate in the market with margins that are higher than in the standard portfolio. Enormous cost advantages through innovative solutions in design, technology and supply chain create a unique position that is difficult to copy. As innovation consultants , we help industrial and technology companies to achieve a unique position and competitive advantages on the market.