Toward a New Era of Frugal Innovation & Long-Range Leadership
“We Live in Extraordinary Times”
It often seems hubristic when someone makes that sort of declaration. But if ever there was justification for the generational hyperbole, now is it. The past two months have revealed the fragility of our world and the economic and cultural systems that comprise it. In such moments of disruption, experts of all sorts engage in an all-out race to predict what is to come. How will we emerge from the crisis? What will the world look like when we do? Yet oftentimes this rush towards the future comes at the expense of a full appreciation for the decisions that have led us to this very moment. So instead, let’s pause and reflect ⏤ not only on the immediate challenges, but also on why and how the world’s leading economy is so vulnerable to disruption and what we might do about it.
COVID-19 has exposed one of the greatest managerial paradoxes of this generation. Over the past three decades, U.S. companies have operated under a set of guiding principles that have given rise to unimaginable wealth and prosperity, yet at the same time have put us at risk. Within these principles, ‘meeting the numbers’ was overvalued relative to deep, counterintuitive imagination and ‘growth’ was overvalued relative to long-term sustainability. Decisions were treated as one-offs that were separate and distinct from long chains of impact. However, rather than indicting a generation of leaders, this is an inspired call-to-action as we approach a critical inflection point: the unanticipated opportunity to build a future that is more diverse, frugal and thoughtful by shifting corporate focus toward the creation of broader, dispersed value, often in collaboration with other firms, agencies and state actors. The starting point for this opportunity is an updated set of managerial principles that focus corporate executives on the second and third-order effects of their decisions, extending their routine focus from first-order impacts.
Nowhere is the disconnect between past decision-making and the resulting long-term impacts more evident than hospitals. In the U.S., hospitals have been shuttered to make way for city revitalization efforts, new developments and, in particular, via a wave of corporate mergers in rural communities. Thirty hospitals closed in 2019 alone, and the number of beds available nationally dropped from 1.5M in 1975 to less than 900,000 in 2015. Decision-makers often cited ‘efficiency’ arguments for these closures, however they failed to consider the cascading effects of fewer hospital beds, like limited capacity to provide care during a pandemic. In comparison, Germany has maintained an oversupply of hospital beds for decades. As a result, Germany has been able to more effectively isolate and treat COVID-19 patients without needing to ration beds and critical life support equipment.
Offshoring has also created unintended second and third-order effects, exposing critical weaknesses in global supply chains. During the late 1990s and early 2000s, American companies discovered the cost efficiencies of moving manufacturing and other labor-intensive processes abroad. Adding this complexity to the supply chain reduced costs in the near term, but it also increased the number of potential “failure points.” COVID-19 has locally disrupted supply chains due to increased pressure on delivery systems and fewer workers available in factories and distribution centers; now, we are starting to see the wider impact of global supply chains faltering. Over 200 of the Fortune 500 have a direct presence in Wuhan, China, where COVID-19 originated. For years, researchers have pointed out that activation of any single failure point in a complex supply chain could spell disaster for a company dependent on offshoring, but financial objectives won out over such concerns.
“People have a hard time understanding the roles of intermediaries… the steps between A and Z,” says Professor Marc Ventresca, an economic sociologist at the University of Oxford’s Saïd Business School. With each new link added to a chain ⏤ whether a supply chain or a chain of logic ⏤ it becomes more tenuous, and indeed fragile, as dependency is spread across multiple failure points. Ventresca notes, “leaders need to see complex interdependencies to each increment of activity; they need to appreciate when a decision occurs, how it shifts or drives path dependence and what are possible alternatives that open or close.” Understanding how each new link affects the others that come after it is critical to making decisions informed by those second and third order impacts.
Perhaps the most significant risk associated with short-term thinking is the permanence of its outcomes. While a decision can be made in a moment, its effects are often irreversible because they trigger a cascade of additional second and third-order effects. In the supply chain example, Professor Ventresca points to a skills gap challenge in efforts to rebuild onshore capacity. As the manufacturing workforce contracted, the associated educational and training infrastructure around it did too. Reassembling onshore capacity won’t be as easy as turning on a switch, because a second-order effect of offshoring was the repurposing of manufacturing workforce infrastructure toward other vocations like IT.
