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

by Roger L. Martin

  FIGURE 2-1

  The predilection gap

  Reliability Versus Validity:A Note on Prediction

  by Mihnea Moldoveanu

  Let us start with examining a reliable prediction. What could this mean? Well, a reliable prediction, which we’ll denote by a sentence, S, about some future event, is one that is produced by a reliable process. A reliable process, in turn, is one that has turned up a reliable prediction N times in the past, where N is a very large number. A reliable prediction of the effects of mortgage rates on housing prices is that they vary in inverse proportion. It is reliable because the process that generated it has worked in the past.

  Now, what is a valid prediction? It is a prediction that turns out to be true. A prediction is always about the future, and, as such, it cannot be judged to be valid before the future about which it is predicated actually happens.

  The “inductive fallacy” is that of inferring validity from reliability. In its strong (and most pernicious) form, the inductive fallacy states that the reliability of a prediction logically entails its validity. So, pre-1999, a reliable prediction would be that high-tech start-up valuations should increase as a large multiple of hits on the fledgling company’s Web site and the number of engineers employed by the company. Using this reliable method for predicting firm valuation post September 2000 would, however, have led to an invalid prediction and plenty of invalid investments, as it turned out.

  The weak form of the inductive fallacy is that the probability of a prediction being valid, given that it is reliable, is greater than the probability of its being invalid, given that it is reliable. Bertrand Russell put this to rest with the simple fable of a chicken who expects (correctly) to be fed every time the farmer appears in the morning, and who predicts (reliably, but not validly) that it will also be fed on (what turns out to be) its last day on Earth, when the farmer comes to chop off its head.

  The problem of going from reliability to validity is, of course, the “all things being equal” condition that appears in most experimental reports and empirical study results, which states that the supposed cause-effect relationship supported by the data will be operational in other contexts, “all things being equal.” But that is precisely the point of living in an open, uncontrolled system, also known as the world: all things are not equal from one experimental run to another. The step that safeguards the transition from reliability to validity is not a simple inferential step but, rather, a far more complex, abductive step. The validity seeker, unlike the reliability seeker, treats past predictive successes as hypotheses to be carefully tested before using them to generate predictions that are expected to be valid. Hence, the real empiricist is “a first-rate noticer” of precisely the anomalies that would cause him or her to throw out the “all things are equal” assumption.

  CHAPTER 3

  Design Thinking

  How Thinking Like a Designer Can Create

  Sustainable Advantage

  THE FIRST TIME I VISITED the Research In Motion (RIM) headquarters several years ago, I couldn’t find the right building. I’d driven about ninety minutes from Toronto to the twin cities of Kitchener and Waterloo. The landscape was as flat as Kansas, with farms flanking either side of the expansive superhighway. This area of southwestern Ontario strikes a unique balance. Just outside town and off the highway, the buggies and carriages of Old Order Mennonites are still a common sight. They mark a stark contrast to Waterloo itself, a city of about a hundred thousand people. Waterloo, traditionally a sleepy university town, has become a high-tech hub, as scores of technology companies have sprouted up, building on the strength of the renowned engineering program at the University of Waterloo. RIM is one of them.

  As I wound my way through the streets of Waterloo, I felt I could have been in Anywhere, North America—a shopping mall here, a power center there, a Chinese restaurant, a section of single-family houses, several Starbucks. Eventually I found 176 Columbia Street, RIM world headquarters. I was surrounded by an unruly cluster of squat buildings, none more than eight stories tall. The buildings all looked pretty much the same, with no hint as to which contained the executive offices. I tried one. Wrong. I hopped back in my car and drove to another. Eventually, I found the right one.

  As I was ushered in, I looked around, expecting to see the usual trappings of a tech-firm head office. There was the usual high-tech corporate security. But beyond that, there was no fancy, avantgarde furniture, little in the way of art, no design flourishes, and certainly no foosball tables. The conference rooms, functional but not ornate, were named after legendary Canadian hockey players such as Wayne Gretzky and Gordie Howe. Walking around, you might guess you were in the regional office of a prosperous but unexceptional Canadian company, rather than in the global headquarters of one of the world’s most innovative enterprises.

  It’s not that the folks at RIM don’t care about design. As makers of the ubiquitous BlackBerry, they’ve built a company with a market value of as much as $84 billion on the design, manufacture, and marketing of wireless communications devices. But for them, design isn’t a cooler-than-thou office compound with beanbag chairs and cerulean walls. Design isn’t just about making things beautiful; it’s also about making things work beautifully. Design is about moving knowledge along the funnel, starting from the mystery of how to enable and enhance communication in a mobile age. At RIM, design is about design thinking.

