Consumer research takes place early in the product development process, yet many consumer-goods companies then shift their focus internally to R&D and engineering and can lose the critical connection to consumer insights. Traditional product-focused R&D and product development processes typically remain in their lanes and have few structured interactions with other functions such as marketing and sales. Next-generation electrical and electronics architectures will require significant upfront investments that will pay off only in the following generation. Our approach, which combines customer, technology, operations, and market insights, along with our partnership with, Our innovative methodology to optimize products shifts the focus from design-to-cost to, By delivering a holistic transformation of engineering departments, we ensure organizations remain agile, effective, and ready to deal with a rapidly evolving marketincluding supporting our clients in identifying forward-looking insights through leading, We leverage proven methodologies to optimize direct and indirect spend categories. Its paired with algorithms based on machine learning to intelligently collect data at scale and identify interesting situations to propel the development of Level 4 and Level 5 autonomous-driving features or optimize driver-assistance features. This research is at an early stage. One element of the diagnostic involves structured interviews with staff from all parts of the R&D function, who are asked about the metrics their organization uses to monitor product-development activities. are all secondary to speed of deployment and asymmetry. leaders, deploying bespoke category strategies, and building innovative capabilities. Annual MCFM Consumer Survey, McKinsey Center for Future Mobility, December 2021, n = 26,285. Automotive OEMs are undergoing an essential transformation from experience-based engineering toward data-driven, virtual engineering. Insufficient focus on the voice of the consumer. For example, cost and margins can overshadow other development considerations and appear inherently at odds with the design and consumer departments, which seek to create differentiation and delight end users. They made limited use of testing fleets or static hardware-in-the-loop or software-in-the-loop testing environments. (When I say business model I dont just mean private businesses, but also government agencies, nonprofits, and others who have a mission model instead.). Yet several trendssuch as the growing importance of data in decision making, an increased focus on consumers and design, and the evolution of product-development methodologiessuggest that much can be gained by considering how consumer-product managers can evolve. OEMs must transition from working with several suppliers to creating alliances and partnerships centered on key technological control points, while tier-one suppliers must adapt to software sales and develop solutions in partnership with OEMs. Technology has made that assumption incorrect: Today innovations like Uber and Airbnb can be rolled out extremely quickly. The Three Horizons allowed senior management to visualize what an ambidextrous organization would look like the idea that companies and government agencies need to execute existing business models while simultaneously creating new capabilities and helped to prioritize innovation products and programs. 1. OEMs and suppliers create a network of cross-functional, empowered teams. The use of function points in the industry, ISBSG, October 2016, isbsg.org. Done right, product development will change the ways automotive companies conceive of, plan, engineer, and monetize new products, thus expanding their go-to-market strategy, business case, and revenue streams. Based on these inputs, agile teams can create detailed requirements before developing and testing the components. Requirements for change include conducting constant reviews, adjusting objectives as necessary, and tracking target achievements. Thats important, because widespread knowledge of a metric indicates that the company is using that indicator actively as part of its performance-management processes. It provides standardized processes for the product development process. From electrification and autonomous driving to digital services and connectivity, a massive number of innovations are on deck today, expanding the innovation pipeline. Instead, they should delegate ownership at the product-manager level. For companies, that means lower costs and lower risksa powerful combination of benefits to have in a highly competitive environment. Weve spent more than a decade investigating the root causes of R&D scheduling and budget challenges. Creating a logical and physical architecture that combines functional and physical elements typically starts with a functional system view based on system requirements. Industry structure. Delayed launches mean lost sales, opportunities for competitors to get ahead, and potentially damaged reputations. McKinsey_Website_Accessibility@mckinsey.com. OEMs also need to provide a fact base to support the planning and steering of their own R&D activities as well as negotiations and steering of suppliers and engineering service companies. The transformation will need to happen along three dimensions: technology, commercial structure, and commercial change. Source2Pay (S2P) The scope of the product manager is expanding rapidly, driven by changes in how software is developedthe growing role of data in product decisions, the evolution of product development practices and execution pod, and the consumerization of B2B software, with an elevated role for design. For incumbents, there are four ways to counter rapid disruption: The Three Horizons model is still very useful as a shorthand for prioritizing innovation initiatives. After reading it, . In our experience, the primary skills of a modern product manager are often dispersed across a number of talented individuals. For example, Microsoft copying Netscapes web browser and using its dominance of operating system distribution to win, or Google copying Overtures pay per click model and using its existing dominance in search to sell ads. In addition, analytical models provide a powerful new way to deal with constraints. For those who grew up with the notion that creative disruptive Horizon 3 products takes years are in for some unpleasant surprises. The company drew on its tradition of standout design to guide product development. By designing agile processes that incorporate source to pay, we help to reduce leakage and to sustain performance to meet future needs. Systems engineering is about breaking large, complex projects down into smaller, more manageable pieces and orchestrating the interfaces between them. When embarking on efforts to design complex things, companies often have little idea how long a project will take, what it will cost, or what theyll finally be able to deliver to the end customer. It's All About Customer Value If you beat competitors at the customer value game, your products will win. A global team of analysts from five Sourcing Centers, located in best-cost sourcing hot spot locations, help provide our clients implementation-level support in global sourcing diagnostics; country and category prioritization; supplier identification and evaluation; supplier bidding, negotiation and selection; and global sourcing organization design. Furthermore, the centers of gravity in global and regional markets continue to shift toward Asia, requiring local strategies to provide incentives for OEMs and suppliers to maintain local footprints and keep data in the region. Product managers in the consumer-goods industry tend to fit a more traditional profile, with a focus on project management and tactical execution. $50K Becoming customer centered also requires a new go-to-market model that features