Any company dedicated to “starting from scratch, from a white page” needs a design thinker in the CEO’s office. The CEO need not be a product design guru, as Lazaridis is at RIM or as Laliberté was for many years at Cirque. Rather, the CEO needs to position himself, as Lazaridis and Laliberté do, as the guardian angel of the balance between reliability and validity in the company, building and protecting the organizational structures, processes, and norms discussed in the last chapter. There are multiple ways to play the role of chief design thinker; the key is to do it. It is a job no one else in the organization can take on.
Resisting Reliability
Recall that design thinking represents a fruitful balance between intuitive thinking and analytical thinking, between validity and reliability. The need for the CEO to function as the champion of design thinking arises from the tendency of companies to overweight toward reliability at the expense of validity as they grow.
As companies get bigger and more complex, coordinating their operations becomes more difficult. Senior management becomes more remote from daily operations. Instead of attempting to exercise judgment over a broader and broader domain, senior managers tend to create systems that substitute rules for executive judgment. Those systems—whether they are for budgeting, capital appropriation, product development, or other functions—rely on analytical reasoning. They extrapolate from the past to create plans, targets, and budgets for the future. Using the past as the key reference point is relatively simple and straightforward, allowing senior management to build systems to control an increasing number of regions, product lines, and distribution channels from a distance. The use of systems is seductive, as they both save time and reduce subjectivity. So it is no surprise that external actors, such as boards of directors and stock market analysts, pile on and ask for yet more systems and structures that promote consistency and predictability. The combined internal and external pressures reinforce the company’s reliability orientation.
So, too, do the backgrounds of most CEOs. In a reliability-oriented culture, employees are rewarded based on their ability to deliver on expectations. It makes sense then that the CEO’s path to the corner office is often paved with a stellar record of reliability. Traditionally, a disproportionate number of CEOs have risen through the finance function, where ensuring consistency, control, and predictability are the heart of the task. Of course, CEOs who rise through finance can go on to lead design-thinking companies, but to do so, they must recognize their own biases and step outside the structure that helped them become so successful—and to do so even as board members and Wall Street urge them toward ever more reliability.
As their companies grow, CEOs must consciously take on the role of validity’s guardian to counter the internal and external pressures toward reliability. They will have no template to follow, as champions of reliability do. The path of the reliability-biased CEO is clear: when faced with a decision about investing in something new and promising, but not in the current budget, just say no. Argue that if something cannot be planned and budgeted in advance, it is not worth doing. Make sure that all jobs have to be formally installed into the permanent structure of the company. And if a project does somehow get the go-ahead, pile it on top of the ongoing activities of someone with a permanent assignment or give it to someone who is unimportant, an underperformer, or on the way out. This way, the organization can read the signals: projects are not important. The CEO can continue to grant the highest status and compensation to those running the biggest businesses, even if they are highly stable algorithms that run like clockwork, and to devalue the tackling of wicked turnaround challenges by giving the managers assigned to them lower status and lower compensation. It is a time-honored formula for enshrining reliability atop the company’s hierarchy of values.
The signals the CEO sends establish the company’s norms. If the CEO reacts to a problematic constraint by complaining about it, treating it as immutable, and taking suboptimal actions that accept its continued existence, the rest of the company will quickly learn to accept constraints as enemies too powerful to defeat. The CEO who unfailingly demands that executives prove their innovative new ideas with airtight inductive or deductive logic reinforces the norm that these are the only legitimate forms of logic. The CEO who harshly punishes executives who champion innovations that fail, upbraiding them for not doing their homework, ensures that abductive logic will quickly be considered verboten.
The inclination toward reliability is stronger in some parts of the company than others. Typically, the farther the area is from the customer, the greater the reliability bias. Staff functions like finance, information technology, and human resources are farthest away from the customer, while line functions like sales or manufacturing are closer. Left to their own devices, staff functions can and do run roughshod over validity. “We’ve always done it this way,” becomes a magical spell that dead-ends innovation. “We need to have consistency across the entire organization” stops exploration in its tracks. And because the human resources department has a monopoly on its functions, resistance is futile. For internal functions, there is no real market discipline against an overreliance on reliability. The sales function, on the other hand, has beneficial, if sometimes painful, market discipline. A salesperson is the first to know when customers lose their taste for a product or service that has reliably and consistently sold well in the past. Sales will be the first function to argue for a valid proposition, because the reliable one no longer sells.
