The results of this effort reinforced the value of identifying a product manager to guide the development team and experts through the process. The most intriguing result of our analysis is one that should give every R&D leader pause for thought. 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. Theres a riptide cutting through automotive-product development, and its forcing OEMs and suppliers to reoptimize their product development processes and R&D operating models. McKinsey research has found that more than 40 percent of companies arent talking with end users during product development. The company also expects to improve its margins by 20 to 25 percent. We strive to provide individuals with disabilities equal access to our website. 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. 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. The second root cause is overestimating the productivity of the development team. Breakthrough innovation in product development requires the rigorous engagement of all functional lenses throughout the end-to-end process. Recognizing that dramatic action was needed to get back on track, the company embarked on a six-week sprint led by a specially appointed product leader. This dynamic will place more importance on roles and skill sets that involve orchestrating and integrating product-development processes. The ability to relate credibly to all stakeholders, especially when passions are high, is extremely valuable. 1 To study the impact of individual KPIs on short- and long-term financial performance, we compared the average of each of our two metrics for companies that used a given indicator with the average for those that did not. We combine services and software to help companies unlock procurement value from spend insights. This requires that OEMs and suppliers shift their current development processes toward a cyclical, more integrated pattern and establish R&D steering approaches that connect software and hardware development along the entire life cycle of the vehicle. are all secondary to speed of deployment and asymmetry. That means shifting from the traditional use of scattered, embedded electronic-control units (ECUs) to a domain-focused system with central vehicle controllers. But for practical reasons, the only useful factors are ones easily measured, consistently gathered, and known early enough to drive budget and planning decisions. In practice, of course, such problems do affect almost every project. This approach requires a top-down definition of general requirements with a strong focus on customer expectations and experience. Traditionally, OEMs and suppliers steer their product development activities without the support of a single source of truth. Instead, they rely on scattered data lakes and data systems for the most important product and cost data, including product specifications and features, material costs, R&D costs, capital expenditures, and other data. Automotive manufacturers are moving away from a traditional product development steering approach focused on direct material cost optimization targeting the SOP. The product manager has emerged as a crucial force to steer this process and balance these lenses. Likewise, proactive risk and error detection actions will improve overall productivity based on predictive maintenance and machine learning algorithms, as will intelligent talent and team management techniques such as capacity management and scheduling. Serviceability, maintainability, completeness, scale, etc. First, they need to set the right ambition level to drive innovation at a competitive cost level and identify opportunities for efficiency improvements to free up resources for other projects and innovations. We'll email you when new articles are published on this topic. Going forward, OEMs need to adopt data-enabled engineering and virtual-engineering capabilities to understand the value drivers of automotive customers in todays new ecosystem, which includes autonomous driving and data services. Beyond woefully insufficient budgets, anemic resource allocations, and misaligned success metrics, companies too often follow a traditional, siloed approach that creates blind spots, handoff issues, and inefficiencies. For example, their products tend to require much quicker response to consumer trends and needs, and often require localization, which is unlike tech companies that have longer product lifespans and largely worldwide solutions. 1. The use of this type of metric was strongly associated with both relative-profit growth and profit-growth stability. If you would like information about this content we will be happy to work with you. The new service will enable spend transparency, spend and cost analytics, and value-capture management. Product development should be ongoing, as many products can be improved based on what happens during their lifespan. Product development is inherently risky and unpredictable: no plan survives contact with the enemy. Filter your search results by job function, title, or location. We based the work on ten years of data collected through the McKinsey Product Development Fingerprint, a proprietary product-development diagnostic tool. Delays, and the extra resources needed to counter them, mean higher costs too. McKinsey Three Horizons: this article explains the Mckinsey Three Horizons of Growth model in a practical way. This finding should not be interpreted as a suggestion that companies stop tracking their R&D project budgets, but it may have important implications for the way budgets are used. The Three Horizons provided an incredibly useful taxonomy. This success will shift the business model away from one-time sales and toward vehicle life cycle revenue streams and new forms of monetization, such as pay-per-use or subscription-based models. Organizations that apply analytics and predictive tools to their product-development and project-planning processes see a dramatic reduction in schedule slippage. It assumes that breakthrough innovations will take years to develop. In our experience, the most effective product managers look to orient new product development around a consumer-first focus, connect different functions, and facilitate an agile process (Exhibit 2). This requires the introduction of a holistic systems-engineering approach combined with an agile organization and agile ways of working. Product Development & Procurement (PDP) Academy We take a blended approach to learning, combining assessments with online courses, classroom training, coaching, and group work to create targeted learning journeys for different cohorts. McKinsey_Website_Accessibility@mckinsey.com. Likewise, the approach applies iterative and incremental development processes to hardware and mechatronics development, synchronizing them with top-down planning. McKinsey's Product Development service line is committed to helping clients develop products that fit market needs, produce attractive margins, provide platforms for add-on offerings, and enhance the reputation of brands for future business growth. The shift toward electrification due to market and regulatory forces has resulted in new requirements across all main vehicle domains, including new electric powertrains; thermal management and heating, ventilation, and air conditioning (HVAC) systems; and new infotainment services keyed to finding charging stations. We correlated the use of selected metrics with two measures of financial performance. Until recently, even companies that understood and sought to address these issues didnt have effective tools for doing so. In part, that's because R&D activities require companies to juggle so many dimensions. Visit our Product Management & Development page, McKinsey_Website_Accessibility@mckinsey.com. Incentivize external resources to focus on your goal or mission. This new approach to product development isnt just a fadits the future. Build product management talent through four levers: a well-articulated leadership development model, tailored learning journeys, ongoing development enablers and strategic recruiting. Earn badges to share on LinkedIn and your resume. Led teams of up to eight consultants in growth strategy, marketing & sales, and technical product . 