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Saturday January 17, 2009

Blue ocean that’s also green

For some time now, I have advocated that we need a sufficiently large second stimulus plan to meet two major policy objectives: create (and retain) jobs for Malaysians by adding value (up the value chain) and launch a new initiative to restructure the economy (especially manufacturing) with a strong tinge of green.

These are both short and long term goals. They overlap and are mutually reinforcing. Current circumstances call for it.

We need to act now because preparation takes time and their multiplier effects are known to lag over time. But its announcement impact is immediate – and helps to build confidence that firm leadership is there for better prospects.

Some readers have asked what adding value means in practice.

The starting point is of course innovation. Empirical evidence has shown that historically, innovation is needed to drive rapid – and more importantly, sustainable growth.

Simply put, innovation refers to new products or services, new business processes or systems, and organic changes that add value to whatever we do to create wealth or social welfare.

We definitely need fresh thinking and approaches to add (i.e. create) value.

That’s what we should be doing. In addition, if we can get to do all this and at the same time reduce waste and the carbon footprint, we can help protect the environment in a very sustainable way (go green).

One practical way to go about doing this is to create blue oceans that are also green. W. Chan Kim and Reñee Mauborgue (Harvard Business Review, October ’04) point to a counter intuitive way forward by making competition irrelevant.

They suggested that “In blue oceans, you invent and capture new demand, and you offer customers a leap in value while also streamlining your costs. Results? Handsome profits, speedy growth and brand equity that lasts for decades while rivals scramble to catch up”. In so doing, you should endeavour to go green at the same time.

Consider the humble single-use glove. On Nov 19, 2008, the 2008 European Medical Devices Green Excellence Product Innovation Award was presented to the world’s first made-in-Malaysia reusable latex glove, which created a blue ocean of uncontested market space with a strong tinge of green.

It introduced a unique system that will move “glove supply from simple commodity style purchasing to a full service based approach”.

According to the announcement by Frost and Sullivan (a global growth consulting company), this innovation will provide a consistently high quality glove at lower overall cost, results in better quality control, reduced import burdens and, at the same time, addresses important issues of waste management and overuse of resources, especially in the healthcare arena.

What lessons can we draw to help add value? – by offering customers more value and in the process, create a new business (and industry) through Schumpeter’s innovative concept of creative destruction.

Today, about 150 billion disposable gloves are used annually just once and then turned into more than a million tons of landfill (most are not biodegradable). Their sustainability is increasingly called into question with pressures from government, regulators and green activists to reduce emissions and waste.

The new reusable glove is expected to transform the conventional low margin “box moving” glove supply into a high value-added service business, delivered by local service providers with improved margins for all stakeholders in the supply chain and with built-in customer loyalty.

What makes this new product so unique in the value-added business? Well, (i) it’s traceable (using state-of-the-art information technology), providing vital data for statistical analyses and management use;

(ii) it’s both safe and clean (100% pinhole tested, decontaminated, almost allergy free, and packed by size automatically – using newly patented scientific and engineering processes);

(iii) it’s patented as reusable and flexible and of high quality (reconditioned at high speed for multiple use without sacrificing quality and integrity of the glove);

(iv) it’s green, so it is also eligible for carbon credits (its cleaning uses novel innovative processes, slashes waste and cuts energy use), while rejected gloves are shredded and sold for re-use in other forms (no more landfills);

(v) it’s cost-effective, providing significant savings for users;

(vi) its logistics simplification and environmental consciousness underline the gloves ability to translate conservationism into a successful business model;

(vii) its cleaning processes use a completely automated and IT-managed Guru (glove use reconditioning unit), including automatic packing; and

(viii) it’s virtually superbugs free (helping hospitals better manage contamination and hospital-acquired infection from microbes and endotoxins).

What are we to do?

I know this list provides more than you really want to know about any glove.Nevertheless, the details are important since practically every element adds to its uniqueness.

Each layer upon layer of added value helps to raise the efficiency of the production and supply chain in this new uncontested market space.

More important, the entrepreneur makes additional profits every time he adds value, while the user receives new benefits and the regulator, enhanced comfort in greater safety and less carbon emissions and waste.

The main intention is to show that the processes do add significant value that is sustainable. Sure, it is not rocket science.

The underlying structure of most of the Malaysian economy needs to be overhauled – value added is too low for far too long, especially in manufacturing.

More important, we have come to use, and rely on, too much imported unskilled labour – generally, they add little to GDP but bring-on high economic costs.

Many industries are over-subsidised; most rely on the old growth model of continuing capital injection with diminishing marginal returns; and few are blue oceans.

Indeed, most compete in overcrowded red oceans with dim prospects for innovation and for breaking out to create a leap in value for themselves and the global market place.

E.g. value added in the E&E (electrical and electronic components) industry – despite its very large size – is low.

Consider the value-added linkages in the manufacture of notebook PCs.

To take full advantage of the entire value chain, you will need to develop notebook original design manufacturing (ODM) capability, including base manufacturing capability in batteries, keyboards, memory and wireless cards; motherboard and chassis integration capability, LCD modular assembly capability, design and testing capability, global procurement and e-supply chain capability and R&D development capability.

The list is not exhaustive. Malaysia is presently engaged in mainly the lower end of this supply chain.

Similarly, in the construction industry, the adoption of IBS (industrialised building system), essentially pre-fabrication, will significantly raise value added and reduce the use of imported unskilled labour.

Malaysian workers’ income will be a clear beneficiary. It is encouraging that the Government has now agreed to build 70% of all its projects through IBS.

Look at all the other industries in this same light: from plantations to transportation to construction; and from forestry to agriculture to services; they all tell the same story – the predominance of low value added.

The current economic slowdown provides the best opportunity to restructure and reform the system with two main objectives (i) create jobs (including green-collar jobs) with high value added for Malaysians; and (ii) incentivise the training and re-training of Malaysians for high-value added jobs.

In the final analysis, human resource management holds the key to higher and rising value added.

Where expertise is lacking – be it the creation of high-value added businesses or in high value added training, the liberal import of expertise (brain gain) and technology should be actively promoted in practice.

For this purpose, I had previously suggested the setting-up of a sizeable Restructuring Fund (RM10bil-RM15bil) as part of a much larger second stimulus package, to help existing industries and businesses restructure, add value and find their own blue oceans.

This fund should actively promote the inclusion of all the green elements in a very sustainable manner.

The common glove example shows a way of doing this – not the only way. It is meant to demonstrate what is possible, even with a very simple product. Malaysia Boleh!

  • A former banker, Dr Lin is a Harvard educated economist who now spends time promoting the public interest.

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