Here is a brief excerpt from an article written by Ankur Agrawal, Mark Dziersk, Dave Subburaj, and Kieran West for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Customer choice has never been greater, so terrific design is essential for outstanding products and services—and to build lasting customer relationships.

Because customers demand compelling experiences, successful companies create products with a “hook”—a certain look or unique features that meet customer desires and build brand loyalty. At a time when demand is restrained in many sectors and geographies, such products can be a source of differentiated growth. The most successful designs achieve this growth in a commercially viable way by juggling the trade-offs of maximizing customer value within constrained costs.

For many years, manufacturers have used the design-to-value (DTV) model to manufacture products at lower costs while retaining the features needed to compete. These principles have now evolved into design for value and growth (D4VG), a new way of creating products that provide exceptional customer experiences. Under D4VG, design not only creates value but also generates growth, through products with the features, form, and functionality that turn customers into loyal fans and leading to above-trend sales.

In addition to generating badly needed growth, well-designed products can also raise margins—even if, initially, D4VG products can cost more to build. That sounds counterintuitive, but makes sense if considering how a design can evolve over time. The upfront investment in a design that includes extra features or more costly materials pays off if those design choices are based on a clear understanding of a product’s core brand attributes, deep insights into consumer motivations, and innovative design thinking. These are the designs that hook customers. Once hooked, redesigns that focus on clever cost reduction lead to second- and third-generation products that are significantly more profitable. The impact of this approach is highlighted in research by the Design Management Institute. Over a 10-year period, from 2003 to 2013, design-led firms delivered returns 228 percent above those of the Standard & Poor’s 500 index (Exhibit 1). When we reviewed the institute’s figures in May 2015, the outperformance was still at 219 percent.1

Apple is the poster child for the D4VG-led approach. When the iPhone debuted in 2007, its sleek metal case, sharp screen resolution, and easy user interface set it apart from any other phone on the market and created a massive fan base. Since then, Apple has not only managed to increase customer value through each generation of iPhone, it has also steadily cut costs. The features of the iPhone 5, released in 2012, dramatically improved on those of the original 2007 model,2yet estimates suggest that bill-of-materials costs (including 26 percent lighter packaging with 41 percent less volume) were 8.6 percent lower (Exhibit 2). The iPhone 5 was followed by the iPhone 5S and 5C. The former, using a lower-cost polycarbonate casing instead of a metal one but offering similar functionality, was built to attract more cost-conscious customers.

Apple is not unique. Design-led value creation is being used across industries, including in CPG, by some of the largest global players. Still, most companies have not seized the D4VG opportunity. Despite the evolution of design-led product development, many companies still see it as a cost-reduction approach, often as part of a procurement cost-saving drive. Or they tinker around the edges, making minor changes they perceive will do no harm to the integrity or appeal of the product, such as thinning package walls or reducing the number of color variants. But they aren’t thinking about design that enhances the user experience and improves the desirability of a product, which would lead to higher sales and stronger customer loyalty.

Building capabilities for design-driven growth

The key to design-driven growth is blending traditional design-to-cost principles with consumer insights and specialized product-redesign expertise to create a winning combination of lower costs and more desirable products. This enhanced, reinvigorated approach requires an end-to-end perspective on D4VG:

o knowledge of the competitive landscape to frame the product space
o insights about competing products to understand potential alternative offerings and learn from companies facing similar design challenges
o insights from customers to determine what makes them desire a product and what they are willing to pay for
o a complete understanding of a product’s cost drivers and of production capabilities and constraints to ground discussions about feasibility and cost limits
o design teams that bring together this knowledge in desirable product options

For the purposes of this article, we will focus on generating consumer insights and using design thinking. Other steps in the standard DTV process, such as competitive product teardowns, factory walkthroughs, and supplier workshops, are core parts of the D4VG diagnostic framework but much has been written on them previously.

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Here is a direct link to the complete article.

Ankur Agrawal is a partner in McKinsey’s Detroit office; Mark Dziersk, the head of LUNAR, is in the Chicago office; Dave Subburaj is a consultant in the Miami office; and Kieran West is an associate partner in the London office.