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Design: key to competitiveness

Summary
In comparison with their main foreign rivals, many British manufacturers are missing the opportunities for improved growth and better profits that can come from putting the product creation process at the centre of a company's corporate strategy. Research has shown that investment in product design is relatively inexpensive and risk-free yet can lead to substantial competitive gains in terms of reducing costs, attracting customers, and enhancing profit margins.

Such gains can be achieved consistently only if the product creation process is properly managed. In principle, design management is no different to any other kind of management, requiring the setting of clear objectives and then ensuring that these are achieved.

What is at the very root of any manufacturing company's success or failure? Which element of a company's activities can reduce costs, improve profit margins, and increase market share? And which activity gives the best return on investment? The answer to all three questions is design, the process by which products are created.

The evidence for these claims is overwhelming. Research has shown that investment in design yields the largest returns for a manufacturing company.

A study carried out by the Open University and UMIST between 1987 and 1990 (1) examined the benefits and costs of investment in design in the context of more than 200 British companies. Most of these companies were small- or medium-sized and had little experience of using professional designers. Projects ranged from the development of advanced electronic products to the incremental improvement of engineering components, and included packaging, graphics, and ergonomic design projects as well as engineering and product design. The results of this study showed that almost half the projects paid back their total investment in under a year. In total, more than four fifths of the projects recovered their full costs - including development, tooling, machinery and launch costs - through improved sales, higher profit margins and/or lower manufacturing costs. The average payback period was fifteen months.

[CS] Case study : Nautech Ltd

(1) Open University/UMIST Design Innovation Group, The Benefits and Costs of Investment in Design, Milton Keynes, 1990

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The source of product success

There is little doubt that the UK's prime manufacturing rivals in Japan and the European Community understand the contribution of design to international competitiveness better than the majority of British companies. (Some notable UK exceptions provide the case histories in this document.) When the Design Council sent a study group of senior British industrialists to see how Japanese companies organise their design activities, they were greeted with polite incredulity that anyone could consider design as a separate issue from a manufacturing company's overall strategy. As one major Japanese manufacturer put it, 'Products are the core of any manufacturing company, and design is what makes those products into successes or failures'. Most Japanese companies believed that their product development and design activities were their most powerful competitive weapons.

This view is supported by the Policy Studies Institute, following a study carried out in 1989 (2). The study examined five key industries - mechanical engineering, electronics, motor vehicles, chemicals and textiles - in the UK, West Germany, the United States and Japan. Between 1972 and 1985 the British industries invested less in research, design and development than the other three countries: as a result, the British industries grew more slowly than their rivals in all five sectors and, with the exception of chemicals and electronics, also fared worst in export performance.

The Policy Studies Institute concluded that the UK failure was due to a concentration on 'the current manufacturing operation (thus the preoccupation with "productivity"), when equal emphasis should have been on the future and on ways of providing products to meet future world demand'.

Design has a central role to play in improving productivity and cutting manufacturing costs. On average, some 80 per cent of the costs of a product over its total manufacturing lifecycle have been committed by the end of the concept stage of the design process. UK companies have traditionally underfunded this activity, yet since the concept design stage costs very little, even doubling its resources hardly affects overall costs and can lead to dramatically increased profits.

[CS] Case study : Ernest H Hill Ltd

Investing in design has benefits beyond its potential for improving almost every competitively sensitive aspect of a product, for it is also comparatively inexpensive and risk-free. Another management consultancy, McKinsey & Company, has compared the sensitivity of profits over the life of a product with three potential problems:

  • delayed launch

  • high production costs

  • overrun of development costs.

Assuming a 20 per cent market growth rate, a 12 per cent annual price erosion and a product life of five years, McKinsey found that a development cost overrun of 50 per cent would reduce after-tax profits by just 3.5 per cent. But a 9 per cent overshoot in production costs reduced profits by 22 per cent, and missing the launch date by six months cost 33 per cent of the profits of the project.

This underlines the importance of getting the design concept right, for design has a key role in ensuring that a product can be manufactured on schedule and at the target cost.

(2) J. Cox and H. Kriegbaum, Innovation and Industrial Strength, London, 1989

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Contributing to competitiveness

Design can contribute to improved competitiveness in three main areas:

Cost

Design affects cost in two ways. It can reduce manufacturing costs (including overheads and investment in plant and tooling) and it can minimise lifetime costs to the user.

Product acceptability

Design governs product performance and specification. It affects aspects such as product uniqueness, reliability, appearance, ease of use, environmental acceptability and safety, all factors that can be critical in persuading a purchaser to choose one product rather than another. It is the intellectual input of a product that is the key to its profitability and to its capacity to ward off cheap competition.

Service

Design has an important role in packaging and presentation, ensuring that a product is delivered on time and in good condition, and simplifying maintenance and repair.

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