20% of Rio de Janeiro’s population lives in favelas (Brazilian Portuguese for “slums”). And all over Brazil, cities such as São Paulo, Fortaleza, Guarulhos, and Curitiba have seen the growth of large favela populations. A favela is not simply a slum, but instead is marked by:

•    Illegal building on 3rd party land
•    Irregular, self-constructed, unlicensed housing
•    Little or no infrastructure
•    Residing on the urban periphery, many times on undesirable land (such as hillsides)

This combination creates a unique living situation, in which residents need to provide their own water and navigate steep, ad hoc dirt passageways instead of sidewalks and streets in a congested environment. In these highly compact, structurally deprived societies, the rules are different and both residents and governments have had to adapt. When examined, many of these adaptations reveal innovation best practices:

1.    Turn the problem on its head
2.    Incentivize correctly
3.    Learn from everyone

Turn the problem on its head

How do you bring community facilities to a place with literally no free space? Favelas are built organically without prior planning, and this creates problems when all the space is gone. Brazilian architect Jorge Mario Jáuregui has a solution. While there isn’t any free space to use for public facilities, there is space that can be used twice.

“In a project currently underway, Jorge is creating public space in the Manguinhos favela on existing train tracks that bound the community on one side. These train tracks will be elevated and the space below will become a linear park, defined by the conjugation of spaces, activities, buildings and vegetation. Facilities in the park will include sport, cultural, and income generating facilities, with a focus on providing children and teenagers with alternative attractions that will integrate them into the community. The space will also incorporate a new public transportation hub.

“This new metropolitan park will be an articulator, attracting favela residents as well as a larger public from the surrounding communities. As an integrated public space it eliminates the existing barrier and transforms the space from divider to connector. By directly intervening at the physical boundary of the favela, Jorge is directly confronting the deeper socio-economic divide that has plagued the city for decades.”

Jorge Mario Jáuregui realized that while there was no horizontal space left to plan public spaces, there was vertical space left. He turned the problem on its head and came up with a unique solution that meets all of the project’s objectives.

Incentivize correctly

Local governments and institutions are also approaching these favelas in new ways. While historically ignored, city governments are realizing that these favelas are not going away and are only growing. Unless all necessary parties have incentive to change, growth will continue in the same haphazard way as before. The city of Curitiba, in Southern Brazil, is working to integrate favelas into their society through innovative measures that incent residents in favelas to work alongside the government.

“Most favelas receive transit stations shortly after being built, and the city runs a cleanup program for favelas, in which residents receive a bag of fresh produce in exchange for every bag of trash collected and turned over to the city.”

Through their trash for produce program, Curitiba is encouraging both clean living and healthy eating. The favelas get cleaner, the people get healthier. It’s a win-win for all parties.

Learn from everyone

Last, the world is starting to realize that the favelas have much to offer them. True, favelas are home to some of the poorest, most socially marginalized people in the world. But that doesn’t mean they don’t have good ideas. An Architect article titled “Cities of Tomorrow” reveals that favelas are showing many of the signs associated with sustainable development:

•    Compact footprints
•    High density
•    Low energy use
•    Little to no grading
•    Reclaimed materials
•    Humane scale
•    Vibrant social interaction
•    Self-determination

The most unique perspectives come from the most unique vantage points, whether that means talking to a child in a favela or involving all of a company’s pay grades in the innovation process.

They say that necessity is the mother of invention, so it’s no wonder that the favelas of Brazil are such fertile ground for innovation best practices. Sometimes the best ideas come from the most unlikely places, and the slums of Brazil are no exception.

Image sources: walker_dawson and Jorge Mario Jáuregui

“Honey, I swear—I saw black swans!” Byron was back from his journey exploring the Pacific, and was adamant about what he had seen. But his wife Patricia knew better. “No.  Everyone knows that all swans are white. It’s common knowledge.” Patricia was right because all swans in Europe were white and all empirical evidence supported her beliefs. But it turns out that everyone was wrong. Europeans couldn’t have predicted the discovery of black swans in Australia, but they had to immediately change their beliefs with one simple discovery.

So-called Black Swans - rare, unpredictable events - as described by author Nassim Taleb provide opportunities for massive gains or massive failures. Taleb describes these events as having three primary characteristics:

1)    Black Swans are outliers with low probabilities. These events lie outside the realm of normal expectations. They can’t be readily predicted, even using sophisticated models.