Multiple Paths out of the Mystery
If the CEO is not the organization’s guardian of the balance between reliability and validity, the long-run sustainability of the company is in question. The role really is that important. But there are lots of productive ways to play the position and play it well. One way to encourage design thinking to take root is to serve as the company’s chief designer. The CEO can create a design-friendly culture in large part by taking an active personal role in the design process. This is the Mike Lazaridis model. As the best engineer at RIM, he is ultimately responsible for the portfolio of BlackBerry product designs. His approach to design problems encourages a validity orientation throughout the company. At the other end of the continuum, the CEO can leave the actual design work to others and focus instead on building design-friendly organizational processes into the company, as A. G. Lafley did at P&G. Then there are James Hackett of Steelcase and Bob Ulrich of Target, nondesigners both, who built design-friendly organizational processes and norms into their companies in two distinct but successful ways. In doing so, they made their companies safe havens for design thinking.
Bringing Design Thinking in from the Outside
James Hackett took over as CEO of Steelcase in 1994 at the ripe old age of thirty-nine. Like Lafley, Hackett had not a minute of design training or background; he was a sales guy, an ex-football-star sales guy in fact. He was also the first nonfamily member to be CEO in Steelcase’s proud ninety-six-year history as a family-owned, private company. The largest and most prominent player in the office furniture market worldwide, Steelcase had a rich design heritage. It took root in the 1960s, when, as mentioned in chapter 5, the center of the furniture industry began to shift from western Michigan, home of Grand Rapids—based Steel-case, to the southeastern United States, where labor costs were much lower. To survive, the Michigan-based manufacturers had to focus on design-intensive office furniture. Steelcase, Herman Miller, and Haworth not only survived with this strategy but prospered when the corporate market embraced well-designed furniture at higher prices.
Despite its strong design heritage, Hackett could foresee that as Steelcase grew and went public (which it did in 1998), it could drift away from its tradition of inventing and reinventing the future. The demands for reliability from the board and Wall Street analysts would be hard to ignore or resist. To head off that possibility, he pondered how to instill design thinking into the fabric of his company. His answer came in the form of a longtime partner.
> Steelcase had developed a strong working relationship with California-based industrial design firm IDEO. On the basis of its iconic designs, including the first commercial computer mouse and the first laptop computer, IDEO had grown into the country’s largest industrial design firm and, based on its lead in industry design awards, quite possibly the world’s best. In 1996, Hackett acquired IDEO and made it a wholly owned subsidiary of Steel-case. The purpose of this bold and somewhat controversial move was twofold. First, he wanted to make sure that the design-thinking culture that was so much a part of IDEO would directly influence the culture of the parent Steelcase. And he wanted to signal to his organization that as CEO, he placed a high value on project-based work, abductive reasoning, and a culture of solving wicked problems—the design-thinking attributes of IDEO.
The IDEO acquisition could easily have backfired. There are plenty of examples, across many different industries, of big traditional players acquiring the small innovative entities and then crushing the innovation that made them attractive in the first place. Consider EDS’s $600 million purchase of strategy consulting firm A.T. Kearney. EDS acquired Kearney in 1995 hoping that it would infuse the parent company with its creative strategy-making capability. Instead, Kearney’s best talent left within a few years, frustrated by the rigid structures, processes, and norms forced on them by their EDS overlords. In 2006, EDS sold Kearney back to management for a nominal price.
Hackett desperately wanted to avoid that outcome. He kept IDEO freestanding, reporting not to the CFO or some line executive but rather to him. IDEO was encouraged to maintain its own structures, processes, and norms, and to teach the Steelcase executives the power of design thinking through joint projects. Rather than wither away postacquisition, as many smaller creative shops tend to do, IDEO blossomed under Steelcase, retained and grew its stellar talent pool, and recently made an agreement to buy back majority control. Hackett acceded to the buyback because the highest priority for him was to foster the things that make IDEO special and to continue to develop the unique benefits those attributes conferred to Steelcase. A CEO who was also his firm’s leading advocate for validity, Hackett accomplished the task not by designing but rather by ensuring that the structure, processes, and norms of his firm balanced reliability with validity.
Creating a Design-Thinking Organization from Within
Then there is Bob Ulrich. In 2008, Ulrich quietly retired after more than twenty years as CEO in what most people would consider one of the dullest and dreariest industries in America: discount retailing. Close your eyes and imagine the typical discount retail store—vast suburban parking lots and characterless cinder-block buildings. Inside, cases of supersized products are stacked to the rafters, amid ramshackle bins of assorted knitwear. Smock-wearing staff members, when spotted, are sullen and unhelpful or painfully cheerful. In the background, droning Muzak is occasionally interrupted with staticky announcements of “special on dishtowels in aisle seven.” That was precisely the sort of retailer that Ulrich did not want to build. The discount retailer that he envisioned and brought to realization was Target (or “Tar-jhay” if you will) a chain that grew on his watch from 317 stores and $5.3 billion in sales in 1987 to more than 1,600 stores and $63 billion in sales in 2008, when he stepped down as CEO. Everything about Target is miles away from Walmart, the prototypical discount retailer. The difference is largely due to Ulrich’s leadership and vision. 5
In a rough and tumble, every-penny-counts industry in which reliability rules, Target—and Ulrich—marched to a different drummer. Ulrich saw to it that Target did not let reliability rule but rather maintained a balance between validity and reliability, constantly innovating where others doubled down on the past. And the big innovation that Ulrich and Target gambled on was embracing design as a competitive advantage.
