A Win Win Cost Reduction/Performance Innovation in the Cell Phone Industry

The cell phone carriers are about to introduce a product innovation, called a femtocell, to improve cell phone reception within a home. These femtocells are about the size of a toaster. The wireless carriers will install these mini cell phone towers. The tiny tower will connect with cell phones inside the consumer’s home through a broadband internet connection to the telephone network.

The wireless carriers hope that this innovation will increase the reliability of the wireless system to the extent that the consumer will be able to get rid of the $50 a month average land line cost. The consumer will pay about $100 for the femtocell, plus ongoing monthly service fees for the “enhanced” telephone service. (See the Symptom & Implication, “Companies are trying to create upscale niches” on StrategyStreet.com.) This sounds like a pretty good deal for the consumer, assuming they can get rid of their land lines. The innovation should substantially reduce the customer’s telecommunications costs. (See the Perspective, “The Choice of New Products” on StrategyStreet.com.)

It is an even better deal for the wireless carriers. These carriers pay about $200 for each of these boxes. They will recoup that $200 through the $100 installation fee plus the ongoing “enhanced” service fees. The beauty of the technology is that it lets the wireless carriers shift some of the cost of an increase in wireless capacity to their consumer customers. The capacity addition helps the carriers avoid some of the costs of adding new and expensive transmission towers.

We have studied patterns of cost reduction for a number of years. Costs are Inputs of people, purchases or capital. These Inputs produce product Outputs. The cost reduction objective is to reduce the ratio of Inputs to Outputs. We have observed that there are four separate approaches to reducing costs:

  • Reduce the rates the company pays for the use of an Input

  • Reduce the number of units of Input that are wasted or idle in the production of the Output

  • Redesign the product or the process to avoid activities or steps that are currently undertaken in the production of the Output

  • Find new customers and sales volume, i.e. more Output, for fixed cost Inputs.

This femtocell innovation is an example of the third cost management technique: the redesign of a process to reduce activities. This particular redesign reduces the capital requirements in the industry by shifting activities and investments to the consumer for no compensation. In fact, in this case, the consumer pays for the shift directly.

This certainly looks like an attractive win win deal.

The Improve/Cost section of StrategyStreet contains several hundred brainstorming ideas to control costs in even the best of markets.

Posted 11/6/08


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