BOOK SUMMARY

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Roger Martin. (2009).

The Design of Business: Why Design Thinking is the Next
Competitive Advantage.
Boston MA: Harvard Business Press.

CHAPTER 1: THE KNOWLEDGE FUNNEL: HOW DISCOVERY TAKES SHAPE

This book offers a new model for value creation. The underlying premise is that businesses must
learn to reconcile and balance two different perspectives:
1. Analytical thinking: value is a created by applying inductive and deductive reasoning and
meticulous, repetitive quantitative analysis, in order to eliminate bias and uncertainty and
achieve mastery.
2. Intuitive thinking: value is created by ingenuity, invention, and originality which are a
function of the non-rational innovation process, manifested in sudden, non-linear,
intuitive bursts of creativity.

This book seeks to resolve the polarity between these two modes of thought. Although both are
necessary, neither is sufficient to ensure business performance. Instead, successful business must
learn to balance analytical and intuitive thinking in a way that produces a third approach, design
thinking .

Companies that employ design thinking are unique in their willingness to continually reexamine
their business model, focusing on both efficiency and innovation. An early example of this is the
fast-food restaurant model, created by the McDonalds brothers who experimented with smaller
menus and dramatically different service delivery models. Building on this, Ray Krocs ultimate
innovation was to simplify the McDonald's approach, replacing judgment and variation with a
strict and standardized process.

Design thinking enables companies to create value by moving them through the knowledge
funnel a process of knowledge creation, innovation, and application. Firms that master this
process will not only have a competitive advantage; they will be responsible for new
breakthroughs that alter the world as we know it today. This process includes these three steps:
o Step I The Mystery : knowledge starts with a question, a feeling, or an undefined
intuition that can take a variety of forms. For example, wondering what kind of food
people would like to eat as their pace of life and reliance on cars increases.

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o Step II The Heuristic : a simplified way of thinking that provides a rule of thumb
for dealing with the mystery. As an example, a fast-food, drive through restaurant was a
simple way to deal with the mystery of how people in the post-World War II era wanted
to eat.
o Step III - The Algorithm : a final design that converts the heuristic or simplified rule of
thumb into a fixed procedure or method, for example, a rigid and unvarying process of
fast food production that produces a guaranteed result.

The creation of value in business is a function of moving through the knowledge funnel from
mystery to heuristic to algorithm. The end result is always a substantial gain in efficiency. Note
that not every mystery becomes an algorithm. (For example music is and should remain a
mystery.) However, where applicable, the purpose of the knowledge funnel is to simplify and
master any complexities. In business today, the consummate algorithm is the computer code.

Management scholar James March suggested that these two different but complementary
activities are necessary to create value across the knowledge funnel:
o Exploring: searching for new knowledge, e.g. by moving through the stages of mystery,
heuristic, algorithm. Exploring is equated with the creation of business.
o Exploiting, or amplifying the benefit of current knowledge, e.g. deepening the understanding
within a given stage. Exploiting is equated with the management of business.

Typically, businesses move along a similar route: the business is created when a creative insight,
produced by intuitive thinking, moves a mystery to a heuristic. Then, the company improves the
heuristic, demonstrating an increasing reliance on analytical thinking. Over time, the company
moves into a lengthy phase focused on the management and administration of the business.
They become complacent, choosing to focus either on exploring or exploiting, creating potential
blind spots and a false sense of security. Eventually another external party invents a more
powerful heuristic to address the original mystery and gains competitive advantage.

Only a small percentage of companies are able to generate a second intuitive innovation that
moves beyond heuristic to algorithm. These highly successful companies show an ability to
continuously retrace their steps back up the knowledge funnel to reexamine the original mystery
or consider new mysteries encountered along the way. They strive to balance exploring and
exploiting which helps them to avoid blind spots and continue to innovate. These companies
become design-thinking businesses.

Companies that over-value analytical thinking train their managers to look to the past for
evidence that will inform their decision making for the future. Intuitive thinking can be quite
frightening for these managers. They have learned to seek reliability which suppresses

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innovation. (Allowing for innovation requires the ability to balance reliability with validity, the
topic of Chapter 2.)

The solution is not to abandon analytical thinking in favor of intuitive thinking. What is required
instead is a third form of thinking: design thinking.

