2015 Institutional Innovation Report
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The Power of Modularization
Several people commented on the role of modularization in spurring innovation by giving individual participants in a larger production system the ability to improvise and experiment in order to improve their performance. A key to making this approach work is to create “process networks” that provide the freedom to improvise while ensuring that each component meets required specifications.
The way that movies get made in Hollywood provides an instructive example of the effectiveness of modularization. Each time a new movie goes into production, independent craftspeople from different guilds (e.g., set building, lighting, makeup, cinematography) are assembled and are expected to quickly begin working together. While each guild has its own practices, developed and honed over time, each also understands the practices of other guilds, which enables them to immediately begin working together efficiently.
An example of the power of modularization to spur innovation is provided by the evolution of motorcycle manufacturing in Chongqing, China as described in a 2014 report from the Deloitte Center for the Edge:
One of the largest [Chinese motorcycle] manufacturers, Dachangjiang, found itself short of high-quality local suppliers. Rather than try to build a single, verticalized channel of suppliers, however, it broke its design into several modules and, for each, awarded two to three suppliers the responsibility for developing parts. The suppliers worked under common, tight timeframes, but were given great latitude to fashion the different modules, and assurance that Dachangjiang would support innovative designs with investments in the appropriate equipment and processes to build them. The suppliers responsible for each module found modes of collaboration that worked for them, and they varied; there were vertically integrated state-owned enterprises, traditional joint ventures, and more loosely coupled arrangements. The network proved capable of far more innovation than would have occurred had it been directed and controlled by a single entity.
Brown added that one reason this arrangement worked is that the suppliers were located in the same city, which enabled them to meet informally in tea houses in order to figure out how they could best work together.
Another notable example of the power of a loosely coupled process network is Li & Fung, the Hong Kong-based sourcing company that has created a dynamic ecosystem of more than 10,000 small manufacturers to supply apparel to major multinational clothing companies. The role of Li & Fung is to provide standardized interfaces for participants that clearly define what comes into each participant’s module and what the output of the module will be. While the members of this network are located all over world, Li & Fung provides a common platform that enables them to work together effectively and to learn from one another.
Moving toward the modular at Kaiser Permanente. Vivian Tan noted that Kaiser Permanente had been successful precisely because it operated as a single, integrated system that combined a health plan (insurance) with comprehensive healthcare services. But now, Kaiser is attempting to embrace a larger view of health that extends out into the community.
To illustrate the shift in focus, Tan cited the example of a hospital in an urban setting that finds itself coping with an increasing number of patients coming into its emergency room with gunshot wounds. A conventional response would be to review the hospital’s procedures for dealing with trauma to see how they could be improved to provide better care to gunshot victims. But taking a broader view could entail considering the causes of gun violence in the community and exploring what might be done to reduce its prevalence. (Kaiser recently gave a grant to the police department in Vacaville, California, to enable it to establish a sub-station at a Kaiser health center there with the goal of not only improving security at the center but also improving police coverage of the surrounding neighborhoods.)
This shift involves moving from seeing Kaiser as a separate, independent entity that is responsible for keeping people healthy or treating them when they are ill to seeing itself as part of a larger ecosystem that plays a big role in creating health or sickness. This new, wider perspective makes it necessary for Kaiser to begin seeing constituent components as modules in a larger system and seeing itself as one module in a larger entity of which it is a part. Tan described the challenge to the organization as “determining how each cog in the wheel works with other cogs.” She then presented four facets of the challenge in terms of “MINDing (Movement/Information/Norms/Design) the Gap between Modules”:
As an example of a success story, she cited the results of KP’s PHASE program which produced substantial, quantifiable improvements in the health of a large group of at-risk members (see "The Power of Data" below).
