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1 May 2010

Costs of complexity: in healthcare, and in the mobile industry

Filed under: books, business model, disruption, healthcare, innovation, modularity, simplicity — David Wood @ 11:56 am

While indeed there are economies of scale, there are countervailing costs of complexity – the more product families produced in a plant, the higher the overhead burden rates.

That sentence comes from page 92 of “The Innovator’s Prescription: A disruptive solution for health care“, co-authored by Clayton Christensen, Jerome Grossman, and Jason Hwang.  Like all the books authored (or co-authored) by Christensen, the book is full of implications for fields outside the particularly industry being discussed.

In the case of this book, the subject matter is critically important in its own right: how can we find ways to allow technological breakthroughs to reduce the spiralling costs of healthcare?

In the book, the authors brilliantly extend and apply Christensen’s well-known ideas on disruptive change to the field of healthcare.  But the book should be recommended reading for anyone interested in either strategy or operational effectiveness in any hi-tech industry.  (It’s also recommended reading for anyone interested in the future of medicine – which probably includes all of us, since most of us can anticipate spending increasing amounts of time in hospitals or doctor’s surgeries as we become older.)

I’m still less than half way through reading this book, but the section I’ve just read seems to speak loudly to issues in the mobile industry, as well as to the healthcare industry.

It describes a manufacturing plant which was struggling with overhead costs.  At this plant, 6.2 dollars were spent in overhead expenses for every dollar spend on direct labour:

These overhead costs included not just utilities and depreciation, but the costs of scheduling, expediting, quality control, repair and rework, scrap maintenance, materials handling, accounting, computer systems, and so on.  Overhead comprised all costs that were not directly spent in making products.

The quality of products made at that plant was also causing concern:

About 15 percent of all overhead costs were created by the need to repair and rework products that failed in the field, or had been discovered by inspectors as faulty before shipment.

However, it didn’t appear to the manager that any money was being wasted:

The plant hadn’t been painted inside or out in 20 years.  The landscaping was now overrun by weeds.  The receptionist in the bare-bones lobby had been replaced long ago with a paper directory and a phone.  The manager had no secretarial assistance, and her gray World War II vintage steel desk was dented by a kick from some frustrated predecessor.

Nevertheless, this particular plant had considerably higher overhead burden rates than the other plants from the same company.  What was the difference?

The difference was in the complexity.  This particular plant was set up to cope with large numbers of different product designs, whereas the other plants (which had been created later) had been able to optimise for particular design families.

The original plant essentially had the value proposition,

We’ll make any product that anyone designs

In contrast, the newer plants had the following kind of value proposition:

If you need a product that can be made through one of these two sequences of operations and activities, we’ll do it for you at the lowest possible cost and the highest possible quality.

Further analysis, across a number of different plants, reached the following results:

Each time the scale of a plant doubled, holding the degree of pathway complexity constant, the overhead rate could be expected to fall by 15 percent.  So, for example, a plant that made two families and generated $40 million in sales would be expected to have an overhead burden ratio of about 2.85, while the burden rate for a plant making two families with $80 million in sales would be 15% lower (2.85 x 0.85 = 2.42).  But every time the number of families produced in a plant of a given scale doubled, the overhead burden rate soared 27 percent.  So if a two-pathway, $40 million plant accepted products that required two additional pathways, but that did not increase its sales volume, its overhead burden rate would increase by 2.85 x 1.27, to 3.62…

This is just one aspect of a long and fascinating analysis.  Modern day general purpose hospitals support huge numbers of different patient care pathways, so high overhead rates are inevitable.  The solution is to allow the formation of separate specialist units, where practitioners can then focus on iteratively optimising particular lines of healthcare.  We can already see this in firms that specialise in laser eye surgery, in hernia treatment, and so on.  Without these new units separating and removing some of the complexity of the original unit, it becomes harder and harder for innovation to take place.  The innovation becomes stifled under conflicting business models.  (I’m simplifying the argument here: please take a look at the book for the full picture.)