The foundation of design thinking is abductive logic , a notion developed by the philosopher
Charles Sanders Pierce. This form of logic does not rely on past history or other conventional
definitions of proof. Pierce argued that new ideas and concepts cannot be proven in advance;
rather validity is revealed only by events as they occur in the future. Knowledge is advanced not
by considering the past, but by taking a logically intuitive leap and considering what could be
possible in the future.

Design thinking leads businesses to operate differently:

o Reliability-oriented firms are organized around the belief that the continual application
of a heuristic or algorithm is their principal task. This mindset leads them to building
static organization structures with permanent departments staffed by people in set roles.
o Companies who value design thinking know that innovation requires continual shifts in
process, structure, and culture. Naturally, any organization will require some elements of
its structure to be stable. However design thinking firms will create temporary structures
across significant portions of the organization.
o Design thinking also produces leaders able to balance exploiting and exploring, reliability
and validity, management and innovation.

The opportunity for those who are not in senior roles, such as the CEO, is to gain experience
and develop the tools and capabilities of a design thinker. The first goal is to become an
outstanding observer, looking for trends, beliefs, actions, processes, and new opportunities that
others might miss.

CHAPTER 2 THE RELIABILITY BIAS: WHY ADVANCING KNOWLEDGE IS SO HARD

The goals of reliability and validity are distinct: reliability is focused on generating predictable
outcomes; validity is focused on generating outcomes that produce a desired goal.

In business, the goal of reliability usually supersedes validity because business leaders are taught
to look to the past to predict the outcomes of their decisions. This mindset is an overpowering
force leading most organizations to focus on reliability rather than validity. This tendency only

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reinforces the reliance on deductive and inductive logic because both methods of thinking rely
on the past to predict future outcomes.

Another common assumption is that businesses growth and efficiency are best achieved by
eliminating idiosyncratic thinking that might inject bias or subjectivity into decision making.
Many consulting firms (e.g. McKinsey) cultivate the assumption that reliability is the best
measure of business success. Despite this belief, there is evidence that an exclusive dependence
on reliability creates organizational cultures that are insensitive to human needs and capabilities.

Corporations also focus on reliability because a predictable system can save a huge amount of
time. If the objective is to ensure ongoing, reliable and consistent processes and results, the
organization will reward managers who are able to build highly predictable and efficient systems
(e.g. using six Sigma) and who analyze past performance to perfect heuristics and algorithms as
measured by top and bottom line results. In actuality, these managers often create a logjam in
the knowledge funnel, obstructing forward movement to the algorithm.

Firms that focus all their resources on reliability are unable to pursue validity which means
they focus exclusively on predictability versus desired results.

The challenge is to integrate a validity mindset into a reliability-focused organization. Doing this
requires the skill of abductive reasoning.

CHAPTER 3: DESIGN THINKING: HOW THINKING LIKE A DESIGNER CAN CREATE

SUSTAINABLE ADVANTAGE

What is design thinking anyway?

o The notion of design thinking has been slowly developing over the past decade.
o Design thinking as an approach that uses the awareness and methods of a designer to
synchronize the needs of people with available technologies and workable strategies to
create new services and products.
o Design thinking applies the designers most crucial tool to the problem of business:
abductive reasoning.

North Americans tend to rely on only two modes of logic: deductive logic (moving from general
to the specific; seeking to understand what is) and inductive (moving from the specific to the
general; seeking to understand how it works).

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These two forms of logic are powerful, but incomplete. This was addressed by the pragmatist
American philosophers William James and Jon Dewey who claimed that understanding is gained
only through experience rather than abstract reasoning. They argued that knowledge does not
come from seeking a single truth, but from an evolving process of connecting and interacting
with ones environment.

Another prominent thinker, Charles Sanders Peirce studied the origin of new ideas. Pierce
concluded that new ideas are intellectual leaps in logic that occur when a person wrestles with
data that doesnt fit with the conventional beliefs or existing models. Reasoning, he noted, began
with wondering, not observation. He called this way of thinking abductive logic.

Applying abductive logic to business, Pierce stressed that any new design must also be
technologically possible in order to be successful. The end goal is not to replace deductive or
inductive reasoning, but to balance them with abductive inferences.

Advocates of design thinking in business claim that abduction is almost entirely discounted in
modern corporate life. To encourage greater access this form of reasoning, leaders must model a
way of thinking that doesnt always require immediate evidence. This requires an ability to
operate in the realm of possibility, where emerging ideas cannot be immediately proven or
disproven by data from the past.