2)    Black Swans have extreme impact. These events change something fundamental about the world – either in terms of economic or social costs. Although the discovery of black swans in Australia might not have had this kind of impact, World War I and September 11th certainly did.

3)    In hindsight, Black Swans are very easy to explain. One example is the recent financial crisis of late 2008. As Taleb explains, today many people claim they saw the crisis coming, but these same individuals also held bank stocks, showing that indeed only hindsight is 20/20.

Black Swans are everywhere. These types of events define our modern history from stock market crashes to terrorist attacks to world wars to banking crises. But Black Swans don’t necessarily have to be negative, they can be positive as well.

Positive Black Swans might include new technologies – such as the Internet, runaway bestsellers or blockbuster drugs. Who knew that a communication protocol used by the military would transform into the World Wide Web and change the way society works? In the same manner, who knew that a potential hypertension medicine would change the love lives of millions of people around the world?

How do Black Swans factor in the business world?

Taleb is critical of many modern management and financial techniques in which companies fool themselves into thinking that they can control or predict their future with great certainty. He argues that it is impossible to predict or control Black Swan events, which are often the greatest source of value creation. Instead, he suggests organizations should try to optimize for:

•    Maximizing the chances for positive Black Swans to occur: Companies accomplish this through taking risks while minimizing the costs associated with those risks. Taleb would argue that companies should take all the “cheap” risk they can because being aggressive will ultimately create economic growth. In gambling terms, he wants to be that hyper-aggressive gambler who understands all of the best bets at the casino, always risking a small amount as long as the payoff is maximized. As Taleb says, “learn to fail cheaply, with pride, comfort, and pleasure – and do it often”.

•    Minimizing the chances for negative Black Swans: Since negative Black Swans can come in many forms such as economic crises, terrorist attacks, or even consumer backlash, it is difficult to be specific on this topic. Taleb would argue that companies should be hyper-conservative on downside risk, shying away from huge bets that have the potential to be very costly.

In short, Taleb thinks most companies have it wrong. In a recent interview, he said “Be hyper-conservative when it comes to downside risk yet hyper-aggressive when it comes to opportunities that cost you very little. Most people have the wrong instinct. They do the opposite.”

Sources:

Webb, Allen. “Taking improbable events seriously: An interview with the author of The Black Swan.” McKinsey Quarterly, December, 2008

Taleb, Nassim. “The Black Swan.” Random House, Inc., New York, 2007.

Gladwell, Malcolm. “Blowing up.” The New Yorker, April 22 & 29, 2002.

Image Source: ianmichaelthomas

(r)evolution collaborates with clients to develop business solutions that enhance their existing business models. In addition, we create white space offerings that support new revenue growth models.  Often clients come to us in search of the next Swiffer, but they fail to realize that it is often the less exciting things (process, culture, leadership, organizational structure) that enable transformational change and breakthrough ideas.  Over the next few months, we will highlight case studies of innovative companies that have addressed such issues to transform their businesses.

For an industry that touches every consumer, healthcare is rarely described as consumer-centric.  Drug manufacturers traditionally view healthcare providers and insurance companies as their primary customers, not patients.  Hospitals are typically organized around the needs of nurses and doctors, rather than the needs of the patient.  This lack of attention to the consumer often transforms interactions with the healthcare industry into dreaded experiences.

One particular medical center has made it a mission to transform the patient experience, making it both more enjoyable and affordable.  The Cleveland Clinic has created a patient-centric culture that allows it to fully integrate patient needs into its various processes.  In 2007, Cleveland Clinic treated patients from all 50 states and 90 countries at a lower cost than many other hospitals. In fact, the Dartmouth Atlas of Health Care found that chronically ill patients cost Medicare only $55,000 when treated at the Cleveland Clinic, tens of thousands of dollars less than at many other top-ranked academic medical centers. Here are some of the initiatives that have helped Cleveland Clinic offer great care at such a low cost:

Redefining success metrics. Cleveland Clinic realized that patients care less about what constitutes a treatment and more about the outcome of that treatment. To that end, in 2000 the Clinic became the first hospital in the U.S. to publish its outcome measures, and by 2007, it had published outcomes for every department compared against the best available benchmarks. The Clinic also does informal surveys of post-op patients, realizing that the voice of the patient should not be lost just because he or she has left the hospital. All this data is then used to improve outcomes and lower costs for procedures—something valued by both patients and payors.

