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(originally published by Booz & Company)


Building Cars by Design

That’s not to say cost isn’t important; manufacturers should still begin by removing unnecessary costs from the vehicle to the greatest degree possible. This bare-bones cost structure becomes the new baseline to which they can add high-value features, while staying within the price window. Each choice must be made with reference to both the increased costs required to integrate the option and the expected gains in sales. The ideal option may trim razor-thin profit margins even further, but it should also generate more revenue from the sale of more cars, offsetting the higher expenses. And it’s critical to make these decisions in the very early stages of design, when 80 percent of the cost and value of a car is already determined.

The first step in a design-to-value analysis involves determining what exactly is important to consumers. How much does the size of the engine matter? Do customers care about power steering or fancy instrument gauges? What audio system options might customers be willing to pay for? Demographics, market trends, industry experts, and focus groups all can help in gaining a clear understanding of what drives value for specific consumers.

Those value drivers must then be placed in the context of the new car’s baseline cost. That cost has already been determined by how the car will be built, what materials and basic features will be used, and how additional factors such as plant location, supply chain and distribution logistics, and overhead fit into the equation. Against that baseline, the automaker can analyze which features and options truly add value for consumers and design them into the car. This analysis should also take into account the competitive landscape: What features is the competition offering? How much does it cost to add them? And how much value do they add to competitors’ final product?

Armed with broad knowledge of costs, customer preferences, customer perceived value, and competitive activities, manufacturers can then begin to gather ideas from throughout the enterprise — engineers, designers, purchasing managers, manufacturing chiefs, and corporate executives — for new approaches to everything from the design of the car itself to manufacturing footprints, supplier relationships, and logistics. But all choices must add value to the final product.

India, for instance, does not yet have a well-developed automotive supplier pool, but it is the world’s second-largest manufacturer of two-wheeled vehicles, producing 8 million per year. The manufacturers and suppliers in that industry should be tapped for ideas on what consumers want, how the systems and components they make might aid in the design of cars, and how the two-wheeler supply base might offer the automotive industry economies of scale. At the other end of the value chain, sales and maintenance and even financing should also be examined for new ideas: Given limited dealer networks, might roving mechanics be sent around to perform regular maintenance? Could entire extended families enter into financing deals for new cars?

No carmaker has fully embraced the concept of design-to-value yet, though some have come close. India’s Tata Motors gave a great deal of thought to what first-time car buyers in India were looking for as it designed its small, US$2,500 Nano, to be launched by March 2009 (possibly with pilots before then). Meanwhile, the West, under the pressures of high gas prices and emission regulations, has been moving inexorably toward smaller cars as well. It’s time that the concept of design-to-value finds its place among Western manufacturers — not just for export, but also for their home markets.

Author Profiles:

Vikas Sehgal is a partner with Booz & Company in Chicago. He specializes in product strategy, innovation, emerging markets strategy, and offshoring for automotive, transportation, and industrial companies.

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  1. Kevin Dehoff, Vikas Sehgal, John Loehr, Kazutoshi Tominaga, “Cars for India, Cars for the World” (PDF), Booz & Company white paper, September 2008: A closer look at the growing demand for small cars in developing markets, and how the Indian auto industry should respond.
  2. Bill Jackson, Scott Corwin, and Evan Hirsh, “End-of-Year Letter to the Automotive Industry” (PDF), Booz & Company, December 2008: An analysis of the coming restructuring of the auto industry worldwide, and what it means for both OEMs and suppliers.
  3. Bill Jackson and Vikas Sehgal, “One Billion New Automobiles,” s+b, Winter 2006: An early look at expanding auto sales in emerging markets, especially at the bottom of the pyramid, and their global implications.
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