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The Design of Business Why Design Thinking is the Next Competitive Advantage Roger Martin

One of the most compelling examples in Roger Martin's book is a personal tale from his own days as a consultant. Asked by a Canadian bank to come up with a new strategy to cater to high-net-worth clients, Martin and his team came up with a bold plan they thought might revolutionize the bank's entire business. The bank's chief executive met the excited presentation with one question: Had any competitor already gone this route? "No!" Martin replied brightly. "You would be the very first!" And with that the meeting was over, the idea was killed. The story, and others in Martin's new book, The Design of Business: Why Design Thinking Is The Next Competitive Advantage, illuminates more than just the risk-aversion of so many leaders. Instead, Martin is calling for a new way of thinking to permeate business that embraces the tricky reality of executing innovation. He calls the technique "design thinking" and argues that it provides the necessary balance between the poles of analytical and intuitive thinking that are commonly taught and nurtured in today's professionals. Dean of the Rotman School of Management at the University of Toronto, Roger Martin has been a key figure in driving understanding of the concept of design thinking. With examples from companies such as Procter & Gamble and Research in Motion, Martin shows the power of design thinking in action.

The Knowledge Funnel

Analytical, Intuitive and Abductive thinking Knowledge Funnel Analytical Thinking Analytical thinking harnesses two forms of logic – deductive reasoning and inductive reasoning – to declare truths and certainties about the world. The goal of this model is mastery through rigorous, continuously repeated analytical processes. Judgment, bias and variation are the enemies. Strategy based on rigorous quantitative analysis is at the heart of analytical thinking. Intuitive Thinking

Another school of thought is intuitive thinking – the art of knowing without reasoning – this is the world of originality and invention. To this school, analytical thinking has driven out creativity and doomed organizations to boring stultification. “No great product was created from quantitative market research”. Great products spring from the heart and soul of a great designer unencumbered by committees, processes or analysis. Design Thinking Design thinking is a discipline that uses the designers’ sensibilities and methods (including immersion research and analytics) to match people’s needs with what is technically feasible and what a viable business strategy can convert into customer value and market opportunity. Design thinking uses abductive logic rather than deductive logic or inductive logic. Deductive logic – the logic of what must be – reasons from the general to the specific. Inductive logic - the logic of what is operative – reasons from the specific to the general. Abductive logic - the logic of what might possibly be true - involves “making a logical leap of the mind” or imagining what might be rather than what can be proven deductively or inductively. Organizations dominated by analytical thinking are built to operate as they always have; they are structurally resistant to the idea of redesigning themselves and their systems dynamically over time. They are built to maintain the status quo. By sticking close to the tried and true, organizations dominated by analytical thinking enjoy one very important advantage; they can build size and scale. In organizations dominated by intuitive thinking, innovation may come fast and furiously, but growth and longevity represent tremendous challenges. Intuition based firms cannot and will not systematize what they do, so they wax with the individual leaders. The most successful businesses in the future will balance analytical mastery with intuitive originality in the dynamic interplay called design thinking. Design thinking firms stand apart from in their willingness to engage in the task of continuously redesigning their business. They do so with an eye in creating advances in both innovation and efficiency. The knowledge Funnel The Knowledge funnel is a model for how businesses can advance knowledge and capture customer value. There are three parts that make up the funnel, mastery, heuristic and algorithm.

The beginning is mystery where a question is posed to frame the opportunity (a hunch or pre-linguistic intuition). This step is situated in intuitive senses that draw from many sources and experiences. Mysteries form in the subconscious mind and can be triggered from immersion, study, research or casual exploration. The second stage is a heuristic is an open ended prompt to think or act in a particular way (heuristics are explicit and bring intuition to language). Heuristics are rules of thumb hat helps narrow the field of the inquiry and work the mystery down to manageable size. They guide us to a solution by way of organized exploration of the possibilities (if this… than that). Algorithms are certified production processes. They guarantee that in the absence of intervention, following the steps they embody will produce a known result. Algorithms take the loose unregimented heuristics and simplify and structuralize them to the degree that anyone with access to the algorithm can deploy it with equal efficiency.

Validity vs. Reliability Biases Exploration – Exploitation Validity Reliability Organizations move through the knowledge funnel stages to create value. Management theories claim that organizations engage primarily in one of two modes; exploration or exploitation. The author shows that design thinking can enable the advantages and balance of each mode as a competitive advantage. Exploration is the search for new knowledge that will drive growth from new platforms. Exploitation is the maximization of payoff of existing knowledge. The table below contrasts the two organizational modes. Characteristics of Exploration and Exploitation Organizatio nal focus Driving forces Future orientation

Exploration The invention of business Intuition, feeling, hypothesis about the future, originality

Exploitation The administration of business Analysis, reasoning, data from the past, mastery

Long term

Short term

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

An organization exclusively dedicated to exploration will expire in relatively short order. Exploration alone will not typically generate enough returns to fund more exploration. A business that creates value solely through exploitation will exhaust itself in due course. It can’t exploit the same piece of knowledge forever. The author uses two additional perspectives to illustrate the need for balanced exploration and exploration to drive sustainable growth. The perspectives are reliability and validity. Reliability The goal of reliability in organizations is to produce consistent, predictable outcomes. Business systems such as Six Sigma, CRM, Lean and ERP are examples of reliability based methodologies that reduce waste and variability (low risk). Reliability is strongly supported by deductive logic (the application of a general rules derived from past experience). These systems operate in the algorithm part of the knowledge funnel. Validity The goal of validity is to produce outcomes that meet the correct user needs (articulated or not). This may mean that the correct outcome is not predictable therefore not reliable (risky). It requires a prediction about the future that is not directly derived from past results. It utilizes abductive logic to imagine a future that is non-linear with the past. Three forces converge to feed reliability and marginalize validity; • the demand that an idea be proven before advancing (can’t prove something never been done) • an aversion to bias (the need for market data) • the constraint of time (reliable systems are predictable, breakthroughs cannot have certain schedules)

Design Thinking What is Design Thinking? The design thinker employs abductive reasoning to discern a pattern in what to others is still an amorphous whole. Of course, the search for patterns is typically marked by repeated false starts and blind alleys. With experience, design thinkers learn to spot handholds where others only see sheer cliffs. It is critical to use design thinkers in the appropriate forum. Do not set reliability and algorithmic expectations for these talented people. Develop management methods that grow their abilities, protect them from the judgment of those that

distrust intuition in favor of data. The manager must also keep them in the “mystery” portion of the knowledge funnel. In the near future, physical segregation may be the best method for cultural growth. As early successes drive cultural acceptance of design thinking as a valued talent, integration will be important for sustained growth.

Transforming the Corporation Building a Design Thinking Organization from Within The transformation requires a leader that can speak the language of design and the language of business. The leader must take steps to bring design into an organization. The list below is from P&G; •

•

Set expectation clearly up front and get the leaders on board Start in the areas of the business with an existing interest in design (not where it is needed most). Start where there is ‘suction’ and willingness to learn • Get external help Build a network of experts and partners with tools and capabilities that will be needed. Hire the best experienced talent even if you need to flex the rules • Expect some speed bumps Everything will need to be constructed including tools, work environment and metrics Don’t try to talk about it. Just demonstrate it, demonstrate it, demonstrate it Most of this art cannot be explained well but can be richly experienced Include Sr. management in the research to get them on-board with the process and success.