Restructuring Departments into Institutes. Hospitals are generally structured around the needs of doctors and nurses. This model often inconveniences patients, who have to go to multiple locations and see multiple specialists for one ailment. In 2007, Cleveland Clinic realized that if it structured its departments more broadly around diseases instead, it could improve patient outcomes while lowering costs—the nirvana of healthcare delivery. For instance, their Neurological Institute brings together 150 doctors of various specialties, from neurosurgery to psychiatry, as well as any therapists and equipment that patients might need. This reduces runaround time for patients, as well as allows doctors and surgeons to work together more collaboratively—limiting unnecessary procedures and tests.

Aligning the Patient Perspective throughout the Organization. The “Patients first!” message starts with Dr. Cosgrove, the CEO of Cleveland Clinic. It then moves throughout the organization, helped by a fully integrated Electronic Medical Record system. This system makes it easy to identify potential research recruits, flag patients at risk for hard-to-detect illnesses, among other benefits. Cleveland Clinic also surveys outpatients and creates advisory councils made up of patients and family members. The patient satisfaction ratings from this research are an important part of performance reviews for doctors, who are incentivized by a purely salary-based system. The “Patients First” message is even delivered by housekeepers, who carry business cards and introduce themselves to patients at the beginning and end of every shift.

Article written by Erica Connelly and Jeff LaFlam
Image source: noraohio

During WWI, the German U-Boat revolutionized sea warfare. For the first time, battleships had a hidden enemy beneath the surface of the water. And these battleships were being sunk at an alarming rate. In open water, traditional wartime camouflage was ineffective. The sea and sky were constantly changing a ship’s “natural” environment as weather fluctuated.

So what was to be done? Rethink camouflage, obviously. British naval officer and artist Norman Wilkinson pioneered a new camouflaging technique based not on blending in, but on standing out. Blending in was impossible. Standing out was possible, but why was it useful?

Torpedoes were slower back then, and radar and sonar weren’t as advanced. U-Boats had to fire torpedoes based on where they thought a ship was headed. This involved determining a ship’s bearing and speed. Anything that disrupted these two metrics was also effective at camouflaging a battleship in the open sea. Thus was born a form of camouflage termed “Razzle Dazzle.”

Norman Wilkinson used bright, loud colors and contrasting diagonal patterns painted on boats to confuse U-Boat captains and make their bearing and speed less apparent. Examples of this Razzle Dazzle are below, but try imagining them in bright colors like purple, orange, and yellow.

Camouflage is often thought of as a way to conceal an object. However, if the object cannot be hidden, as in the case with a WWI ship on the open sea, the purpose of camouflage then becomes to disrupt those trying to find the object. Case in point: zebras. Alternating black and white stripes doesn’t seem like an ideal camouflage, but when a bunch of zebras are hanging out, the stripes all blend together in a predator’s vision. This makes it difficult for the zebra’s primary predator, the lion, to hone in on one particular zebra, increasing safety for all.

Razzle Dazzle camouflage is a prime example of innovation through design research. Design research is an investigation into the process of product design. In the case of Razzle Dazzle, coming up with an effective means of camouflage meant revisiting the goals of camouflage and the constraints on an enemy’s weapons. In commercial examples of new product innovation, many times this means revisiting how consumers are actually using your products.

Consider the Whirlpool Duet front-loading washers and dryers. Whirlpool observed one woman who had placed her front-loading dryer on cinderblocks to make loading and unloading easier. This kind of design research led to the pedestal and storage unit, which is now prevalent with front-loading washers and dryers. New innovation opportunities can often be uncovered by going back to the basics:

•   What problem are we trying to solve?
•   What are the parameters?
•   How are products currently being used to solve this problem?

As Microsoft Ethnographer Tracey Lovejoy said, “In today’s competitive and global market, companies are finding it necessary to deeply understand their customer and build their product accordingly.” Though in the case of Razzle Dazzle, one could easily substitute “customer” for “enemy” and “product” for “battleship.”

The lethality rate of combat wounds has steadily decreased since the Revolutionary War, due to innovations in battlefield medicine. But what exactly is the nature of this innovation? And can these learnings be applied to a business context?

Atul Gawande first examined the lethality of combat wounds in a 2004 New England Journal of Medicine. He noted that despite the invention and use of even more devastating weapons, the wounded-in-action lethality rate (that is, the rate of death among those wounded in combat) had fallen in every major US war until “settling” at roughly 25% after WWII. Even the Persian Gulf war in 1991 had a lethality rate of about 24%. But then, somewhat inexplicably, the combat lethality rate in Iraq and Afghanistan since 2001 dropped to just under 12%.