  Leading Design

  As I was soon to discover, RIM is headed by one of the most committed and remarkable design thinkers—Mike Lazaridis, RIM’s founder, president, co-CEO, and design visionary. Lazaridis is responsible for product strategy, R&D, product development, and manufacturing. His co-CEO, Jim Balsillie, leads the business side of RIM, including corporate strategy, sales, and finance. It’s a uniquely successful partnership between two starkly different men. Balsillie is a sleek bundle of contained energy, his quick mind—and mouth—racing from one idea to the next. Next to the angular, athletic Balsillie, Lazaridis cuts a softer, heavier figure, with a thick mane of prematurely grey hair. He is quietly thoughtful until it comes time to talk about his products. Then, the enthusiasm virtually bubbles out of him. When he shares new products with his board of directors (of which I’m one), he can only be described as wildly excited, genuinely thrilled to share his innovations and to see the reactions. Clearly, designing BlackBerrys makes him happy.

  Born in Turkey to Greek parents, Lazaridis was five years old and already fascinated by technology when he immigrated with his family to Canada in 1966. By 1984, Lazaridis was an electrical engineering student at the University of Waterloo, just a few credits shy of graduating. But his real passion was designing gadgets. He convinced his parents to lend him seed money to start a technology company and finally dropped out of the university when the fledgling start-up secured a contract with General Motors.

  Lazaridis started out making circuit boards and before long was generating more than $1 million in annual sales. One of his customers was Balsillie, who eventually left his job to help Lazaridis grow RIM into something even bigger. Lazaridis turned his attention to mobile communication devices. He’d learned about digital signal processing at the university, and combined with the expertise in surface-mount technology he’d gained from his circuit-board work, Lazaridis was convinced he could change the wireless communication marketplace, then entirely dominated by analog technology.

  He knew it was a ridiculously lofty goal. All the phone companies were massively invested in analog, while digital was in its infancy. Looking back, he says, “Digital had nothing going for it. It was complicated, it was expensive, it was bulky. Anyone who didn’t understand the future, and couldn’t see where digital signal processing was going to take us, thought this was ridiculous.” His prototype digital devices, he says, could be summed up quickly and derisively: “Three boards, packed with parts, battery lasts maybe fifteen minutes. What the hell is this crap?” 1

  Yet Lazaridis was convinced digital p
rocessing was the future, and that RIM could take the lead if it thought about innovation in a way that none of its peers did. It’s a philosophy that he maintains to this day. Product design, he says, “has to push the envelope to the point where it seems like you’re making a mistake.” He argues that you have to strive to make a leap far beyond what is possible at the moment. “It has to be audacious from a technical point of view,” he says. “When a little company in Canada decides to build a cellular radio and to build it better than the people who birthed cellular radio—notably Motorola and Ericsson at the time—that’s a big, audacious goal.”

  All the more reason to pursue it, figured Lazaridis and Balsillie. RIM entered the product market with an interactive two-way pager, but Lazaridis already believed that the growth of e-mail would make paging obsolete. He wanted to combine the flexibility of the wireless network with the relatively data-rich communication of e-mail, taking wireless communication beyond the character limits of text messaging. Making a logical leap to what might be, he hit on the idea of a personal digital assistant that would handle e-mail on the go. RIM’s signature product, the BlackBerry, was born.

  From its inception in 1984 to the launch of the BlackBerry in February 1999, RIM grew relatively slowly. Since the BlackBerry launch, RIM has grown explosively from zero subscribers and $50 million in revenue from its legacy pager products to more than 25 million customers and $11 billion in revenue by February 2009. 2 And the BlackBerry has become an indispensable aid to millions of people. Not for nothing is it nicknamed the CrackBerry.

  RIM took its first big mystery—how to provide wireless e-mail to corporate users—and drove it to a heuristic—the first primitive BlackBerry. RIM then drove that heuristic to an algorithm, serving corporate customers around the world through its carrier partners and its own proprietary network. It achieved massive scale and efficiency as it drove through the knowledge funnel. But it didn’t stop there.

  Lazaridis, who shifted from circuit boards to pagers to Black-Berrys, continually reexamined the original mystery and sought out new mysteries as well. “In a business,” he says, “no matter how good the process is, no matter how much you’ve got it down pat, no matter how much money you’re making, how efficient, you have to always go back and say ‘Is there something fundamentally wrong with the way we’re seeing the market? Are we dealing with incomplete information?’ Because that’s what’s going to get you: it’s not necessarily that some young whippersnapper’s going to come up with some better idea than you. They’re going to start from a different premise and they’re going to come to a different conclusion that makes you irrelevant.” By watching his competitors, Lazaridis had learned the danger of resting comfortably on existing heuristics and algorithms. “Motorola lost because it didn’t embrace the future,” he says. “It was too damn good at what it was doing.” Seduced by reliability, Motorola had stopped thinking like a designer.

