New Horizons: The next wave of innovation

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This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on January 11 - 17, 2016.

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THERE is a groundswell movement emerging in these troublous times. Soon, old school solutions that eat up massive resources, use plenty of energy and generate a lot of waste will no longer be acceptable anywhere in the world.

“The lesson for business is that we are now in a very different phase. The squeeze on the cramped middle classes can no longer be relieved through financial engineering. To live well, middle-class consumers in the developed world will need well-designed products that help them make the most of their straitened circumstances,” says Charles Leadbeater in his book, The Frugal Innovator.

Why straitened? “Denying hundreds of millions of people lifestyles they aspire to will further entrench inequality and fuel social discontent. Yet meeting this demand using current technologies and production processes will edge us towards disaster,” he says.

The solution? Frugal innovation. “Reconciling these pressures will require a wave of sustained innovation and creativity on an unprecendented scale in how we acquire and use resources to power our offices and factories, heat our homes, grow our food and move about. The next 30 years will have to be an era of unparalleled creativity to innovate new ultra resource-efficient ways to live and work,” he explains.

Leadbeater says the systems of the future will have to work with the grain of the environment rather than cutting through it, extracting from it and depositing waste into it. “Indeed, the innovations we will need in the future will take their design principles from natural systems, using waste from one process as the fuel for another, minimising transport costs by using local resources as far as possible and using renewable energy wherever possible and very sparingly.”

These solutions will also require new levels of social coordination to manage our interdependence, he adds. “That is why frugal solutions will be social as much as technological innovations.”

Today, innovation is seen as a means of competition between companies seeking to differentiate themselves, getting ahead by creating new products, opening up new markets and deploying new technologies. “The context for innovation is provided by other companies and the need to compete with them. This narrow perspective, focused on innovation as a facet of competition within industries and among companies, will still be vital but not enough in the future,” says Leadbeater.

He points out the necessity of seeing innovation in a much wider context of, and as a response to, the more fundamental societal changes the world faces: the constraints of competition over scarce resources in the context of climate change; the demands of the new price-conscious middle class of the developing world; and the sustained squeeze on the living standards of the middle classes of the developed world.

What defines the frugal innovator? At its core, there are four common design principles — lean, to minimise waste; simple, so they are easy to use in many different settings; social, so as to create shared solutions and experiences, which bring people together and reduce costs; and clean, by recycling, restoring and renewing what we have already.

Frugal innovators use the constraints they operate under to their advantage as a motive for innovation. The often extreme and difficult conditions under which they operate spur them to innovate, helping them to generate new solutions.

“Radical, disruptive innovation invariably starts in the margins serving demanding consumers who cannot afford high-end solutions. Extremity and crisis can breed urgency and ingenuity and provide focus,” says Leadbeater. 

“A lack of resources can feed a process of creative improvisation, making the most of what is already available rather than creating technologies and infrastructure from scratch.”

Not having a special environment in which to experiment and innovate can hold back fundamental research and radical thinking, but it also encourages innovators to try things out in the real world, with real consumers.

The book is littered with such examples. One that most people today are familiar with is Toyota, the car company that pioneered the whole concept of lean manufacturing. It didn’t do this to be innovative but because by 1949, following the ravages of World War II and unable to compete with the large US manufacturers, it was about to go out of business.

“Toyota did not have a grand plan to create a new way to make cars at low cost, high quality and with minimal waste. Instead, its engineers were intent on solving a host of problems that beset the company,” Leadbeater points out.

These innovations came to be known as “lean production”, but in the first 10 years, they had no name. At the time, Ford Motor Company and General Motors, the large US car manufacturers opted for mass manufacturing. Ford, for instance, made millions of cars in a few models, employing semi-skilled workers organised in a division of labour to operate expensive, heavy-duty machinery that was dedicated to repeating the same task over and over again. 

The machines were run at full capacity for as long as possible and delays were not tolerated. Often, 

mistakes were passed down the line, to be corrected or ignored later, just to keep the line moving.

“Toyota could not afford this approach as it had neither the capital nor the level of production and demand to make it work. The extremity of its position meant it had to think afresh. That is where Taiichi Ohno comes in,” says Leadbeater.