The notion that the lethality rate “settled” at 25% after WWII is somewhat misleading. The rate actually follows a somewhat predictable, logarithmic path. If you were a military planner in 2001 asked to estimate the combat deaths of a long war in Iraq or Afghanistan, you would have used this logarithmic model. It would have predicted a lethality rate of 20.5%. The exact rate, of course, could not be predicted with much precision. So it would have been useful to know the range of lethality rates to expect. The model would predict that the actual rate would likely be between 14.2% and 26.8%.  This would have been consistent with an ongoing improvement over the most recent experience in the Persian Gulf in 1991, when the lethality rate was roughly 24% (albeit on a very small base of wounded). It turns out that the rate for the current war, as of January 2010, is only 11.7%, which is much lower than the 20.5% expected and even well below the range of what would be expected. Why?

There are two ways to think about this. The first, explored by Gawande, is that the improvements prior to 2001 were the result of a process of discovery that led to incremental improvements year-over-year. This explains the near-constant decrease in the lethality rate every year since the Revolutionary War. Gawande attributes the significant improvement in the 2001-2010 rate in Iraq and Afghanistan to a change in the basic principles of R&D used by the military. After all, there have been no advances in medicine since the Persian Gulf War in 1991 significant enough to explain the transformational improvements suggested by steep decline in the lethality rate. But what if this seemingly smooth process of improvement is really the result of a series of big breakthroughs? These would lead to significant reductions in lethality followed by relatively flat periods of lethality.

This explanation is plausible. Antiseptics and anesthetics were more widely used after 1800, the use of combat medics was pioneered in the Civil War and amputations were more widely used in the Napoleonic period before WWI. During and after WWII, fields hospitals and MEDEVACs became regular features of combat. These inventions could explain a step-function pattern rather than a smooth process of continuous improvement. In this context, the recent improvements in lethality are simply a result of a significant innovation. Without a significant improvement in medicine to explain the lethality declines, the step-function improvement must be in the systems and processes rather than the quality of the medicine or surgical techniques. Indeed, Gawande outlines several reasons for the recent improvement, which include:

•  More widespread use of body-armor and eye-protection
•  The development of Forward Surgical Teams (FSTs) of leaner and more mobile units of 20 surgeons, nurses, medics and other support personnel who are farther forward, closer to battle
•  A military surgical strategy focused on damage control, not definitive repair:

“Whatever is necessary to stop bleeding and control contamination without allowing the patient to lose body temperature… Surgeons seek to limit surgery to two hours or less, and then ship the patient off to a Combat Support Hospital (CSH), the next level of care.”

These are examples of improvements in the systems and processes rather than the invention of new medicines or surgical techniques. Gawande’s thesis is that the recent improvements have been driven by a focus on systems and process performance. But this transformation is a step-function breakthrough in a series of step-function breakthroughs.

There are two general conclusions from Gawande’s observations. First, true innovation and improvement in disciplines like R&D and Product Development are more often the result of step-function breakthroughs than from continuous improvement. Second, a focus on performance can lead to further breakthroughs as the process of discovery reaches diminishing returns.

Sources: Military Care for the Wounded from Iraq and Afghanistan and Better: A Surgeon’s Notes on Performance

With new product failures exceeding successes, is it surprising that the rate of failure is not declining over time? As innovators, are we learning from our failures? John T. Gourville, of the Harvard Business School, may have part of the answer. He argues convincingly that the answer may be the psychological costs created when new products force consumers to change their behavior. Essentially, he argues that new products must not only provide a significant perceived benefit (i.e.- less costly, faster, stronger, etc.) but also provide minimal behavioral change.

An illustration of this idea is the difference in adoption between the dishwasher and the microwave oven. The microwave reached 60% household penetration in 15 years while the dishwasher required almost half a century. The behavioral change from using a conventional oven to using a microwave oven (i.e. -open door, press button and cook) was minimal compared to the change in behavior required to use dishwasher.

Image source: susanonline

Open innovation, by definition, requires that a company understand and assimilate highly specialized information from diverse inputs outside of its traditional competencies. That sounds scary. It requires the company to develop a new set of capabilities. That sounds even scarier to anyone who has tried to teach an old company new tricks.

Among the most important of these new tricks is how to quickly and effectively triage information. To accelerate this process (and do it right) many companies have learned to use external subject matter experts to quickly and inexpensively synthesize information and assess innovation opportunities. It may be tempting to find the expert with gravitas but those having the most success are not using the big name HBS authors. They are tapping the “everyday” expertise of disciplines as prosaic as pharmacists, chefs and even auto mechanics. This “innovation triage” is a capability that tomorrow’s best-in-class innovators are mastering today.