A still-evolving example is the recent work-from-home (WFH) transition. While there are benefits to WFH in normal circumstances, including cost savings and improved employee wellbeing, the rapid shift to WFH due to COVID-19 may have unintended impacts. Two thirds of call center workers are women, and labor economists have repeatedly shown the burden of managing a household and caring for children falls asymmetrically on mothers. For this group of workers, an ‘office job’ can be an important reprieve from the role of primary caregiver. What are the effects on this group when the office goes away? Recent data from the Kaiser Family Foundation applies these ideas to the current crisis: women were 11 percent more likely than men to say that their life has been disrupted by COVID-19. The second and third-order effects of this WFH period remain to be seen, but it’s vital to consider the possibilities now and incorporate them, as well as associated mitigation strategies, into decision-making and planning processes.
In the context of innovation, this shift in guiding principles is equally important. Innovation activity has historically focused on labor cost savings and operational efficiencies, to considerable profit and consumer wellbeing. Rather than conducting an analysis of unintended consequences when assessing innovation strategies, we have prioritized near-term financial gains to the exclusion of other impacts. These behaviors have compounded over time, as humans struggle to take in new information that contradicts strongly held beliefs. Yet the benefits of such an analysis are not only societal; they’re also financial, as building innovations that are resistant to unforeseen crises protects the returns on those investments.
A Way Forward
Marc Andreessen recently lamented that we find ourselves in the current situation due to “a failure of action, and specifically our widespread inability to build.” While we find his sentiment well-meaning, we respectfully disagree. Silicon Valley is littered with proof that we know how to build. Unfortunately, it turns out that many of the things we have chosen to build over the preceding decades are just not that important. They are not important because, as a society, we have been asking the wrong question.
Andreessen urges us all to ask each other, ‘what are you building?’ but isn’t that the question every venture capitalist already asks every entrepreneur who walks in the door? A better place to start might be to ask: ‘what do we need?’ followed by, ‘what happens if we build it?’ and, ‘how will it reshape key elements of how we live?’ We must develop tools and metrics that show aggregate impacts, even for the near-term, so that we can evaluate them in decision-making processes. This is the essence of frugal innovation, understood as ‘whole system’ awareness and experimentation, to create value that is evenly-distributed and often at a reduced unit cost. The ‘frugal innovator’ recognizes that innovation for the sake of innovation, cost-savings for the sake of cost-savings and building for the sake of building are each incomplete activities.
The concept of frugal innovation is not new, but until now its principles and applications have been relegated to the exclusive domain of developing markets, sadly in much the same way America has relegated supposed “unskilled” manufacturing jobs to workers in emerging economies. But perhaps, with a dose of new-found, COVID-inspired clarity, Silicon Valley may find inspiration by looking towards people and places where the only option is to solve the problems that matter. Frugal innovation involves rethinking production processes and business models with an eye towards resiliency, robustness, cost competitiveness and self-sufficiency. It’s difficult to design, but you know it when you see it: Henry Ford’s assembly line, as well as the development of lean principles in Post-WWII Japan. Most importantly though, frugal innovation is more than just an outcome or a process; it’s a form of long-range leadership that recognizes responsibility for what is built and takes ownership of the resulting effects, both positive and negative, that arise.
The paradigm shift toward frugal innovation won’t be easy, as it goes against many of the instincts and learned behaviors of Silicon Valley. It will require us to abandon the era of “move fast and break things” as we become more intentional in our analysis and rigorous in our thinking. It will ask us to consider over-preparedness, intermediary effects and chains with too many links. It will guide us with frugality and thoughtfulness. Fortunately, we already have the knowledge base to engage in this type of thinking. Over the past three decades, academic attention has turned towards frugal innovation and we have witnessed an explosion of theories, ideas and frameworks. There is certainly more to be discovered, but incremental gains in understanding are sufficient to get us started. The more we engage with practical, real-world applications the more the academic community will be able to advance our collective understanding of innovation models that engage the challenges and opportunities of the post-COVID world.
We wish to express our appreciation to our colleagues at Silicon Foundry and Prof. Marc Ventresca whose insightful comments and suggestions have greatly informed this piece.