Cheaper and better: how ‘costovation’ can transform businesses

In a nondescript block in Cleveland, Ohio, a handful of doctors and nurses clock-in at 7pm each evening for a 12-hour shift, keeping watch through the night on about 200 patients in intensive care beds.

There are no patients in the room, however, only a bank of screens showing beds and a feed of live patient data. If patients experience problem, alerts can be sent to medical staff on the ground, hundreds and sometimes thousands of miles away.

The clinic has ambitions that one day some patients will be able to enjoy the technology from home, shortening hospital stays.

It's an example of what Stephen Wunker, a protégé and collaborator of Harvard professor Clay Christensen, calls a "costovation". Far from cost-cutting, which often cheats customers, costovation is about delivering new benefits by reimagining ideas and processes, while at the same time delivering cost benefits.

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“All costovations are rooted in having a unique perspective in the market. It’s about defying assumptions about the way things should be done,” Wunker says.

Subtraction

While innovation is often associated with adding features or capabilities, some of the most powerful innovations arise by way of subtraction. Rethinking what will solve customer needs or desires can create breakthroughs that reduce – rather than add – costs, delighting customers in the process.

This addresses another of Wunker’s key concepts – one he calls “jobs to be done”.

Marketers, he says, should think in terms of what customers need or want from products and services. A car, for example, can be either a functional vehicle to get from A to B or it can be a status symbol to show peers that the owner has ‘arrived’ – both are valid markets to pursue but require very different approaches.

“Many customers struggle with the products and solutions that they use today. They complain about price, customer service and the products themselves. These customers will jump at opportunities to spend less if they can be well satisfied too. Costovation is a great tool for delivering on those needs,” Wunker says.

The idea is not new – think par-baked bread which can be mass-produced, delivered frozen and finished off easily in small retail outlets, creating attractive aromas suggesting freshness in-store.

Costovation concepts, however, can be applied in many industries, with plenty of existing examples.

James Adams, a US jeweller specialising in diamond rings, offers customers discounts of up to 50 per cent on its rivals. Running a largely online model, it eschews the costs of holding inventory and maintaining expensive showrooms with sales assistants. Once an order is placed on its website, the diamond is sourced from the manufacturer, inspected and sent on to the customer. This asset-light approach is one where the emphasis is on managing the network.

Yotel is a low-cost hotel chain often found at airports. Its stripped-down model involves small rooms with only the most basic facilities. It does, however, offer a power shower and is seen as an inexpensive way for business travellers to de-grime.

Modularisation is another approach. At the Smart Car factory in northeast France, suppliers bring partially assembled car parts to the factory and have their own employees install them. Smart Car's owner MCC benefits in several ways. They are relieved of the financial and legal responsibility for supplier-installed parts. Some 1,100 of the 1,800-strong workforce that make the car are not on MCC's books. It also takes just 4½ hours to assemble each car.

Downsides

This one-size-fits-all does have it downsides, Wunker concedes: “The trade-off here is that too much standardisation can impact flexibility. You need to be clear up front about what your strategic priorities are and the trade-offs you are willing to make.”

Costovation approaches can also be applied to service industries. Bridge has opened a massive market in private schooling in Kenya, with a $6 a month offering high-quality instruction based on a centralised model with limited local administration.

Wunker says Costovation is an approach that can be applied by traditional players and does not necessarily involve nimble start-ups shaking up old industries. Toyota’s approach to simplifying its manufacturing lines is a class example, he says.

However, conservatism and ingrained culture can lead to complacency, one reason why disrupters often triumph by attacking from left-field.

“If you have grown up in an industry it’s very hard to see some of the absurdities and inconsistencies for what they are. Apply that to people who have day-to-day responsibility for business operations and costs and you can see how difficult it is to question the assumptions that underpin your business.”

Wunker’s five steps to Costovation

– Prepare the ground: investigate past failures and identify barriers to success. Coach key people in innovation behaviours and provide cover for those bold enough to take chances.

– Define boundaries: decide why you are innovating and how far you are prepared to go. For example, are you disrupting a product line or a business model? Also, decide what metrics will define success.

– Subvert traditional thinking: reimagine your organisation and your industry from afar. Look through your customers’ eyes and see what motivates and frustrates them. Rally around a single area where you can excel.

– Ideation: brainstorm as many ideas as you can. Innovate in how the product is made, sold and delivered. Score the ideas on metrics such as feasibility, risk, time to return and key customer jobs to be done that are satisfied.

– Build out what is promising: build out the business case for the best ideas. Provide detail on implications for the organisation of each along with top three risks and assumptions. Identify who the project will be handed to and determine what they will need to move ideas to execution.

Costovation by Stephen Wunker and Jennifer Luo Law is published by Amacom