Image source: safoocat

The word innovation is pervasive in business today. So pervasive, in fact, that the Wall Street Journal has identified something called innovation fatigue, which IBM lampooned with its Innovation Man Ad. But most of us know that real competitive advantage is the de facto product of some form of innovation. So which is it - lampoon or savior? The problem is that innovation as a business discipline has come with its share of hucksters and snake-oil salesman who define innovation as “facilitating a culture of out-of-the-box, goal oriented, value added, disruptive, web 3.0″ thinking. For all of us in the business of innovation who are not selling snake oil, I propose the following basic definition:

Business Innovation (biz’-nis in’-e-va‘-shen) n. a significant change to an existing business process, program, product or service that leads to profit growth

Note that under this definition innovation is well beyond “product” and, above all, it must lead to profit growth. Lampoon or savior? Profit growth sounds much more like savior to me.

Every so often I see a presentation or read a book that brings clarity to something that I have learned intuitively through my client work but haven’t quite articulated yet. Last week’s Front End of Innovation conference provided several of these moments of illumination.

Microsoft taps hard-core gamers to create the Xbox

Dev Patniak, the author of Wired to Care told the story was about how Microsoft entered the gaming and entertainment spaces. Several years go Sony’s Playstation represented a serious threat to Microsoft. With a DVD player and Internet access, Playstation was positioned to challenge the PC as one of the primary information and entertainment devices for the home.

Microsoft hired a team of hard-core gamers – people who indulge in all-night marathons of “first-person shooter” games driven by immense volumes of caffeinated energy drinks. This team created the Xbox and launched it with the blockbuster game, Halo. It was the most successful new game system launched in the US in over 20 years and successfully countered the Playstation threat. A few years later, Apple launched the iPod. Microsoft again recognized the threat. They moved quickly to have the Xbox dream team develop a response for Microsoft. The result was the Zune – a total failure. How was Microsoft able to enter one market with entrenched, mature competitors successfully and utterly fail in another using the same exact team and approach?

The difference between the Xbox and Zune

It turns out that the Xbox development was an “empathic process.” In other words, the developers knew exactly how to handle the thousands of little everyday decisions about how to create the Xbox because they intimately understood the life of hard core gamers. They were gamers. They literally developed a system based on their intuition as gamers. This team of gamers was completely disconnected from the audiophiles who were the initial buyers of mp3 players. They developed the Zune from reading research reports about the target segment. They had no intimate knowledge about the life of audiophiles and they never engaged any experts or luminaries with tacit, intuitive knowledge about audio.  Therefore, they had no intuitive basis for making all the daily decisions that impact what the product would look like and how it will be positioned.

Innovation success through empathizing with consumers

This pattern of success-through-empathy has been repeated at companies like Harley-Davidson (they all ride motorcycles) and Jet Blue (the CEO flies coach 2-4 times a week to intimately immerse in the customer experience). P&G makes its senior management spend several weeks living with research participants so they better understand, at an intuitive level, the lives of their target consumers. The primary idea is that corporations often mute rather than amplify our intuition about customers and we can lose touch with the outside world unless we create innovation processes that enhance our natural empathic abilities.

Polo Ralph Lauren is a highly empathic company. It never conducts market research – no focus groups, no ethnographies, not even secondary research. And yet it has developed and continued to maintain strong brands without gathering and analyzing data about consumer preferences and buying habits. This is almost heretical in the world of brand marketing.

But is it? I would make the case that Polo Ralph Lauren, like Harley-Davidson, is among the most empathic organizations. Walking around the Polo Ralph Lauren headquarters in Manhattan is like stepping in to catalog photo shoot in Nantucket. They all wear Polo Ralph Lauren and more importantly, they live the Polo Ralph Lauren lifestyle. Polo Ralph Lauren hires people who understand the target segment because they are the target segment. And their leadership embodies the values and lifestyle. People at PRL develop an intuitive sense of the styles and colors that will shape the next season’s fashions by living everyday in the world of their consumers. They are intuitively equipped to make the thousands of decisions about fashions and colors and advertising and branding that will strengthen their brands and appeal to their consumers because the result is intuitively appealing to them. Just like the bearded men on the assembly line in Milwaukee and the caffeinated gamers in Seattle have an intuitive sense of how their work will appeal to, well, them.

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