What SpaceX Can Teach Us About Cost Innovation

Harvard Business Review

Earlier this week, the space-transport start-up SpaceX had its most successful launch test yet with Grasshopper, the first fully and rapidly reusable rocket. This is the latest step in the company's journey to dramatically reduce the cost of space travel, and follows the first private resupply of the International Space Station with the launch of their Falcon 9 rocket and Dragon spacecraft last fall.

Initially when the start-up's founder, serial entrepreneur Elon Musk, looked at the space industry, he faced a quandary 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.

They 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. And we can see this occurring in other businesses too. Though traumatic, the restructuring of GM and Chrysler, including a major reduction in overhead, led to their resurgence since 2009.

They think about the future. 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.

They remember that increasing profits isn't the only goal. 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. For a similar example in business, when former Kraft and Gillette CEO Jim Kilts cut overhead costs, he then reinvested the savings in product development and advertising to strengthen brands. Using this strategy, Kilts was able to dramatically improve financial results and stock prices.

Although the business world rarely sees cost cutting as a creative act, Elon Musk is demonstrating how it can open up vast new frontiers and play a critically important role in the innovation process. To date, SpaceX is saving the government billions by self-funding development costs rather than charging them back. Furthermore, according to company projections, their per-launch costs are projected to run 40 to 60 percent less than what's being charged today.

Developing new products and cutting costs each require an innovation mindset. Creative problem-solving skills, thinking about the long term, and adopting a holistic perspective will lead to savings ranging from incremental to breakthrough. Cost innovation — rather than simple cost reduction — can only occur once an organization broadens its approach and keeps a constant eye on the long term.

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