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

by Roger L. Martin

  Another costly impediment to design thinking is the widespread corporate tendency to leave heuristics in the hands of highly paid executives or specialists with knowledge, turf, and paychecks to defend. If they were to advance the heuristic in their heads to the algorithm stage, the company could break the specialist’s information monopoly and hand the job to a less costly employee. To them, design thinking might well be seen as a threat to be beaten back.

  Another common corporate error is to settle at the algorithm stage without refining that algorithm to code. Some algorithms sit unrecognized and unexploited because they’re run by people, not computers. For example, the duties of a manager of a retail store might include preparing the weekly staffing schedule. Making up the schedule entails following strict rules involving a handful of variables and little or no individual judgment. A piece of software could do the job just as well or even better, a fact recognized by such companies as Workbrain and Blue Cube, which automate scheduling for retailers. There are plenty of other recent examples of clerical algorithms being pushed to code and saving incalculable person-hours of mindless work. But the impetus for that work is coming from the supply side, from outside software vendors who perceive what their clients do not: they’re using costly labor to run algorithms that could easily be pushed to code.

  By clinging stubbornly to one stage of the knowledge funnel, companies squander opportunities to become more efficient in delivering what they are currently delivering. And the overriding emphasis on a single stage crowds out the time and energy needed to explore new mysteries and fashion new heuristics. This sedulous and usually unexamined loyalty to the status quo undercuts the company’s best efforts at innovation.

  The design-thinking organization, in contrast, reaps the benefit of efficiency as it pushes activities through the knowledge funnel and frees up time and capital to tackle the next knowledge-advancement challenge. But it takes special leadership to stare down the capital markets and do what is necessary to promote the company’s long-term health and vibrancy. Chapter 4 explains how, as chairman and CEO of Procter & Gamble, A. G. Lafley managed to convert a tradition-bound, publicly traded company into a design-thinking organization, driven to push knowledge as far and fast as possible, and how he won over a skeptical analyst community in the process. Chapter 5 highlights the way in which an organization’s structure, processes, and norms can help or hinder design thinking. Chapter 6 discusses the ways in which leaders can act as guardians of validity to protect their companies against the tendency to let knowledge settle at its current stage.

  CHAPTER 4

  Transforming

  the Corporation

  The Design of Procter & Gamble

  PROCTER & GAMBLE (P&G), the world’s largest consumer packaged-goods company, spent most of the 1990s in a restructuring mode. It actively acquired new businesses, diligently pursued cost-cutting measures, and reorganized its business around products rather than geography. It bought and sold businesses, closed plants, and shuttled executives to new positions in the company. By January 1999, it had a new CEO in place and was ready for the challenges of the new century. Or so it seemed.

  Instead, by spring 2000, P&G was facing perhaps the greatest crisis in its 165-year history. CEO Durk Jager had spent several months embroiled in a complex but ill-fated potential merger with drug companies Warner-Lambert and American Home Products (now Wyeth). A friendly takeover offer for Gillette was quickly rebuffed. In March, with its core business in decline and acquisitions slowing down, P&G was forced to warn investors that it would suffer its first quarterly profit decline in eight years. In response, the stock, which had already fallen from a cyclical peak of $116 in January to $86, fell by 30 percent, to less than $60 a share, in a single day. 1

  The headlines in the business press that spring told the story: “Procter and Gamble Awash in a Sea of Selling,” 2 “Trouble in Brand City,” 3 “Investors Agonize over P&G Stock Slip; Analysts: Recovery Could Take 3 Years.” 4 Investors—and employees—had good reason for their loss of confidence. Revenue growth at the $40 billion company had slowed to a measly 3 percent to 4 percent a year, profit had stagnated, and seven of ten of P&G’s biggest billion-dollar brands were losing market share.

  Worse, the decline was accelerating. By June, P&G’s fiscal year-end was looming and so was yet another profit warning. The company’s performance was deteriorating so quickly that the dramatically scaled-back targets set just three months earlier were already far out of reach. Wall Street had long set its watch by P&G’s earnings; suddenly, analysts could no longer rely on the company’s forecasts, and the Street took its frustrations out on P&G’s stock. P&G shares stalled around $60; analysts scorched management in their reports and downgraded their recommendations. P&G, they said, was no longer a sure bet for long-term growth.

  P&G’s board had seen enough. For the first time in the company’s storied history, directors fired the chairman and CEO. As they considered Jager’s successor, directors saw one obvious candidate: A. G. Lafley, who had recently returned from a successful assignment running the Asia-Pacific business to head both the North American region and the global beauty business. Directors worried that Lafley, then fifty-three, needed several years more seasoning. But P&G was a promote-from-within company; there were no other compelling internal candidates, and it would be almost unthinkable to bring in an outsider, no matter how deep the crisis. So, on June 8, 2000, the board appointed Lafley as CEO. To ease their concerns about Lafley’s relative youth and inexperience, directors asked Jager’s predecessor, the capable and popular John Pepper, to come out of retirement and serve as chairman for Lafley’s first two years. The headline in P&G’s hometown paper, the Cincinnati Enquirer, read, “Bruised P&G Turns to New, Old Leaders.”

