April 25, 2013

Harvard Business Review looks at Spacex for Cost Innovation Lessons

Serial entrepreneur Elon Musk, entered the space industry several years ago. He faced a problem about where to innovate, given the restrictions and mandatory performance criteria for space travel. Musk quickly zeroed in on the one area ripe for innovation: cost reduction. He gathered a team with a wide cross-section of expertise and put them to work at trimming the fat.

NASA has tried for decades to provide low-cost space flight — that was the failed promise of the Space Shuttle — a reusable spacecraft to avoid the expensive building of a new craft for each mission. The complexity of the Shuttle and its reliance on 1970's technology drove costs up. Contractors paid based on their costs, with little incentive to save, increased them even more. Working against NASA as well was a heritage of exploration: unique space missions that pushed technologies and space travel to the edge. It was fundamentally different from the mindset of low-cost frequent and standardized transport that SpaceX embraces today.

SpaceX has learned. With industry veterans and outsiders, they benefit from past experiences but are unconstrained by forces and factors that pushed up NASA costs. It's not that they threw away the NASA playbook, rather they combined what worked with new ways that have the potential to dramatically reduce costs (as the Grasshopper test flight demonstrates). Their process — having a big goal, learning from the past, looking at the whole picture to find and prioritize opportunities, then refining key aspects of the space flight model to achieve their objective — is an approach that can make any organization more creative about cutting costs.

Think Big

In large companies, the task of cost cutting is invariably incremental and left to finance, which works with individuals or small groups within a specific department, region, or area of the business. On the other hand, the SpaceX approach innovates and transforms by looking at the entire business model instead of the parts. Cuts weren't just made to the physical rocket itself but to everything surrounding it — overhead, support services, development timeframe, and more. With small teams and far lower overhead, SpaceX was able to go from incorporation to first space flight in six years.

Sustaining cost reductions over many years

SpaceX developed a plan for sustaining the lower-cost business model over many years. To build a business for the long haul, SpaceX wisely recognized it must embark on the complicated and risky task of developing an entirely new rocket engine. Another similar space venture is still using fuel-inefficient surplus Russian rocket engines built in the 1960's that cost more to run and maintain over time. Due to their finite number, the company has a limited future unless like SpaceX it develops its own engine.

This is where most businesses fail in cutting costs: Its results are typically analyzed narrowly by the financial impact of a reduction in one area or department over a year or two. But shortsightedness can lead to long-term problems. For instance, after one company cut product costs for years, it then looked at the sales force for additional savings. Meanwhile the mix of business had changed such that their high-touch and relatively high-cost sales force was more important than ever before. So when they reduced the sales force, a key competitor was able to gain share even more rapidly than before.

Reinvest for more innovation

With SpaceX's cost savings in an era of declining government budgets, reduced costs make the investment in space exploration and big science projects more viable, such as a mission to Mars. In a recent interview, Musk even suggested that a project to develop warp drive could be in the future. NASA Administrator Charles Bolden agreed it's a possible investment.

In companies, those profits can be invested in other innovation efforts like new products. For example, be savvy when adopting an across-the-board cost reduction strategy. Once identified and implemented, a portion of the savings should be selectively reinvested in products and services that offer the best prospects for future returns. Ultimately the real objective is not about cutting costs at all, but rather a redirection of investments.

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