In short: reducing overhead costs isn’t just a matter of “eliminating obvious inefficiencies, spending less time on paperwork, etc”.  It often requires initially painful structural changes, in which overly complex multi-function units are simplified by the removal and separation of business lines and product pathways.  Only with the new, simplified set up – often involving new companies, and sometimes involving “creative destruction” – can disruptive innovations flourish.

Rising organisational complexity impacts the mobile industry too.  I’ve written about this before.  For example, in May last year I wrote an article “Platform strategy failure modes“:

The first failure mode is when a device manufacturer fails to have a strategy towards mobile software platforms.  In this case, the adage holds true that a failure to strategise is a strategy to fail.  A device manufacturer that simply “follows the wind” – picking platform P1 for device D1 because customer C1 expressed a preference for P1, picking platform P2 for device D2 because customer C2 expressed a preference for P2, etc – is going to find that the effort of interacting successfully with all these different platforms far exceeds their expectations.  Mobile software platforms require substantial investment from manufacturers, before the manufacturer can reap commercial rewards from these platforms.  (Getting a device ready to demo is one thing.  That can be relatively easy.  Getting a device approved to ship onto real networks – a device that is sufficiently differentiated to stand out from a crowd of lookalike devices – can take a lot longer.)

The second failure mode is similar to the first one.  It’s when a device manufacturer spreads itself  too thinly across multiple platforms.  In the previous case, the manufacturer ended up working with multiple platforms, without consciously planning that outcome.  In this case, the manufacturer knows what they are doing.  They reason to themselves as follows:

  • We are a highly competent company;
  • We can manage to work with (say) three significant mobile software platforms;
  • Other companies couldn’t cope with this diversification, but we are different.

But the outcome is the same as the previous case, even though different thinking gets the manufacturer into that predicament.  The root failure is, again, a failure to appreciate the scale and complexity of mobile software platforms.  These platforms can deliver tremendous value, but require significant ongoing skill and investment to yield that kind of result.

The third failure mode is when a manufacturer seeks re-use across several different mobile software platforms.  The idea is that components (whether at the application or system level) are developed in a platform-agnostic way, so they can fit into each platform equally well.

To be clear, this is a fine goal.  Done right, there are big dividends.  But my observation is that this strategy is hard to get right.  The strategy typically involves some kind of additional “platform independent layer”, that isolates the software in the component from the particular programming interfaces of the underlying platform.  However, this additional layer often introduces its own complications…

Seeking clever economies of scale is commendable.  But there often comes time when growing scale is bedevilled by growing complexity.  It’s as mentioned at the beginning of this article:

While indeed there are economies of scale, there are countervailing costs of complexity – the more product families produced in a plant, the higher the overhead burden rates.

Even more than a drive to scale, companies in the mobile space need a drive towards simplicity. That means organisational simplicity as well as product simplicity.

As I stated in my article “Simplicity, simplicity, simplicity“:

The inherent complexity of present-day smartphones risks all kinds of bad outcomes:

  • Smartphone device creation projects may become time-consuming and delay-prone, and the smartphones themselves may compromise on quality in order to try to hit a fast-receding market window;
  • Smartphone application development may become difficult, as developers need to juggle different programming interfaces and optimisation methods;
  • Smartphone users may fail to find the functionality they believe is contained (somewhere!) within their handset, and having found that functionality, they may struggle to learn how to use it.

In short, smartphone system complexity risks impacting manufacturability, developability, and usability.  The number one issue for the mobile industry, arguably, is to constantly find better ways to tame this complexity.

The companies that are successfully addressing the complexity issue seem, on the whole, to be the ones on the rise in the mobile space.

Footnote: It’s a big claim, but it may well be true that of all the books on the subject of innovation in the last 20 years, Clayton’s Christensen’s writings are the most consistently important.  The subtitle of his first book, “The innovator’s dilemma”, is a reminder why: “When new technologies cause great firms to fail“.

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30 January 2009

Century reached in Japan

Filed under: Fujitsu, Japan, simplicity — David Wood @ 10:41 pm

Last Monday (26th January), leading Japanese network operator NTT DoCoMo starting selling the F-06A mobile phone. The phone is manufactured by Fujitsu and is based on Symbian OS v9.4.