  Investors remained wary. P&G stock fell $4 to $57.50 on the day Lafley’s promotion was announced and fell below $55 by the end of June. In less than six months, P&G had dropped from the twenty-first largest company in the world, as measured by market capitalization, to fifty-first, just over one-third the value of Walmart, its biggest customer. 5

  Shareholders, analysts, employees, and retail customers were unhappy, and they were all looking expectantly at Lafley. He recognized that at the heart of their discontent lay a single, disturbing trend: P&G’s value equation—the value P&G created for consumers relative to the cost of creating that value—was becoming increasingly unfavorable. The company was introducing fewer and fewer successful new products and brand extensions, and was taking longer and longer between introductions. Meanwhile, P&G’s costs, especially in research and development—were soaring. P&G’s faltering pace gave Lafley’s immediate customers—big global retailers like Walmart and Tesco—an opening, which they were quick to seize. They aggressively courted shoppers with their own in-house, private-label products, hoping to persuade them to switch from P&G’s more expensive, branded offerings. The push was successful; as Lafley studied the competition reports, he could plainly see that private-label brands were taking market share from P&G in many categories.

  Lafley knew there was only one way to win back straying shoppers and convince others not to leave the reservation: P&G had to become more innovative, so that customers would be willing to pay a premium for P&G products. But innovation could not come at any cost. The expense side of the value equation also had to be addressed. P&G needed to become more efficient, so that it could charge a lower premium to customers and still keep shareholders happy with steady growth in profits and margins. There was just one problem: conventional business thinking said that a company could have innovation or it could have efficiency, but not both at once. There was, according to the received wisdom, always a trade-off.

  Although he was a rookie CEO, Lafley was prepared to take bold action to pull P&G out of its downward spiral. Design thinking, he believed, offered a way out of the trade-off between innovation and efficiency. He committed to turning P&G into a design organization, beginning with his senior leadership team. I
n 2001, only a year into his tenure, he appointed Claudia Kotchka as the corporation’s first-ever vice president for design strategy and innovation. Her mandate was to build P&G’s design capability and act as the corporation’s champion of design thinking. (See “Building a Design-Thinking Organization from Within.”)

  Building a Design Thinking Organization

  from Within

  by Jennifer Riel

  The first time A. G. Lafley offered Claudia Kotchka the job of heading up P&G’s design initiative, she turned him down flat. In fact, when he approached her again a few months later, she turned him down a second time. Kotchka had reason to say no. She had recently launched Tremor, a new word-of-mouth marketing initiative within P&G, and did not feel ready to let it go. And she was wary. She knew that creating a design-thinking organization would be a major effort, and she wondered if the newly minted CEO would have the time to devote to it: “He had a lot on his plate, so I just didn’t think this would be a priority. I knew that if it was not a priority for him, it was never going to happen. It was just too big an effort.” 6

  But by September 2001, when Lafley came to Kotchka for the third time, she could see that he was truly serious about embedding designing into the DNA of P&G. “I knew he had decided it was critical. The question that I asked him was, ‘What’s your vision for the company, and how does this fit in?’ That was what I needed to know,” Kotchka explained. Lafley replied that he planned to leave five legacies by the end of his tenure as CEO. Design was one of them. Kotchka thought, “Okay, if this is one of the five important things for him to leave the company, it’s a big enough change that I will absolutely take it on.”

  Some questioned why Lafley had handpicked Kotchka for the task; she was a proven performer and dynamic internal entrepreneur, but absolutely not a designer in her own right. Lafley wanted Kotchka for the balance she struck between business and design. As he explained to her, “In order to do this, I need someone who can speak both languages—the language of design and the language of business.” Lafley understood that credibility with the business folks would be essential, but so would an ability to understand designers, to know what makes them tick and how to apply their skills to business. Kotchka, who was trained as an accountant but who had been drawn to design as she took on corporate marketing roles, was the perfect fit.

  Embedding design into a company as big as P&G, and one with such a strong and defined culture, was a massive challenge. “A. G. had always been a believer in design,” Kotchka said, “but the company, I would say, had not.” Reflecting on her time as P&G’s design czar, a role from which she has recently retired, she laid out several key steps needed to bring design into an organization:

  Set expectations clearly up front and get your boss on board

  The first thing Kotchka did when she finally accepted the job was to draw up a contract with Lafley, outlining what she could do, what she could not, and what she would need from him to make it happen. The contract, Kotchka said, was invaluable: “Getting very clear with him in what I could accomplish, how long it would take, was probably one of the smartest things I did. We had a very clear plan of what I was going to do and what he was going to do, and that paid dividends later.”

  In her view, the most important thing to agree on was where to begin. Kotchka was adamant that she needed to start in the areas of the company where there was an existing interest in design thinking, rather than in the areas of greatest need: “I said, ‘I’m going to start where there’s suction. I can’t force design on some business that doesn’t want it.’ ” Lafley ultimately agreed.

