Friday, July 2, 2010

The Design of Business (2009)

The Design of Business: Why design thinking is the next competitive advantage, by Roger Martin was a positive surprise as it was a quick read, well structured, delivered several interesting concepts and some in depth cases on design thinking and business model innovation.

Even though several of the cases are familiar for many readers (such as P&G, Apple, Cirque du Soleil, McDonalds and RIM) Roger, who is dean of the Rotman School of Management at the University of Toronto, professor of strategic management, and author of the book The Opposable Mind, adds interesting perspectives and sometimes information from behind the scenes working as a consultant and advisor. The book is an extension of Roger's popular article (free download) from 2004 with the same name.

The book in three bullet points:
  • It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs, and the activities of moving across the knowledge stages (exploration) and operating within each knowledge stage (exploitation).
  • To accelerate the pace at which knowledge advances through the Knowledge Funnel, it presents the concept of design thinking as the necessary balance between analytical thinking using deductive and inductive reasoning (with the need for reliability and the ability to produce consistent and predictable outcomes), and intuitive thinking (with the need for validity and to produce outcomes that meet a desired objective).
  • It discusses challenges (primarily the results of proof-based analytical thinking) faced by organizations, CEOs and individuals within organizations, to build structures and processes that foster, support and reward a culture of design thinking, and how different CEOs have used different approaches to generate successful outcomes.
A brief summary of the different chapters:

1. The knowledge funnel: How discovery takes shape
The introductory chapter starts with a story about McDonalds journey from mystery (how and what did Californians want to eat) to algorithm (stripping away uncertainty, ambiguity, and judgment from almost all processes). It briefly discusses analytical thinking, intuitive thinking and design thinking, to solve mysteries and advance knowledge, and the fine balance between exploring new knowledge and exploiting existing one.
It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs. This is explored also in later chapters: "Mysteries are expensive, time consuming, and risky; they are worth tackling only because of the potential benefits of discovering a path out of the mystery to a revenue-generating heuristic", "The algorithm generates savings by turning judgment… …into a formula or set of rules that, if followed, will produce a desired solution" and “Computer code – the digital end point of the algorithm stage – is the most efficient expression of an algorithm”.

It also addresses the need for organizations to re-explore solved mysteries, even the founding ideas behind the business, and not get too comfortable focusing on the "administration of business" running an existing algorithm.

In addition, the first chapter presents abductive logic, and some ideas originated by philosopher Charles Sanders Peirce; that it is not possible to prove a new thought concept, or idea in advance and that all new ideas can be validated only through the unfolding of future events. To advance knowledge we need to make a "logical leap of the mind" or an "inference to the best explanation" (or "Leaps of Faith" that John Mullins and Randy Komisar calls it in the book Getting to plan B see review/summary) to imaging a heuristic for understanding a mystery. Free preview of Chapter 1

2. The reliability bias: Why advancing knowledge is so hard
The second chapter focus on the distinction between reliability (produce consistent, predictable outcomes by narrowing the scope of a test to what can be measured in a replicable, quantitative way) and validity (produce outcomes that meet a desired objective, that through the passage of time will be shown to be correct, often incorporating some aspects of subjectivity and judgment to be achieved). Roger's main point in the chapter (or even in the book) is that today's business world is focusing too much on reliability (due to three forces: demand for proof, an aversion to bias and the constraints of time), with algorithmic decision-making techniques using various systems (such as ERP, CRM, TQM, KM) to crunch data objectively and extrapolate from the past to make predictions about the future. "What organizations dedicated to running reliable algorithms often fail to realize is that while they reduce the risk of small variations in their businesses, they increase the risk of cataclysmic events that occur when the future no longer resembles the past and the algorithm is no longer relevant or useful" With the turbulent times we live in, where new mysteries constantly spring up that reliable systems won't address or even acknowledge, businesses risk being outflanked by new entrants solving old and new mysteries developing new heuristics and algorithms. "Without validity, an organization has little chance of moving knowledge across the funnel. Without reliability, an organization will struggle to exploit the rewards of its advances… the optimal approach... is to seek a balance of both"

3. Design thinking: How thinking like a designer can create sustainable advantage
Chapter three starts with an interesting case of Research In Motion (RIM) that leads into the discussion of what is really design thinking. Roger uses the quote by Tim Brown of IDEO, "a discipline that uses the designer's sensibility and methods to match people's needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity" and adds himself "a person or organization instilled with that discipline is constantly seeking a fruitful balance between reliability and validity, between art and science, between intuition and analytics, and between exploration and exploitation". That designers live in the world of abductive reasoning, actively look for new data points, challenge accepted explanations to posit what could possibly be true (in contrast to the two dominant forms of logic - deduction and induction, with the goal to declare a conclusion to be true or false).