The F-06A has some notable features, that have been designed with one special type of customer in mind: businesses that worry about the possibility of misuse of phones in the possession of their employees. To reduce the likelihood of information leakage or unsanctioned use of the handset outside approved corporate purposes, businesses can:

  • Manage these phones remotely, including initialisation and re-configuration;
  • Remotely reset the data on the handset (including contacts, schedule, messages, call log, and media gallery);
  • Remotely lock down or limit usage of functions such as camera or infrared connectivity.

At the same time, the phone lacks a memory card slot, and omits support for mass storage PC connectivity mode. Other features that are common on advanced phones in Japan, such as mobile wallet payment, digital TV, and entertainment services, are also omitted or deprioritised. These omissions may lower the attractiveness of the phone in the eyes of some users, but boost the attractiveness of the phone in the eyes of the company purchasing them.

This can be seen as another example of the “less is more” principle: for some markets, you create a better product by removing features, rather than by adding more. The resulting simplicity of operation can have its own attraction. Fujitsu have already benefited richly from applying this same principle in their renowned “Raku Raku” series of easy-to-use phones for the NTT DoCoMo network – initially launched in September 2004, and a runaway success since that time.

To be clear, neither the F-06A nor the Raku Raku phones are technology weaklings. They contain their own extensive mix of advanced hardware, software, and network connectivity. For example, the F-06a has internal and external (3.2 megapixel) cameras, a rotatable 3.2-inch wide VGA TFT screen with 16 million colours, Flash Lite 3, GPS, fingerprint identification, and so on and so on. But the choice of what’s included and what’s excluded gives this phone its own unique flavour.

The F-06A is significant in the Symbian story in one more way: it’s the 100th Symbian-powered phone model to come to the market in Japan. The very first such phone – the FOMA F2051 – went on sale in January 2003, almost six years to the day before the launch of the F-06A. The creators of that first breakthrough phone were also Fujitsu. The internal codename for the F2051 project was “Sakura”, which is Japanese for cherry blossom.

About six months before the launch of Sakura, things were looking far less rosy for Symbian in Japan. Any prospect that, before the end of the decade, 100 different Symbian phone models would come to market in Japan, would have seemed far-fetched:

  • The underlying theory was strong: a reusable and customisable smartphone platform (Symbian OS) would support a wide range of differentiated products;
  • The initial engagement was also strong: no less than five Japanese phone manufacturers had commenced projects to create Symbian phones (and several more were considering doing the same);
  • But the reality of smartphone project development turned out very disappointing in these early years. Many of the initial projects foundered, became delayed, and were eventually cancelled;
  • There was a depressing period in which it seemed that, every few weeks, another project terminated unsuccessfully: the task of bringing complex new 3G handsets to market was much more difficult than anticipated.

Thankfully, the engineering team in Fujitsu proved highly capable and resilient. Backed by a slowly growing team of expert technical consultants based in the Symbian KK offices in downtown Tokyo, and by an ever-more mature network of Symbian Competence Centres such as K3 (Kanrikogaku Kenkyusho), Fujitsu commenced a long series of successful Symbian phone introductions. In time, they were joined by a range of other Japanese phone manufacturers: Mitsubishi, Sony Ericsson, and Sharp.

To date, the 100 Japanese phone models have, between them, sold more than 40 million phones – with an average sales volume, evidently, of somewhat over 400,000 units. It’s an astonishing accomplishment. I’d like to take this opportunity to publicly express my hearfelt gratitude and admiration to all the staff in Symbian KK and in Symbian’s Japanese cutomers and partners, past and present, who have laboured long and intelligently in support of this century of successful smartphone development projects. Happily, there’s been widespread application of the fine Japanese virtues of step-by-step incremental improvement, and constant learning and innovation. This converted Symbian’s Japanese offering from a set of PowerPoint marketing pictures and bullets into a reality of hard-won bone-deep knowledge of the intricacies and complications of smartphone integration. The result, from Sakura onwards, has been a dazzling blossoming of both technology and customer experience.

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