direct interactions between the OEM and the end customer. Furthermore, future revenues and costs are planned, targeted, and tracked in the same way as development efforts and product costs that happen before the SOP due to a lack of experience with update and release cycles for software, for example, and the underlying life cycle revenues and costs. Larger development teams are less productive than small ones, for example, as they must expend more effort on internal coordination and communication. Only 15 percent of the companies in our sample did not make widespread use of this metric, but those companies had an average relative-profit growth 11.4 percentage points higher than the remaining 85 percent. Design the right organization, processes, tools and data infrastructure to get the best out of your product managers. We strive to provide individuals with disabilities equal access to our website. When first articulated by Baghai, Coley, and White in 2000, inThe Alchemy of Growth, the Three Horizons model was a breakthrough. We'll email you when new articles are published on this topic. Absent a role that represents the voice of the consumer from inception through to completion, companies can end up with overengineered products that exceed cost targets and dont meet core consumer needs. Leaders estimate the renewed focus on the consumer will result in a 15 to 25 percent price premium and incremental market share of more than 20 percent by year two. If you would like information about this content we will be happy to work with you. As an example, at one company, a project to create a derivative of a newly released product was originally expected to take just 300 person-weeks of effort. Product development steering should fully use the potential of OTA capabilities deployed in vehicles to offer feature updates, function-on-demand offerings, and new features such as higher levels of autonomous driving. To do this, we designed a second metric. Our dataset comprises 42 companies, for which detailed data on product-development metrics and financial performance was available. With enough industry data, however, the models can see how these sorts of changes affected productivity in the past and provide a good estimate of likely future effects. Nevertheless, the work reveals a number of intriguing and potentially counterintuitive findings. Enabling future customer experiences and accelerating product development. They should optimize project assumptions (including levels of reuse, which technical concepts to use, and the amount of outsourcing) to prioritize R&D resources for the most important projects. It can then assess the risk of the current plan or create a more realistic staffing plan along with a good budget estimate and an achievable schedule. LOG IN or SIGN UP TOP 5 Comments Join our McKinsey experts as they delve into the cost savings, sustainability, and commercial advantages of reducing the size of product packaging, and discuss innovative solutions such as nesting products and honeycomb packing formats to reduce stock outs and improve . For example, some organizations defined Horizon 1 as new features that could be delivered in the short term of three to 12 months, Horizon 2 as business model extensions that will be ready 24 to 36 months out, and Horizon 3 as creating new disruptive products or business models 36 to 72 months out. Please email us at: World Economic Forum: A preview of Davos 2023, Author Talks: The worlds longest study of adult development finds the key to happy living, The executives guide to new-business building. Automotive manufacturers are moving away from a traditional product development steering approach focused on direct material cost optimization targeting the SOP. As Steve Jobs famously noted, You cant just ask customers what they want and then try to give that to them. AirBnB, Uber, Lyft, Craigslist, SpaceX, and Tesla are examples of Horizon 3 disruptions using existing technologies and deployed in extremely short periods of time. In particular, we wanted to identify the approaches used by companies that achieve consistent high performance. Through our work with technology companies, we have identified several principles and approaches for running a successful learning program. Filter your search results by job function, title, or location. We have a proven methodology focused on creating value. And if it cant, the company can run what-if analyses to evaluate the impact of dropping certain features or simplifying performance requirements. Likewise, the lack of clarity regarding key trends such as whether battery electric vehicles (BEVs) or fuel cells will become the dominant battery and energy solution could lead to increased R&D cost pressures. Exhibit 1. In the 20th century McKinsey created a model called the Three Horizons to explain how businesses must invest in current products, incremental innovations, and breakthrough innovations. This misalignment can result in products that miss the mark holistically. We're exploring the concept of 'skinny design' and its potential benefits for consumers, retailers, and the environment. Introducing the next generation of automotive electrical and electronics architecture requires a comprehensive business case that looks beyond the vehicle start of production (SOP) and initial bill of materials. This requires the introduction of a holistic systems-engineering approach combined with an agile organization and agile ways of working. In part, that's because R&D activities require companies to juggle so many dimensions. We also help companies develop and retain this crucialbut often overlookedtalent pool. Strategies such as market penetration (e.g. Something went wrong. The modern product-manager role is rooted in the voice of the consumer and elevates that perspective throughout the process to ensure that product development is guided by these insights. For full details of our data set, and how we analyzed it, see sidebar, Linking product-development metrics to financial performance.. Breakthrough innovation in product development requires the rigorous engagement of all functional lenses throughout the end-to-end process. Remember that use of a metric by a company indicates that it was cited by more than a third of respondents from that organization. Orpheus elevates the focus of spend analytics to guide procurement strategy development and execution. McKinsey proprietary market research; S&P Capital IQ, spglobal.com. Doing that is harder than it sounds. Ironically, rapid Horizon 3 disruption is most often used not by the market leaders but by the challengers and new entrants (startups, ISIS, China, Russia, etc.). Im a big fan of McKinseys Three Horizons Model of innovation. When embarking on efforts to design complex things, companies often have little idea how long a project will take, what it will cost, or what they'll finally be able to deliver to the end customer. Yet too many companies are not getting the results they want from their investments: only 6 percent of CEOs indicate they are satisfied with their companys innovation efforts.2McKinsey proprietary market research; S&P Capital IQ, spglobal.com. Boston, Massachusetts, United States. This should include a concrete, actionable description of what the organization wants and expects from its product managers. procurement functions leverage the power of analytics. In a few of them, however, that fact was not widely known, suggesting that these companies were not using the metric as an active management tool. The approach anchors the responsibilities for prioritization, architecture, road maps, and commonality on each system level, driven by strong decision making in the project organization. Tech companies built upon this product- and consumer-centric philosophy and created new ways to bring together different sources of insights to build world-class products.