A good example of design thinking is the invention of the Blackberry RIM. This began by
wondering what might be possible if people didnt need to use every finger to operate a key
board.

Increasing speed through the knowledge funnel can be a powerful source of competitive
advantage both in terms of cost and innovation. Navigating the knowledge funnel includes:
o Exploring the mystery is the most expensive activity in the funnel because mysteries are
inherently uncertain and time consuming.
o Heuristics produce results more quickly because they are a short-hand. The inventor of
a heuristic deliberately omits elements rather than consider every aspect of the mystery.
This, however, takes superior cognitive skills.
o Finally, the algorithm leads to efficiencies and cost reductions by creating procedures
and rules that ensure the desired outcome.

Barriers to design thinking include:

o The tendency of corporate leaders to suppress curiosity about the mystery and settle at
another stage of the knowledge funnel.

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o The practice of putting heuristics in the hands of specialists and business executives
which leads to unproductive turf wars.
o The failure to sufficiently define, understand and exploit the algorithm. This is often the
case with algorithms run by people instead of computers.

CHAPTER 4: TRANSFORMING THE CORPORATION: THE DESIGN OF PROCTER &

GAMBLE

In this example, the key actors are A.G. Lafley, CEO of Proctor & Gamble, Claudia Kotchka,
head of P&Gs design initiative, and the industrial design firm, IDEO.
o Lafley believed that increased innovation would attract customers willing to pay higher
prices for their products. To do this, he would have to challenge the conventional
wisdom that innovation and efficiency were mutually exclusive.
o Kotchkas role was to embed design thinking in the company.
o IDEO helped to build design thinking into P&G by designing a course and set of tools
for business teams to get experience using design thinking, working on real problems.

Their approach offered practical experience in design thinking and incorporated these three
elements:
1. Thinking holistically.
2. Visualizing new ideas; creating and refining prototypes.
3. Developing systems and processes to bring the new idea into reality to make it part of
the companies culture and ways of operating.

Designing new processes across Procter & Gamble:

o A new strategic review process is illustrative of the dramatically different approaches that
emerged during this initiative. In the past, the strategy process focused on presentations
and the creation of air-tight strategy documents. Instead, the new review process
encouraged dialogue, focused on a creative and open exchange of views rather than a
single right answer.
o The focus also shifted away from difficult problems toward "wicked problems" complicated, ambiguous problems that cannot be solved by rational analytics alone. By
definition wicked problems require design thinking. P&G helped shift this focus by
glamorizing assignments on wicked problems.

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o P&Gs research and development organization created a new approach called Connect
+ Develop which enabled connections between the company and external inventors.
By collaborating with externals, P&G was able to double the number of innovations
entering the knowledge funnel.
o P&G also created a Brand Building Framework which was a concerted effort to drive the
brand building heuristic toward algorithm. This dramatically reduced costs and freed up
senior brand professionals to focus their talent and attention on the next mystery.

Design thinking can create value in unlikely places. Over time, the design culture permeated staff
functions such as P&Gs Global Business Services, resulting in dramatically increased
engagement, more efficient services, and dramatically lower costs.

CHAPTER 5: THE BALANCING ACT: HOW DESIGN-THINKING ORGANIZATIONS

EMBRACE RELIABILITY AND VALIDITY

A case study on Herman Miller demonstrates how strategy is also a design exercise. More
specifically, this chapter describes how the company approached the problem of connecting
design with business outcomes.
o Herman Miller has been managed by a succession of De Pree family members over a
period of fifty years. The De Pree philosophy elevated design decisions to the same level
as any other business function.
o In the company, designers are accorded a great deal of autonomy to identify and solve
problems without any expectation that they will change the design in response to market
pressures.
o Designers receive and depend on feedback from sales and manufacturing, but they
report only to top management. Sales and manufacturing are expected to provide
feedback and information to the design function which helps the designers define and
tackle the problem. However, the designer decides how to use this information; there is
no attempt to adapt to public opinion designers are only expected to deliver a valid
solution.

To expand the use of design thinking, businesses must create an environment that balances
reliability and validity. This means that the business must think differently about these three
elements of its organization:
o Structures: Rather than organizing the company around fixed functions, permanent jobs
and ongoing tasks, a design-oriented company needs to organize around projects.