  Kotchka also got early agreement on the time line. She studied the path that Dutch electronics giant Philips, an acknowledged design leader, had taken to transform itself from a manufacturing company into a consumer-centric design organization, and concluded that it would take P&G about the same amount of time. “It took them ten years, so I told [Lafley] that. I was very clear about the fact that this was the kind of time line we were looking at. He said do it in five,” she said with a laugh. “But at least we were clear it wasn’t going to happen overnight.”

  Get help (you’ll need it)

  Kotchka turned to outside experts like IDEO, her external design board, and a trio of deans (Roger Martin, Patrick Whitney, and David Kelley) to supplement her own skills and expertise, but she also hired the best design talent she could find. Unfortunately, she needed senior talent, and P&G’s recruiting apparatus was set up to hire new graduates straight out of college. “It takes at least ten, maybe fifteen years to really get mastery in design,” she said. Kotchka didn’t have the time to start from the bottom; she needed to import some expertise. In the end, she broke with P&G custom and used outside recruiters to help find that talent.

  Expect some speed bumps

  Well aware of the difficulty of creating a design organization within P&G, Kotchka was nonetheless surprised by some of the challenges that popped up along the way. The corporate culture at P&G was not set up to support design thinking, and she needed to work long and hard to adapt the internal systems to work for her designers. Everything from the recruiting process to the physical work environments to the way in which market research was conducted needed to change in order to allow design to take hold in the organization. “Everything,” she said, “was designed against us.”

  Don’t try to talk about it.Just demonstrate it.

  Kotchka found that the importance of design and its transformative effects could not be explained, only experienced. To illustrate her point, she cited market research, a traditional strength of the company, with traditional practices. For years, P&G had sworn by focus groups. Designers, on the other hand, prefer to go deeper than a focus group allows, spending time one on one with users to better understand their needs. To move in that direction, Kotchka had to slowly validate the new approach over the course of a few years. She would send senior executives out with designers to experience firsthand how a designer observes, questions, and probes the hidden dimensions of the user experience. Over time, by seeing up close how design thinking yields new insights, the executives came to embrace it. “Everything we’ve done has been about demonstrate, demonstrate, demonstrate,” Kotchka said, summing up. “They’ve got to see it; they’ve got to experience it.”

  Kotchka set out to build a design function within the organization, assigning designers to sit on the business teams. Her decision to embed designers in the business units was unusual; most other companies centralized the design function. Kotchka felt very strongly that, at P&G, it was essential to have designers sitting inside the core business teams rather than segregated in a central staff function. Her goal for design, she said, was “to really embed it in the culture, not just have a new design function. I needed people in the business units, sitting in the business units every single day, in order to make that happen.” Kotchka said that the decision, questioned at the time and utterly unprovable in advance, was one of her most important strategic choices: “They’re definitely part of the business team, and that was our goal. We wanted a seat at the table. We wanted design to be sitting on the leadership team, wherever decisions get made, and have a voice. And we wanted the business units to really understand design, participate in design, and not see it as a black box.”

  To help P&G better understand design, Kotchka also reached outside the organization to build a network of design experts. She created an external design board made up of world-class designers such Tim Brown, CEO of IDEO; John Maeda, president of the Rhode Island School of Design; and Ivy Ross, Gap’s executive vice president of marketing. While the board does review P&G’s designs, it is also a key sounding board for the business teams. Teams come to the board for help in thinking through intractable problems or for review and critique of preliminary solutions. The external board works, Kotchka said, because members are not pursuing a personal agenda and have no legacy to protect when they turn their minds to P&G’s dilemmas. In addition to the design board, Kotchka
built close working relationships with several outside design agencies, particularly with David Kelley and Tim Brown of IDEO. In 2003, Lafley took his entire thirty-five-person Global Leadership Team to the IDEO offices in San Francisco for a day and a half of immersion in design thinking that Kotchka said illustrated clearly that “design is not about making things pretty: Lafley’s leadership team really got to experience design thinking for the first time.”

  Experience, Kotchka felt, was the key. Once P&Gers, from the senior team down, got to experience design thinking, they would be converted. The question was how to create an experience that could be accessed by tens of thousands of employees around the world.

  Building Design into the Company’s DNA: DesignWorks

  Kotchka wanted an intervention that would encourage and facilitate P&G’s category leadership teams to really engage in design thinking to solve problems. For help, she turned to three deans: David Kelley of the Hasso Plattner Institute of Design at Stanford (aka the d. school) and also cofounder of IDEO; Patrick Whitney of the Institute of Design at the Illinois Institute of Technology; and me, from my perch at the Rotman School of Management in Toronto.

  In 2005, as a group, we began discussions about creating a comprehensive program that would provide practical experience in design thinking to P&G leaders. We believed that design thinking for business broke down into three essential components: (1) deep and holistic user understanding; (2) visualization of new possibilities, prototyping, and refining; and (3) the creation of a new activity system to bring the nascent idea to reality and profitable operation.