The Design of Business: Why Design Thinking Is the Next Competitive Advantage

by Roger L. Martin

  An organization exclusively dedicated to exploration will expire in relatively short order. Typically, exploration alone will not generate the returns needed to fund further exploration. Imagine Norman Greenbaum as a corporation. After the one random incident of successful intuitive thinking, of exploration, that created “Spirit in the Sky,” Greenbaum Inc. would have gone bust waiting for the next chance event—which never happened. Devotion to exploration is the invention of business, a risky proposition and the reason that nine of ten entrepreneurial start-ups expire in less than two years. Exploration alone is unstable business.

  On the other hand, many organizations flip quickly from an early exploration phase—the generation of the founding idea behind the business—to the steady exploitation of that idea, never returning to exploration. These organizations, solely dedicated to exploitation, might last somewhat longer than exploration-only businesses, but the business that creates value only through exploitation will exhaust itself in due course. It can’t keep exploiting the same piece of knowledge forever. If it tries to do so, the cost to the business can be devastating.

  The exploitation of knowledge within a given stage—that is, running an existing heuristic, gently honing and refining it, but not seeking to move knowledge to an algorithm or running an existing algorithm and not seeking to explore the next mystery—is the administration of business. A high-end Wall Street law firm runs the legal-services heuristic over and over; McDonald’s runs the fast-food algorithm over and over. That is a far different activity from the exploration that drives knowledge from one stage to the next—from mystery to heuristic, from heuristic to algorithm. (See table 1-1.)

  TABLE 1-1

  Characteristics of exploration and exploitation

  Exploration Exploitation

  Organizational focus The invention of business The administration of business

  Overriding goal Dynamically moving from the current knowledge stage to the next Systematically honing and refining within the current knowledge stage

  Driving forces Intuition, feeling, hypotheses about the future, originality Analysis, reasoning, data from the past, mastery

  Future orientation Long-term Short-term

  Progress Uneven, scattered, characterized by false starts and significant leaps forward Accomplished by measured, careful incremental steps

  Risk and reward High risk, uncertain but potentially high reward Minimal risk, predictable but smaller rewards

  Challenge Failure to consolidate and exploit returns Exhaustion and obsolescence

  The vast majority of businesses follow a common path. The company is birthed through a creative act that converts a mystery to a heuristic through intuitive thinking. It then hones and refines that heuristic through increasingly pervasive analytical thinking and enters a long phase in which the administration of business dominates. And in due course, a competitor stares at the mystery that provided the spark for this company, comes up with a more powerful heuristic, and supplants the original business.

  A small fraction of those companies generate a second intuitive breakthrough—often, as in the case of McDonald’s, from a new owner rather than the original entrepreneur—and drive the heuristic to algorithm. These exceptional companies grow to massive size, thanks to the efficiency advantage gained over competitors left behind in the heuristic stage. But they too can fall prey to a new competitor that returns to the original mystery and generates a new heuristic—one powerful enough to overcome even the enormous efficiency advantages of the algorithm. They too can be supplanted in due course.

  Picking Up the Option

  The business that remains at one stage in the knowledge funnel fails to capitalize on the option created when knowledge is advanced quickly through the funnel. It misses the opportunity to delve into the next mystery and push that mystery through the funnel ahead of the competition. To exploit that opportunity, a company can choose to redeploy the personnel who successfully tackled the last mystery and advanced knowledge along the funnel. By putting these resources to work on new mysteries, the company both defends its current position and goes on the offensive by exploring new opportunities.

  McDonald’s more recent history provides a useful illustration. After its transition from the drive-in heuristic to the quick-service restaurant algorithm, McDonald’s grew big and strong exploiting that algorithm with burgers, fries, and shakes. But by the 1990s, it had lost touch with its consumers and what they wanted in the way of fast food; its original solution to that mystery had grown stale with time. The company’s management was so busy running its algorithm that it failed to grasp that many consumers wanted the fast turnaround that is McDonald’s byword, but with menu offerings that were healthier or more diverse than pressure-cooked beef, deep-fried potatoes, and sugared milk. Many other chains, from Taco Bell to Subway, explored the mystery of what those consumers wanted, and their solutions drove McDonald’s into a tailspin.

  Playing defense is essential because there are multiple paths out of virtually any mystery. McDonald’s chose one route out of the mystery and drove it to an algorithm. But when it settled at that algorithm, it gave its rivals an opening to develop alternative solutions to the mystery. Subway, for example, retained the quickservice component, but replaced burgers and fries with submarine sandwiches and fresh, healthful ingredients.

  In doing so, Subway took advantage of the blind spot created on McDonald’s path through the knowledge funnel. Remember that as an idea moves through the funnel, information is shaved away. Some of that seemingly extraneous information can in fact prove crucial to the solution of the next mystery. Early on, McDonald’s left health issues by the wayside. Subway made healthy eating the centerpiece of its value proposition, touting its fresh ingredients and low-fat specialties in response to consumers’ increasing concerns about unhealthy fast food. McDonald’s has subsequently made halting progress toward a healthier menu, but its struggles point to the difficulty that companies have in doubling back along the knowledge funnel.