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. When first articulated by Baghai, Coley, and White in 2000, inThe Alchemy of Growth, the Three Horizons model was a breakthrough. Across the globe, ten Design Labs support clients with design-to-value (DTV) efforts, including competitive teardowns, cleansheet costing, training workshops, customer and brand analytics, and idea generation. In our work with consumer-goods companies, we have identified a critical need for a product manager to connect these many stakeholderssomeone who is ultimately accountable for delivering consumer and business outcomes. A company can model the resource requirements of multiple projects scheduled to run concurrently, for example, to see if there are any points where those projects will demand more staff than it has available for a specific role. 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. Companies can use waterfall practices to define the overall vehicle and domain architecture. In our experience, companies face the following common pitfalls: Lack of well-defined goals. By taking a balanced view of the critical development lenses throughout, companies will be poised to achieve the elusive breakthrough innovation that both resonates with markets and supports key business objectives. Elements of these include the data backbone; the backend or big-data stack; in-vehicle architecture; technology such as machine learning algorithms and simulation techniques; and governance, including data governance, legal framework, and consent management processes. The consumer-goods industry in many ways defined the notion of a product that addresses a specific consumer need and creates value. The use of metrics related to supplier performance was less widespread in our sample. If companies understand the complexity involved in a new project, they can estimate the effort and resources required to complete it (Exhibit 1). The projects planners arrived at this estimate on the basis that 90 percent of the new design would be carried over from its predecessor. Larger development teams are less productive than small ones, for example, as they must expend more effort on internal coordination and communication. To be successful, players must resolve new technical and commercial challenges at speed as new business models and specialist players in hardware and software introduce established, nonautomotive products to the market. In the second step, players need to prioritize their efforts and set up a transformation office to drive change. Large organizations are executing and protecting the legacy. The product manager is well positioned to guide this process as a scrum master would, leading frequent iteration and collaboration across company stakeholders. 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. 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. The Key to Unlocking Growth Potential Product companies thrive or die based on their product strategy. They should implement end-to-end product development steering and controlling basedon a single source of truth. We have a proven methodology focused on creating value. While traditional analysis suggests that Horizon 3 disruptive innovations take years to develop, in todays world this is no longer the case. Please try again later. 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. The consumer-goods industry can learn from the evolution of product management in the technology industry and empower product managers to play this critical role. OEMs focus on material cost optimization to reduce product costs and improve product profit. Are you asking enough from your design leaders? Based on these inputs, agile teams can create detailed requirements before developing and testing the components. The first step should be a thorough and rapid assessment through benchmarking, diagnosing, and pursuing development. Finally, OEMs and suppliers should pursue software and hardware development target costing, including for the needed resources and associated costs. Critically, top management must actively drive this change. Please email us at: Making product development as digital as tomorrows products, Jeremy Hope and Robin Frasier, Who needs budgets?. 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. The Product Strategy Playbook from McKinsey Alum - Free PPT Templates PRODUCT STRATEGY THE BIG PICTURE ON PRODUCT STRATEGY 1. Example of our work Video Horizon 3 is the creation of new capabilities and new business to take advantage of or respond to disruptive opportunities or to counter disruption. Jeremy Hope and Robin Frasier, Who needs budgets? Harvard Business Review, February 2003, hbr.org. Learn how to build slide decks like McKinsey To benchmark R&D performance, they should compare their performance against peers on dimensions such as R&D intensity, new-product costs, time to market, and R&D offshore ratios. Designs and leads major operational transformations for basic materials clients; brings extensive expertise in procurement. OEM can typically use commercial databases to support their benchmarking efforts on material costs and capital expenditures; for R&D hardware and software costs, third-party providers can help. 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. The average budget overrun experienced by a group of factory-automation-software projects we studied was more than 10 percent. New rules for automotive product design and development | McKinsey DOWNLOADS There's a riptide cutting through automotive-product development, and it's forcing OEMs and suppliers to reoptimize their product development processes and R&D operating models. Such investments can bring significant benefits: McKinsey analysis has found companies that invest in innovation during a crisis outperform the competition on market capitalization by 10 percent; investing in innovation after a crisis gives them a 30 percent advantage. Very generic interview. The structure of line organization must build on defined ways of working in things such as team structure, roles, and processes, and delivery teams should be stable across different projects. 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.