The chapter ends with the first discussion on roadblocks to design thinking (many more to come), with one being the corporate tendency to settle at the current stage in the knowledge funnel, and another how "highly paid executives or specialists with knowledge, turf and paychecks to defend” has the company's heuristics in their heads with no interest in advancing to the algorithm stage, making the executives less important. This leads nicely into the forth chapter about the transformation of Procter & Gamble.

4. Transforming the corporation: The design of Procter & Gamble
A.G. Lafley's transformation of Procter & Gamble from an incumbent in crisis to an innovative and efficient organization in just a few years has been widely covered in the business literature. As a student some years back I made an internship in P&G's Connect & Develop (connect with innovators outside the company and develop their ideas for P&G products), and have since been reading up on everything I can find about the transition and why other companies have not been able to make the same transition. Roger adds interesting perspectives, from his work with the company and its first vice president of innovation strategy and design, Claudia Kotchka, to develop "a comprehensive program that would provide practical experience in design thinking to P&G leaders". One of the top-down efforts being to drive brand-building from heuristic (in the minds of scarce and costly senior executives) toward algorithm, providing less senior employees the tools needed to do much of the work previously done by high-cost elites who then could then focus on the next mystery in order to create the next brand experience. The chapter also covers the Connect & Develop initiative and how it bulked up P&G's supply of ideas in the mystery-heuristic transition where it was thin, enabling it to feed more opportunities into its well-developed heuristics and algorithms of development, branding, positioning, pricing and distribution.

Another highly interesting topic covered in the chapter is the change of processes within P&G, including the strategy review, at P&G. Lafley recognized that the existing processes was a recipe for producing reliability, not validity, "so risky creative leaps were out of the question". A transition from annual reviews with category managers pitching, "with all the inductive and deductive proof needed to gain the approval of the CEO and senior management" to "forcing category managers to toss around ideas with senior management… to become comfortable with the logical leaps of mind needed to generate new ideas".

5. The balancing act: How design-thinking organizations embrace reliability and validity
The chapter focuses on the need to balance reliability and validity, and the challenges to do so (foremost all structures, processes and cultural norms tilted towards reliability). "Financial planning and reward systems are dramatically tilted toward running an existing heuristic or algorithm and must be modified in significant ways to create a balance between reliability and validity". Roger presents a rough rule of thumb "when the challenge is to seize an emerging opportunity, the solution is to perform like a design team: work iteratively, build a prototype, elicit feedback, refine it, rinse, repeat… On the other hand, running a supply chain, building a forecasting model, and compiling the financials are functions best left to people who work in fixed roles with permanent tasks". The chapter feels somewhat repetitive, in the uphill battle for validity, and more obstacles of change are presented:
  • Preponderance of Training in Analytical Thinking
  • Reliability orientation of key stakeholders
  • Ease of defending reliability vs. validity
In this chapter, Roger also discusses how design-thinking companies have to develop new reward systems and norms, with an example of how to think about constraints. "In reliability-driven, analytical-thinking companies, the norm is to see constraints as the enemy", whereas when validity is the goal "constraints are opportunities" and "they frame the mystery that needs to be solved".

6. World-class explorers: Leading the design-thinking organization
In chapter six several interesting cases, and approaches of different CEOs, are presented, one being the widely covered case of Guy Laliberté, and his Cirque du Soleil. Again Roger adds to the existing body of knowledge with the twist of reliability vs. validity in creating a new market, and the knowledge funnel taking a one-off street festival into an unstoppable international $600 million-a-year business with four thousand employees. Laliberté has reinvented Cirque's creative and business models time and time again, "usually over protests that he was fixing what was not broken and that he could destroy the company". Other CEOs and cases covered in the chapter are James Hackett of Steelcase, Bob Ulrich of Target, and Steve Jobs of Apple.

The role of the CEO and different approaches to build design-friendly organizational processes and norms into companies are discussed referring to the different cases presented.