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o Processes: Typically an organizations financial and reward systems are biased toward
running an existing heuristic or algorithm. Design thinking requires processes that
balance reliability with validity. In design shops, people are rewarded for solving wicked
problems, not for the size of their business unit and/or teams. Problem-solving cultures
companies create an entrepreneurial spirit or teams of intrapreneurs.
o Cultural norms: Design thinking companies have cultures that think differently about
barriers and constraints. When the goal is reliability, then barriers are seen as problems
that must be eliminated or thwarted. When the goal is validity, potential obstacles
become creative opportunities that help to illuminate thinking and provide focus.

Cultivating a culture of design thinking will be met with resistance. Corporations are full of
people who are trained to be analytical thinkers. Business schools consider abductive thinking to
be frivolous and are dismissive of this approach. Stock market analysts, corporate directors and
many others in senior roles tend to be captivated by reliability. The challenge in any organization
is to foster the language of validity among the organizations employees, boards and investors.

CHAPTER 6: WORLD-CLASS EXPORERS: LEADING THE DESIGN-THINKING

ORGANIZATION

Cirque du Soleil exemplifies those companies that become world-class explorers. In this case,
the mystery of how to update the traditional circus became the heuristic we now know as the
Cirque du Soleil show.

Maintaining a design thinking company is a constant process of maintaining balance between

reliability and validity, particularly when successful. As companies grow, they tend to construct
control systems to manage the increasing number of products, channels, and geographies.
Expanding control can be seductive because it saves time and money - however they also
destroy the balance between reliability and validity.

Design thinking can be developed by bringing in external resources such as the design company
IDEO that partnered with P&C. However, its also possible to create a design-thinking
organization from within, for example, Target.

Some functions, such as human resources, tend to lean more toward reliability, which can
threaten the development of design thinking. Conversely, sales will be often be the first function
to dispute reliability in favor of a valid proposal.

A companys norms can be heavily influenced by the CEOs behavior. The CEO can nurture
design thinking in a variety of ways, which include:

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o By taking an active role in the design process, she becomes, defacto, the company's
designer-in-chief.
o Or by delegating the design work to others, she may instead focus on creating processes
and mindsets that cultivate design thinking.

A hybrid example is Steve Jobs of Apple. Rather than take on the role of head designer, Jobs
advocated the use of design thinking across Apple. He selected and approved great designs. He
took the lead in setting up new processes and structures. However he stopped short of engaging
in the design itself.

CHAPTER 7: GETTING PERSONAL: DEVELOPING YOURSELF AS A DESIGN THINKER

What can you do if your organizations CEO and senior leaders focus exclusively on reliability?

Even at the lowest level of a reliability-oriented company, you can become a design thinker.
How do you do this? By developing your personal skills and knowledge about design thinking.

Consider these three mutually supporting elements:

o Your mindset: Consider how you make meaning of the world around you. Design
thinkers focus on impact they assume that the world can be altered and that they have
the ability to cause that change to happen.
o Your tools: Conceptual tools include heuristics (rules of thumb), theories, processes,
and ideas that help you understand and organize your thinking about the world around.
The tools you chose are guided by your mindset.
o Your experiences: If we allow ourselves to learn from experience, we develop
awareness, knowledge and skill which are essential to becoming a design thinker.

Each of these elements have distinctive characteristics for design thinkers. In general, a design
thinker does not focus on the past, but on building the future in these specific ways:
o Mindset: A design thinker wont ignore reliability, but will be drawn toward complexity,
be curious about what is not known and open to surprise. In seeking to further
knowledge, the design thinker will be more likely to move past reliability in order to
reach a valid answer.
o Tools: The most important tools for design thinkers are observation and imagination,
which bring new insights. The design thinker is also masterful at translating ideas into
systems that create intended business outcomes.

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o Experiences: Design thinkers are self-aware and consciously use experience to develop
mastery and foster innovation.

These final points will help design thinkers be more effective with their teams and colleagues:
1. Refrain from dismissing reliability-oriented colleagues as obstacles. Instead, take on
difference as a creative challenge.
2. Have compassion for those who reside in the extremes of either analysis or intuition.
3. Become fluent in both the language of reliability and the language of validity.
4. Speak simply: translate foreign ideas into recognizable terms.
5. When it comes to proof, turn the future into the past. Recognize that reliability-oriented
people crave proof and are afraid of the future. Make a prediction about what will
happen if you and your colleague take a small step into the unknown. As time unfolds,
and your predictions are manifested, they will learn to trust you and your ideas.