Ohno was Toyota’s engineering director who was pushed to the limit because of the severe constraints the company was operating under. It was broke so he had a very limited capital budget. He could not afford to have fixed machines dedicated to a single task. Machines would have to be interchanged and adapted to undertake several different tasks as they made different models.

This meant that Toyota needed a workforce that was skilled, committed and flexible enough to switch around the machines as needed. It took the US car manufacturers about a day of lost production to switch one machine for another. Ohno brought this down to three minutes. It applied this ethic to other aspects of production, which cut costs and eliminated mistakes. And so, lean production was born.

Toyota could not afford waste, which Ohno defined as human activities that absorb resources without creating any value. He wanted workers to get it right the first time. He saw no reason to have expensive inventories in case something went wrong and from that emerged the idea of just-in-time production — components arriving only as they are needed on the line.

“Toyota responded to the extreme constraints it was working under and made the most of its marginal position as a minor producer to turn conventional wisdom inside out. In the process, it developed a lean approach to making cars, the principles of which are now being applied to health, education, banking, construction and food distribution,” says Leadbeater.

Lean thinking is the first tool in the frugal innovator’s toolbox, he adds. The others include minimising waste; getting things right the first time; focusing precious and costly resources on where they create the most value; avoiding expensive, inflexible, capital-intensive solutions; doing without rigid bureaucratic systems that are costly and inefficient; and enabling cooperative problem-solving. 

Lean thinking started at Toyota, but it has been taken up imaginatively at Indian hospitals, which are among the most radical innovators in the healthcare industry, and among low-cost private schools that are spreading through the slums of the developing world.

Take the Narayana Hrudayalaya hospital chain — the cheapest, most efficient heart hospital in the world. It does hundreds of basic heart operations each month for between US$2,000 and US$5,000 per operation. The same operations can cost US$20,000 to US$100,000 in the US. Despite this, the NH group makes higher profit margins and delivers higher quality, says Leadbeater.

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How does it manage this? “Like a Japanese car factory, the NH heart hospital is modelled on continual flow. About 24 open heart operations and 35 bypass operations are conducted daily, more than eight times the Indian average,” he explains.

“That level of efficiency only comes from the patients being managed as a seamless flow through the theatres, with the surgeons focused only on what they do best — operating — and leaving other staff to fill in the paperwork, prepare the patients and take them to post-operative care.”

Doctors are paid a fixed salary, well below US levels. That means if a doctor does more treatments, the average cost falls. In the US, doctors are paid per activity, therefore, more operations mean more costs.

The hospital chain has also innovated on the customer side, developing a micro-insurance system that costs as little as 22 cents a month for poorer patients to gain basic cover. It charges people according to their ability to pay. Those who can, including many hundreds each year from outside India, pay the full price and get their own air-conditioned room.

Their fees subsidise poorer patients who cannot afford to pay and who are looked after in much more basic facilities. The founder of the hospital, Devi Shetty, gets a text at the end of each day stating the hospital’s financial position. “NH is both lean and social, money making and a moral crusade,” Leadbeater points out.

The Sabis group that operates out of Lebanon is doing for education what NH is doing for heart surgery, he says. It started out as a small Christian school for girls on Mount Lebanon in the late 19th century. For most of its life, it struggled to survive, living through the collapse of the empires and two world wars. The bloody civil war in 1975, the subsequent Israeli invasion in 1982, followed by the Syrian occupation were what sent it over the edge.

The civil war, Leadbeater says, brought it to its knees and it was on the verge of bankruptcy. The school’s salvation lay in international expansion. The Lebanese who had fled the country for the Gulf states wanted a school they could trust. Sabis realised that to expand beyond its home, it would need a reliable system to translate its homegrown approach to new sites.

“Sabis’ remarkable lean education system was born in the midst of crisis. It now applies this approach across a chain of 12 schools from the Middle East to the UK, Europe and the US,” Leadbeater says.