  Other companies can spare themselves similar anguish by using the cost savings generated from pushing their current activities through the knowledge funnel to revisit the mystery whose initial solution drove its original business model. By reengaging with the mystery and considering information sliced away during the previous trip through the funnel, a company can avoid being blindsided, as McDonald’s was by Subway. Only when McDonald’s began to explore new approaches to satisfying the consumers’ changing desires did it start to climb out of its trough.

  The company that gains efficiencies by pushing current knowledge through the funnel also gains an offensive advantage. It can redeploy the savings and redirect its freed-up personnel toward consideration of entirely new mysteries. Procter & Gamble realized enormous efficiencies by refining its knowledge of household cleaning products. The equity generated by those efficiencies was deployed toward the mystery of baby diapering. The result: Pampers, now one of P&G’s biggest businesses. Only fifty years ago it was a complete mystery. In other words, P&G used the equity realized by becoming more efficient to pursue innovation. It exploited the gains of previous advances to fund its exploration of new mysteries.

  Design Thinking and the Design of Business

  Very few companies balance exploration and exploitation by continuously looking back up the knowledge funnel to the next salient mystery (or back to the original mystery) and driving across the knowledge funnel, in a steadily cycling process. These few businesses come to be defined by their balanced approach. They become design-thinking businesses.

  Why do so many companies fall into the trap of choosing either exploration or exploitation, rather than balancing both? The reason, I believe, is that as companies grow, they become more comfortable with the administration of business. They like and encourage analytical thinking. They embrace a very specific way of arguing and thinking that includes a highly restrictive definition of what constitutes reasonable grounds for moving ahead with a project, a v
ery narrow definition of proof. For analytical thinking, all proof emanates from the past—a general rule handed down from the past, or a set of observations of events or behaviors that have already happened. The average manager has been trained and rewarded to look to the past for proof before making the big decisions.

  And to these analytically trained managers, the alternative appears quite frightening: the knowing without the reasoning of intuitive thinking. It is no wonder that organizations slowly but surely shift their structures, processes, and cultures to be friendly to only analytical thinking and, without realizing it, to only exploitation of existing knowledge. Their goal is not to drive out innovation but rather to protect the organization against the randomness of intuitive thinking. They do not realize that they worship at the altar of reliability, a concept that I will return to in chapter 2. But drive out innovation they do. It is a trap and a pernicious one.

  The answer is not to try to get corporations to embrace the randomness of intuitive thinking and eschew analytical thinking entirely. They just won’t do it: it is too scary. What’s more, analytical thinking is absolutely essential to the exploitation of existing knowledge. No, we cannot do without analytical thinking or intuitive thinking entirely.

  The answer lies in embracing a third form of thinking—design thinking—that helps a company both hone and refine within the existing knowledge stage and generate the leap from stage to stage, continuously, in a process I call the design of business. I will explore design thinking at length in chapter 3. For now, let me say that at the heart of design thinking is abductive logic, a concept originated by turn-of-the-twentieth-century philosopher Charles Sanders Peirce. His important insight was that it is not possible to prove any new thought, concept, or idea in advance: all new ideas can be validated only through the unfolding of future events. To advance knowledge, we must turn away from our standard definitions of proof—and from the false certainty of the past—and instead stare into a mystery to ask what could be. The answer, Peirce said, would come through making a “logical leap of the mind” or an “inference to the best explanation” to imagine a heuristic for understanding the mystery.

  The McDonald brothers didn’t know that their Speedee Service System would work. They had imperfect data, but not irrelevant data. They knew that carhop restaurants had the appeal of relatively quick service, but had some drawbacks—loitering toughs and cold food. Their logical leap, their inference, was that patrons liked the basic concept but would like it a lot more if the restaurant were a drive-through with a narrower, more standardized menu.

  The brothers had no “proof,” but they did not lack logic. At the time a heuristic is first tentatively proposed, no one can prove whether it is useful or valid at all. Proof comes only if the heuristic is tried and found to be helpful in producing the desired, or valid, result. The same holds for turning the heuristic into an algorithm. Neither of these steps into new knowledge can be proved in advance; all are validated—or not—through the passage of time.

  As such, abductive logic sits squarely between the past-data-driven world of analytical thinking and the knowing-without-reasoning world of intuitive thinking. Rather than being confined to regressing the past to hone and refine within the current knowledge stage, the design thinker can add abductive logic to the reasoning repertoire to drive the organization through the knowledge funnel. And rather than being confined to the knowing without reasoning of intuitive thinking, the design thinker uses an explicit form of logic and a process that, while less certain and clear than analytical thinking, has promise for producing advances with greater consistency and replicability than pure intuition.