Again, Roger returns to the reliability vs validity battle, now from a CEO perspective with terms such as "resisting reliability", "those systems-whether they are for budgeting, capital appropriation, product development…", and "counter the internal and external pressures toward reliability".

7. Getting personal: Developing yourself as a design thinker
In the final chapter the focus is on how a non-CEO can function as a design thinker and develop skills to individually produce more valid outcomes even in reliability-oriented companies. Roger refers back to his previous book The Opposable Mind, and the concept of a personal knowledge system as a way of thinking about how we acquire knowledge and expertise. The knowledge system has three components:
  • Stance: "Who am I in the world and what am I trying to accomplish?"
  • Tools: "With what tools and models do I organize my thinking and understand the world?"
  • Experiences: "With what experiences can I build my repertoire of sensitivities and skills.
Roger then presents the design thinker's stance, key tools (observation, imagination, and configuration), and how to obtain experiences by trying new things and test their boundaries.

Roger also presents five things that the design thinker needs to do to be more effective with colleagues at the extremes of the reliability and validity spectrum:
  • Reframe extreme views as a creative challenge
  • Empathize with your colleagues on the extremes
  • Learn to speak the languages of both reliability and validity
  • Put unfamiliar concepts in familiar terms
  • When it comes to proof, use size to your advantage

This is a great book and I recommend business developers and business model innovators to buy it, as it is a quick read with several important concepts and interesting cases to learn from. I believe design thinking has the potential to help managers break out from the Matrix they live in and again realize the real world behind the existing algorithms.

If you find this book review/summary helpful, please go to the Amazon book review page and rate my identical review "Helpful" Thanks!

Disclaimer: I read the book at the beautiful cliffs of Vernazza in Italy, and was in a very good mood. I actually read the book twice.

Other book reviews/summaries:
Business Model Generation (2009)
Getting to Plan B (2009)
Seizing the White Space (2010)


  1. Quite a coincidence that i just finished reading this book last night and then see you review here today :)

    I can only agree that it is a great book. While using cases, it has a strong focus on explaining the concepts and it does so in a comprehensive manner. So if you are tired of reading 300 page business books that could have been done in 100 pages, this 180 page marvel will make you happy.

    I can also recommend change by design, from IDEO CEO Tim Brown

  2. Many thanks for your comment Peter, I will order Change by design today!

    Take care,

  3. Hampus JakobssonJuly 5, 2010 at 11:50 AM

    Thanks Anders. Just bought the book as well as marked your review as helpful. Have you read Serious Play and Sketching User Experiences both about prototyping/design thinking to reach business goals?

  4. This is just perfect, reading tips in the beginning of the summer! Thanks Hampus, I checked the previews at Amazon and will order them right away! "Measuring prototyping paybacks" - I can't wait to see if the chapter has any substance! Take care!

  5. Vincent van der LubbeAugust 20, 2010 at 1:27 AM

    Hi Anders,

    what did you think of Change by Design? I found it extremely disappointing, both books by Tom Kelley being much better.

    I agree with Patrick Staehler that "Design thinking" sounds nice, but often does not really add that much value in terms of innovating business models. A successful project in finance was for example "saving the change" on credit cards into an account. But they did not come up with Mint or KaChing ...

    Thanks for your interesting blog, I learned a lot!

  6. Hi Vincent,
    Thanks for your comment! I am happy you find the blog useful! I bought the book Design Thinking but have actually not had time to read it yet (read: I did not immediately grab my attention) Perhaps Peter can elaborate on his recommendation above?

    Take care,

  7. Hi Vincent and Anders

    My reason for reading both "The Design of Business" and "Change by Design" is that i am interested in applying design thinking to entrepreneurial activities and in particular to business model innovation.

    In this pursuit to explore design thinking, "The Design of Business" has been great for creating a logical framework for some of it. Especially the knowledge funnel and the definitions of the process.

    I liked "Change by design" as a more narrative explanation of the area. With a more personal tone and less direct.

    I guess you could say that the difference between the two, is that "The Design..." is like a lecture or workshop presentation. Where as change by design is more like a conversation at a cocktail party.

    I look forward to further debate about design thinking and business model innovation. I have just written a post, where i also talk a bit about it.

  8. Thanks Anders. Just bought the book as well as marked your review as helpful. Have you read Serious Play and Sketching User Experiences both about prototyping/design thinking to reach business goals?