Sabis works backward from the final exams that students have to take to establish the key concepts they will need to learn at each stage of their education. Each subject is broken down into a set of essential and non-essential concepts. In maths for Grade 4, for example, there might be 300 concepts that need to be covered in a year. Those concepts are then organised into a timely flow, like components on a production line, which children have to learn and teachers teach, explains Leadbeater.

To check on progress each week, in every subject, children in every Sabis school complete a large automated test to show what they have learnt. The results of these tests are relayed to the teachers and the Sabis group headquarters so that they can quickly identify who needs extra help mastering the concepts they learnt that week and which teachers are doing the best job.

“Like a Toyota production line, problems are not allowed to build up; they have to be fixed there and then,” Leadbeater points out.

These tests provide the school with reams of data on each child and teacher. In the UK, for example, a parent might get a report once a term, with a brief paragraph from each teacher combined with an overall mark of performance. At a Sabis school, the file on how a Grade 7 child is doing at maths might run to 102 pages. Each concept learnt will have a quality mark attached to it, showing how thoroughly it was learnt.

This data, says Leadbeater, allows Sabis to check on the quality of teachers. Discrepancies in performance quickly show up and academic teams will work with the teachers to improve the children’s scores.

Sabis makes sure that its teachers only focus on teaching; all administrative chores and paperwork are handled by support staff. And to supplement the teachers’ efforts, students who finish a task fast because they understand it are encouraged to help those who are lagging behind. Each class in a Sabis school has a couple of shadow teachers — students who take over when a teacher is absent and are expected to teach properly, taking on new concepts rather than simply holding the fort.

Despite this rigour, students are not ranked and are encouraged to cooperate rather than compete. One of the co-founders, Ralph Bistany, explains that one of the results of rankings is that one child has an interest in somebody else’s failure. “It should not be you or me, but you and me. When people cooperate, wealth increases and everybody has more,” he says.

The next tool in the frugal innovator’s toolbox is keeping things simple. Leadbeater says too much innovation in the modern economy is devoted to the proliferation of slightly different versions of existing products to make them look and feel different, to persuade customers they need to cast off what they already own to upgrade to something different. “Too much innovation provides us with more products rather than better solutions,” he points out.

The simplest innovations are easy to use because they look and feel like something people already use. They are not designed for the special conditions of a healthcare clinic, but for everyday life: the motorcycle that becomes an ambulance; the aerosol that administers oxytocin; the ketchup sachet that holds anti-retroviral drugs, he says.

Frugal innovators focus relentlessly on what counts most to the consumer; they strip out what is extraneous. The easiest way to simplify a product is to remove functionality. Another good way to discover simpler, less complex designs is to move forward by going backwards, recuperating and updating older, discarded ideas that come from a less technologically advanced time, when fewer options were available.

The true test of a simple product is whether it affords itself to be used. It also comes from shrinking and concealing much of the complexity of a product, thus reducing how much the user needs to know. Complex products show off their multi-functionality; simple frugal products hide their complexity.

Genuinely frugal innovation, Leadbeater says, has to be clean as well as lean, simple and low-cost, otherwise low-cost solutions simply breed more demand and so exact a greater environmental toll. The consequence is that frugal innovation, to be really successful, also has to be systemic. It has to be about redesigning entire systems, end-to-end, not just individual, standalone products and services, such as low-cost heart operations or super-cheap ECG machines. The best place to look for the principles that should guide these new systems are systems that are clean and frugal by nature.

Industrial systems take, make and waste resources — in at one end and out the other. Frugal, clean systems are circular, closed loops in which nothing is wasted. Their watchwords are not create, make, mine and waste, but reuse, recycle, refurbish, restore. 

“Fully frugal innovation is not just ultra-low cost. It must be low cost and clean, meeting people’s needs while using fewer resources per capita. That often means looking not just at the product but at whether the system as a whole is frugal,” says Leadbeater.

Finally, frugal solutions make the most of being social to engage consumers in adapting and innovating solutions; spread virally through word-of-mouth emulation and imitation and sharing the costs among many people. “Social, shared solutions will often be more economical than individualised, tailored ones. Frugal innovators work with the grain of cooperation to devise solutions with people,” says Leadbeater.