  The design thinker therefore enables the organization to balance exploration and exploitation, invention of business and administration of business, and originality and mastery. Design thinking powers the design of business, the directed movement of a business through the knowledge funnel from mystery to heuristic to algorithm and then the utilization of the resulting efficiencies to tackle the next mystery and the next and the next. The velocity of movement through the knowledge funnel, powered by design thinking, is the most powerful formula for competitive advantage in the twenty-first century.

  To get there, businesses must acknowledge that they implicitly favor exploitation over exploration, because most businesses, whether they know it or not, favor reliability over validity. In the next chapter, we will examine those concepts in detail and investigate the forces that converge to reinforce an organizational bias toward reliability. Subsequent chapters will deepen our understanding of the contrasting modes of logic that produce exploration and exploitation, and the implications of both for the way we work. Most firms are dominated by declarative logic, or deductive and inductive reasoning (the logic of what should be or is operative). But new knowledge comes about by way of abductive reasoning, the logic of what might be. I offer a guide to developing the capacity for abductive reasoning—the essential core capacity for design thinkers—in the individual and the organization.

  A Different Kind of Organization

  A different kind of thinking demands a different way of organizing work. Reliability-oriented firms view applying a heuristic or running an algorithm on a continuous basis as their overarching task. So they build up permanent departments staffed by fungible people in permanent slots. They devote the bulk of their energies and resources to rigorous planning and strict budgets. Those processes, which are applications of inductive and deductive logic, drive out initiatives that can’t produce near-certain future outcomes.

  To balance administration and invention, a business needs to shift the weighting of its structure, processes, and culture. While some aspects of the organization can and should continue to be structured as permanent jobs or tasks, significant parts of the organization should be structured as projects—that is, with teams and processes designed to move knowledge forward a stage—with a definite end point. While planning and budget management can’t be thrown out the window, they have to be loosened to incorporate initiatives and investments whose outcomes can’t be predicted in advance. And culturally, it’s imperative that people know it is safe and rewarding to bring forward an abductive argument.

  A Different Kind of Leader

  Without committed leadership, no business can realize the structural, process, and cultural adjustments needed to become a design-thinking organization. Given the enticing short-term financial rewards of reliability, most organizations will pursue reliability out of simple self-interest. But given those same rewards, validity has a good chance of being squeezed out if someone at the very top of the organization does not champion its value. CEOs must learn to think of themselves as the organization’s balancing force—the promoter of both exploitation and exploration, of both administration and invention.

  The CEO can perform that function in a number of different but successful ways. Some CEOs, such as Guy Laliberté, founder of Cirque du Soleil, and Mike Lazaridis, founder of Research In Motion, the company that gave the world the BlackBerry, take it on themselves to lead the search for innovation. Laliberté spearheads the design of circuses the likes of which the world has never seen before. Lazaridis keeps creating new devices that define the future of mobile communications. Both drive their organizations forward by taking the lead in moving knowledge forward.

  At the other end of the spectrum, we find CEOs who build design-friendly organizations. Procter & Gamble’s A. G. Lafley is the poster boy for transforming a large, reliability-biased enterprise into a design-friendly organization that maintains a balance between analytical thinking and abductive reasoning. James Hackett of Steelcase acquired the design firm IDEO to infuse design thinking across the entire Steelcase organization. 5

  Between the extremes represented by Laliberté and Lazaridis at one end and Hackett and Lafley at the other, there are numerous intermediate alternatives. Steve Jobs, for instance, cofounder and returned CEO of Apple Inc., is probably the CEO most widely viewed as a design thin
ker, thanks to elegant, customer-pleasing products like the Macintosh, iMac, iPod, and iPhone, among many others. But he is not the solitary design genius of popular imagination. It was Apple’s designers, led by Jonathan Ive, who realized those innovative products. Jobs played a different, equally crucial role: he created an organization that placed “insanely great” design at the top of its hierarchy of values, and he gave the green light to spend the resources necessary to make lasting successes of his designers’ innovations.

  A Different You

  But what if you are not a CEO? Worse, what if the CEO you work for doesn’t have the first clue about the importance of design thinking and the need to encourage it? Are you then powerless to improve your circumstances and your organization’s prospects?

  Definitely not. You are far from powerless, and you are anything but alone. The business world is dominated by reliability. But that need not impede your efforts to sharpen your own design-thinking capability. While you may have to fight your organization’s baked-in biases against design thinking, the effort will help you sharpen your innovation skills and prepare you to be your company’s champion of design.

  To become a design thinker, you must develop the stance, tools, and experiences that facilitate design thinking. Stance is your view of the world and your role in it. Tools are the models that you use to understand your world and organize your thinking. Experiences are what build and develop your skills and sensitivities over time.

  Rather than being cowed by a reliability-oriented world and becoming a prisoner of it, the design thinker develops a stance that puts a priority on seeking validity and making advances in knowledge, even if that stance places the thinker at odds with the organization’s culture. In addition to mastering tools for analyzing the past and using that analysis to predict the future, the design thinker develops the capacity for observation, for seeing features that others may miss. The design thinker, in the words of novelist Saul Bellow, is “a first-class noticer.” 6