Cost Reduction by Redesigning the Product

Over the last several years, we have studied many examples of cost reduction initiatives to improve productivity and create economies of scale. In simplest terms, there are four actions that improve productivity and economies of scale. First, reduce the rate of cost you pay for an input. Second, reduce the inputs that do not produce output. Third, reduce unique activities or components in products and processes by redesigning the products and processes. Fourth, spread fixed cost activities over new product output. The cellular telephone carriers are introducing measures to reduce their costs by redesigning the product.

The wireless carriers use cellular towers to broadcast their signals. The cellular product design offers signals traveling long distances, primarily for voice and for relatively low data speeds. A cellular tower is expensive but capable of sending a signal for several miles.

This cellular technology worked well until the evolution of the smart phone. The growth of the smart phone has put very high demands on the cellular tower infrastructure because of the heavy data usage it brings to the market. Since 2010, data has taken over the majority of network traffic from voice communications. Now the carriers and, in particular, AT&T with its Apple iPhones, is having difficulty keeping up with the growth in demand.

AT&T today and, likely a few others in the future, has found a potential innovative solution, adding Wi Fi access points. These Wi Fi access points are ideal for heavy data traffic sent at high speeds over relatively short distances. Wi Fi access points transmit signals over a few hundred feet. The Wi Fi access points are smaller, easier and cheaper to install than are cellular towers. This low-cost approach appears to make sense in areas with high density of users. AT&T has placed them in New York’s Time Square and Rockefeller Center, in downtown Charlotte, North Carolina, in neighborhoods surrounding Chicago’s Wrigley Field and in San Francisco’s Embarcadero Center.

But there are some drawbacks to Wi Fi access points. Sometimes, a user has to take several steps to connect to a Wi Fi access point. Signals from the Wi Fi access points may interfere with one another, if signals come from multiple networks. Some smart phones do not have Wi Fi capability. These disadvantages have, so far, held back Verizon Wireless’s adoption of this apparently low-cost approach to providing service.

AT&T is leading this cost-saving innovation experiment. Their network strains force it to be creative and experimental. AT&T saves costs by redesigning the product itself using a less expensive technology with some shortcomings. If the AT&T experiment proves both cost effective and acceptable to cellular customers, every other wireless carrier will be forced to adopt it. And since a Wi Fi access point is largely a fixed cost, the wireless carriers with the highest density of membership within the Wi Fi area will have the lowest cost per unit. In most areas of the country that is likely to be either Verizon or AT&T. They will end up getting a unit cost advantage over their smaller competitors…if this works.

Mobile Hears Big Footsteps

A short while ago, we wrote a blog about Radio Shack’s rebranding itself (See Blog HERE) as primarily a mobile product carrier. At the time, we predicted that Radio Shack would have a difficult time competing on Function with Best Buy. Though, it would be more Convenient than the average Best Buy. (See “Video #26: Example of the Customer Buying Hierarchy at Work” on StrategyStreet.com.)

Best Buy is ramping up its mobile product investment now. The company has created 80 stand-alone mobile stores from a standing start in 2006. It may add as many as 100 new shops this year. In addition to these stand-alone shops, BestBuy Mobile operates as a separate store within all 1,000 of Best Buy full-sized stores.

The company has set itself up to be able to catch the mobile wave without committing itself to high costs over the long term. The BestBuy Mobile stand-alone stores average 1500 square feet of footprint. The stores within the regular Best Buy stores are only 600 square feet. These stores compare with an average of 40,000 square feet for a regular Best Buy store. (See “Audio Tip #188: The Efficiency of the Input” on StrategyStreet.com.) The small footprint allows the company to offer fast-growing products in Convenient mall locations near consumers, especially women consumers. In a few years, when growth slows, the company can withdraw from these small locations at relatively little cost and fold the mobile business back into its large regular stores.

BestBuy Mobile looks to be the Function leader in this market. It offers ninety different handsets and service plans from nine carriers. They offer products that work on the networks run by all four major wireless carriers: AT&T, Verizon Wireless, Sprint Nextel and T-Mobile USA.

BestBuy Mobile offers clear advantages over the stores run by the wireless carriers. Their prices are lower. Pricing is also clear and easy, with no mail-in rebates. And the company promises that the customer will leave the store knowing exactly how to use their phone in what the company brands as its “Walk Out Working” product promise. This promise is both a Reliability and Convenience benefit.

Everyone else in the industry must be hearing Best Buy’s big footsteps.