  What Is Design Thinking Anyway?

  Design thinking, as a concept, has been slowly evolving and coalescing over the past decade. One popular definition is that design thinking means thinking as a designer would, which is about as circular as a definition can be. More concretely, Tim Brown of IDEO has written that design thinking is “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.” 3 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. The design-thinking organization applies the designer’s most crucial tool to the problems of business. That tool is abductive reasoning.

  Don’t feel bad if you’re not familiar with the term. Formal logic isn’t systematically taught in our North American educational system, except to students of philosophy or the history of science. The vast majority of students are exposed to formal logic only by inference and then only to the two dominant forms of logic—deductive reasoning and inductive reasoning. Those two modes, grounded in the scientific tradition, allow the speaker to declare at the end of the reasoning process that a statement is true or false.

  Deductive logic—the logic of what must be—reasons from the general to the specific. If the general rule is that all crows are black, and I see a brown bird, I can declare deductively that this bird is not a crow.

  Inductive logic—the logic of what is operative—reasons from the specific to the general. If I study sales per square foot across a thousand stores and find a pattern that suggests stores in small towns generate significantly higher sales per square foot than stores in cities, I can inductively declare that small towns are my more valuable market.

  Deduction and induction are reasoning tools of immense power. As knowledge has advanced, our civilization has accumulated more deductive rules from which to reason. In field after field, we stand on the shoulders of the giants who have come before us. And advances in statistical methods have furnished us with ever more powerful tools for reasoning inductively. Thirty years ago, few in a boardroom would have dared to cite the R2 of regression analysis, but now the statistical tools behind this form of induction are relatively common in business settings. So it is no wonder that deduction and induction hold privileged places in the classroom and, inevitably, the boardroom as the preeminent tools for making an argument and proving a case.

  Yet a reasoning toolbox that holds only deduction and induction is incomplete. Toward the end of the nineteenth century, American philosophers such as William James and John Dewey began to explore the limits of formal declarative logic—that is, inductive and deductive reasoning. They were less interested in how one declares a statement true or false than in the process by which we come to know and understand. To them, the acquisition of knowledge was not an abstract, purely conceptual exercise, but one involving interaction with and inquiry into the world around them. Understanding did not entail progress toward an absolute truth but rather an evolving interaction with a context or environment.

  James, Dewey, and their circle became known as the American pragmatist philosophers, so called because they argued that one could gain understanding only through one’s own experiences. Among these early pragmatists, perhaps the greatest of them and certainly the most intriguing was Charles Sanders Peirce. Peirce (rhymes with “terse”) was fascinated by the origins of new ideas and came to believe that they did not emerge from the conventional forms of declarative logic. In fact, he argued that no new idea could be proved deductively or inductively using past data. Moreover, if new ideas were not the product of the two accepted forms of logic, he reasoned, there must be a third fundamental logical mode. New ideas came into being, Peirce posited, by way of “logical leaps of the mind.” New ideas arose when a thinker observed data (or even a single data point) that didn’t fit with the existing model or models. The thinker sought to make sense of the observation by making what Peirce called an “inference to the best explanation.” The true first step of reasoning, he concluded, was not observation but wondering. Peirce named his form of reasoning abductive logic. It is not declarative reasoning; its goal is not to declare a conclusion to be true or false. It is modal reasoning; its goal is to posit what could possibly be true. (For further information, see “Why You’ve Never Heard of Charles Sanders Peirce.”)

  Whether they realize it or not, designers live in Peirce’s world of abduction; they actively look for new data points, challenge accepted explanations, and infer possible new worlds. By doing so, they scare the hell out of a lot of businesspeople. For a middle manager forced to deal with flighty, exuberant “creative types,” who seem to regard prevailing wisdom as a mere trifle and deadlines as an inconvenience, the admonition to “be like a designer” is tantamount to saying “be less productive, less efficient, more subversive, and more flaky”—not an attractive proposition. And it is a fair critique that
abduction can lead to poor results; unproved inferences might lead to success in time, but then again, they might not.

  Some abductive thinkers fail to heed Brown’s requirement that the design must be matched to what is technologically feasible, launching products that do not yet have supporting technology. Consider the software designers who inferred from the growth of the Internet that consumers would want to do all their shopping online, from pet supplies to toys to groceries. Online security and back-end infrastructure had not yet caught up to their ideas, dooming them to failure.