SpaceX is an example of a company that is highly effective at driving alignment between its operating and business model. Founded in 2002 in a time when the launch vehicle industry was dominated by major aerospace contractors that worked off of cost-plus contracts, SpaceX focused on both process and product innovation to deliver a safe, reliable and low cost service to government and commercial customers. They were the first company to set a fixed price per launch, which they advertised on their website. Prices of existing domestic rockets for a ride to low Earth orbit (LEO) ranged from just under $10,000/kg to over $35,000/kg. SpaceX’s currently advertised prices come out to as low as $4,700/kg for the existing Falcon 9 and $1,700 for the future Falcon Heavy.
The company’s effectiveness is demonstrated by their recent success winning multi-billion dollar contracts with NASA to supply cargo and deliver astronauts to the International Space Station, the US Air Force to launch military payloads, and commercial customers to launch satellites. Their launch manifest currently has over 50 launches.
SpaceX’s business model is to safely and reliably deliver payloads to Earth orbit at a much lower price than competitors. There are a couple of noteworthy points about how the way they conduct business differs from the historical norm in the industry:
- Their pricing is transparent – they advertise fixed prices on their website while competitors lobby for opaque cost-plus contracts.
- Development is milestone based – when they sign a contract with a large government customer to develop a new capability they don’t ask to be payed up front. Instead they get paid when they hit development milestones and carry a large portion of the risk themselves.
SpaceX has focused on both product and process innovation.
The company is constantly seeking ways to reduce the cost of reaching orbit through innovative rocket designs. This can be seen in the design of their rocket engines and in their focus on creating reusable rockets. They have designed their launch vehicle to use a single type of rocket engine that they cluster together in a group of 9 to get the desired lift capacity. Using multiple of the same engine leads to higher production volumes, allowing them to mass produce and perfect the engine design over time. This approach leads to increased safety because if one engine fails they can throttle up the remaining 8 engines on the rocket to compensate. In addition they are experimenting with the ability to land portions of their rocket back on land after a launch instead of allowing them to burn up in the atmosphere or splash into the ocean. Landing their rockets back on the pad allows them to re-fuel, re-assemble and fly again with the same rocket. This product innovation has the potential to decrease the cost of launch by an order of magnitude beyond the cost reduction they have already achieved. The video below demonstrates what this process will look like.
On the process side, SpaceX’s rocket factory takes raw materials in side and rolls fully functional rockets out of the other. Their facility is vertically integrated and designed to mass produce entire rockets. In addition, they use new manufacturing technologies like 3d printing and their own method of friction stir welding. These innovations allow them to simplify manufacturing processes and reduce part counts, resulting in lower production costs and fewer points of potential failure.
Models Support Each Other
The operating model drives down cost and increases reliability which strengthens SpaceX’s value proposition:
- Cost reduction
- Vertical integration to cut out margin otherwise captured by suppliers
- Focus on process development to reduce variable cost of rocket
- Mass production of rockets spreads fixed costs over many rockets
- Product innovation to create reusable rockets
- Safety and reliability improvement
- They control every step of the manufacturing process
- Fewer part count from 3d printing leads to fewer failure points and opportunities for human error
The implications of this alignment between their business and operating models is that SpaceX is able to effectively capture market share by undercutting their competitors on price while remaining very competitive on safety and reliability. Their success in dramatically reducing the cost of accessing space has led to an increase in demand for launches as new in-space projects become financially viable due to lower launch costs. It’s a feedback spiral that has the potential to make Elon’s dream of retiring on Mars come true.
Sources: links in text, factory visit and interviews with friends who work there.