The Power of Data:
In 2004, the Northern California region of KP initiated a program called PHASE—Prevent Heart Attacks and Strokes Everyday—to improve the health of patients at risk for cardiovascular disease by promoting the adoption of proven prevention therapies for controlling blood pressure, blood lipids and blood glucose. Interventions included prescribing four drugs—aspirin, lipid-lowering medications, ACE inhibitors and beta-blockers—whenever appropriate, and promoting four lifestyle changes: tobacco cessation, physical activity, healthy eating and weight management. As a result of the program:
A Day Made of Glass. Jeff Evenson, Senior Vice President and Chief Strategy Officer at Corning Inc., noted that at his company modules are thought of as something quite small: a specific behavior or task. They are, he said, small things that can make big things happen. For example, one module would be a mandate to “make transparent displays happen.” Another module that had a big impact was the creation of “A Day Made of Glass,” a video that presents Corning’s vision for the future of specialty glass and its impact on the world. One commentator described the vision presented in the video as “so breathtakingly stunning that it puts to shame the science fiction display technology from movies such as Minority Report.” Since it was posted on You Tube in 2011, the video has been viewed more than 25 million times, and has led to the creation of several sequels.
Module as fractal. John Hagel suggested that the concept of a module is fractal—i.e., that it can operate on multiple levels. As an example, he described the strategy that was behind Portal Player, a fabless semiconductor company founded in 1999. The company “modularized the design for a portable music player,” then built a network of experts around each module and put out challenges every six months for each module. The company’s role was to act as an “orchestrator” of the modules and managed the interfaces among them. The company’s biggest success was when Apple decided to use Portal Player’s reference platform as the basis for the software for its new iPod, which was released in 2001.
Laura Ipsen of Oracle described how she managed the task of building use cases to drive business outcomes for the company’s software across 20 different industries. She had to “bucketize” the work into more digestible, “bite-sized” pieces to accelerate specific use cases and drive x-industry adoption to achieve maximum impact and higher ROI. Tony Scott noted that the way architects approach a big new project is by “chunkifying it” into smaller pieces that can be worked on by different groups. But getting the boundaries of the pieces right is extremely important.
The Power of Two Pizza Teams. According to John Seely Brown, experience at Amazon.com (where he has served as a member of the board) has shown that the ultimate module is a team that engages ten to fifteen people in a community of practice to drive change. This is what Jeff Bezos has described as “two pizza teams.” (Bezos has declared that no team should be too big to have two pizzas provide dinner for everyone.) Amazon does not have a separate R&D group, but it has over 1,000 two pizza teams working on specific challenges or problems. Every team must write a press release describing what will happen if they are successful—the “so what” of their activity. Every team also must describe what they intend to accomplish over the next six months, and if they fail to deliver on that commitment, the team is terminated. But the team is asked, “What are we lacking in infrastructure that has prevented you from accomplishing your goal?” Teams are self-forming and are now responsible for nearly 1,000 new releases each day, making them a key to enabling Amazon to continue to grow exponentially.
Jason Crawford, a former Amazon employee (and now co-founder and CEO of his own start-up) has provided additional insight into how the combination of accountability and autonomy make two pizza teams (2PTs) effective:
The most important aspect of a 2PT isn’t its size but its fitness function. A fitness function is a single key business metric that the senior executive team agrees on with the team lead. It is the equivalent of the P&L for a division: a single metric to provide focus and accountability. In some cases, the fitness function is literally a P&L: for instance, when I was on the [Search Engine Marketing] team, we used the contribution profit from the sales driven through sponsored links, minus the cost of those clicks. In other cases, it is something more clever: e.g., teams that built fulfillment center software would have metrics related to the efficiency of picking, packing, and sorting. Once approved, the team is then free to execute relatively autonomously to maximize its fitness function—to pursue creative strategies and to set its own internal priorities.
The limits of modularization. It is clear that modularization is a powerful means for accelerating innovation. But, as Casey Carl asked, how can the right balance be struck between modules and shared services? Target wants to have a single view of products and customers, which places a limit on the degree to which modules can be separate and independent. Without a single focus, how can one be sure that modules are properly aligned? Maryam Alavi concluded by noting that when we talk about modules, ecosystems and gaps, we are pushing the limits of organizational complexity. It is important to remember that there are humans in these systems. After all, hierarchies are just one way to deal with the challenges of complexity.