Target began as a fairly traditional discount retailer, offering department store brands at reduced prices. Part of the Dayton Hudson family of stores, which also once included Marshall Field’s, Target faced a critical inflection point in the mid-1980s, just as Ulrich was named president of Target Stores. As Target was growing across the Midwest, Walmart was aggressively expanding into the region and beyond. In those days, Ulrich must have grown increasingly weary of hearing about the singular brilliance of Walmart. Walmart was so much bigger and more valuable than its rivals that discount retailing became known as a stereotypical “winner take all” market, where one firm is so strong that it slowly crushes every rival. In other words, Walmart was considered a category killer.
Walmart chose, then and now, to worship at the altar of reliability. It is all about the algorithm, from the look and feel of the stores, to the mechanics of the distribution system, to the approach of the buyers and merchandisers, to the strategy for expansion. It is not utterly impervious to innovation and change (for instance, its Supercenters now carry groceries), but the basic system is virtually unchanging, and the structure, processes, and norms work against staring into mysteries and developing new heuristics.
As Walmart began to encroach on Target’s traditional territory, Ulrich looked at the heuristics associated with retailing—notably the “pile it high and let it fly” merchandising strategy, the plan-o-grams, and other regimented algorithms that Walmart had adopted—and wondered if there was a better way. He stared into the mystery of how Americans want to shop and came to a new answer. Building on the insight that consumers want to feel good about where they shop, even when they shop at a discounter, he created a store designed around the customer experience.
Ulrich wanted Target to become the kind of place in which an affluent shopper might feel good about spending time. The layout of the stores, the branding, advertising, and merchandising all contributed to shaping the experience. Design became the watchword in all of these areas. The stores were reimagined, with clear sight lines, crisp graphics, and clean floors. The branding and marketing adopted a similar clean, crisp aesthetic, coupled with an irreverent tone to create a brand persona very much in keeping with the personae of the customers they sought. But the greatest single insight pertained to the merchandise. Ulrich believed that everyone, no matter their budget, would appreciate and value good design. His plan, then, was not to sell the cheapest goods at the rock-bottom prices, but to deliver well-designed products at a reasonable price point. The Target team went after renowned designers to create affordable versions of their products. Isaac Mizrahi, Philippe Starck, and Todd Oldham came on board, helping forge Target’s position as a designer chain, priced for the masses.
The Target slogan, “Expect More, Pay Less,” became a strategic filter for senior management’s decisions. Building a culture that Fortune magazine labeled “highly creative, yet tightly controlled,” Target has sought to balance validity and reliability across the business. 6 On the validity front, it has cultivated a creative cabinet—a rotating group of a dozen advisers of varying ages, interests, and nationalities—who are paid a retainer and asked to weigh in on new initiatives from a cereal box design to a new designer relationship. Target has also designed a budgeting mechanism in which year-to-year budgets are not based entirely on past performance. Instead, some portions of the budgets are distributed based on the unproved ideas and projects each department presents for the coming year. The most promising ideas get the most money. That structure has led to dramatic one-off Target experiences, like the temporary floating store installed on New York’s Hudson River at Christmas 2002. On the reliability front, it sought to redesign its own infrastructure and back-end processes to be more efficient, so that it could deliver competitive prices on the everyday, national-brand products, like Pepsi and Tide, on which it competed directly with Walmart.
While Walmart focused on a deeply ingrained algorithm, based on logistical excellence and market dominance that it used to strong-arm suppliers into delivering low prices, Target developed a new heuristic. “Walmart’s strategy is in many ways more simple than ours,” Ulrich said in 2008. “It’s more about price an
d more about mass quantities. It’s a hell of a competition, but ours is more dependent on innovation, on design, and on quality.” 7
The new heuristic has served Target well. By 2004, Walmart was beginning to bump up against the limits of reliability, and Target for the first time experienced higher same-store sales growth and higher sales per square foot than Walmart. Discount retailing was not, after all, a winner-take-all market. Two giants were duking it out, while two giants of an earlier time—Sears and Kmart, which contributed so much to discount retailing’s dreary image—withered away. Target stayed in the fight through continuous innovation, even as it grew to the scale necessary to become a worthy and meaningful competitor to Walmart.
The Design of Business: Why Design Thinking Is the Next Competitive Advantage Page 13