The Design of Business

"[...] the business that creates value only through exploitation will exhaust itself in due course. It can't keep exploiting the same piece of knowledge forever." - Roger Martin

INTRODUCTION

The core of The Design of Business is a theme I'm obsessed with: how do organizations become and stay innovative (and the many challenges in doing so).

In 175 pages or less, Martin introduces:

The three types of logic: Deductive, Inductive and Abductive. He does so as the foundation for the main argument that to succeed longterm, organizations need to effectively blend all three.
The Knowledge Funnel: comprised of three stages (mystery, heuristic, algorithm). The objective of a firm that seeks longevity is to explore & exploit knowledge through this funnel as efficiently as possible.
Design Thinking & Integrative Thinking: similar in many ways, the Design Thinker (Abductive & Integrative) sits between Deductive Thinkers and Inductive Thinkers to help navigate the innovative path that is the Knowledge Funnel.

And more. Well worth the read.

TAKEAWAYS

I've reordered and added to these takeaways. For a chronological ordering of the core insights - see my original Thread here.

FUTURENATIVE - THINK BETTER. BUILD BETTER.

I very occasionally send out an email recapping some thoughts, learnings and ideas typically centred around a thesis & approach I call being “FUTURENATIVE”.

In short, the thesis states: FUTURENATIVE individuals and organization find a unique way to leverage apparent tensions and blend both discovery & execution work, in order to unlock massive impact.

You can sign up here to learn more:

GENERAL

The master who never tries to think in novel ways keeps seeing the same thing the same way. [...] By the same token, originality without mastery is flaky, if not entirely random. The power is in the combination.
The most successful businesses in the years to come will balance analytical mastery and intuitive originality in a dynamic interplay that I call design thinking. Design thinking is the form of thought that enables movement along the knowledge funnel, and the firms that master it will gain a nearly inexhaustible, long-term business advantage.
CEOs must learn to think of themselves as the organization's balancing force the promoter of both exploitation and exploration, of both administration and invention.
[...] the business that creates value only through exploitation will exhaust itself in due course. It can't keep exploiting the same piece of knowledge forever.
The path taken by the McDonald's and Kroc--from pinpointing a market opportunity to devising an offering for that market to codifying its operations is not just a study in entrepreneurship. It's a model for how businesses of all sorts can advance knowledge and capture value. My term for that path is the knowledge funnel.
In every phase of McDonald's operations, judgment was removed, possibilities were removed, and variety was removed.
These two models seem utterly incommensurable; an organization must choose to embrace either analysis or intuition as the primary driver of value creation. This choice then plays out in the structure and norms of the organization. Organizations dominated by analytical thinking are built to operate as they always have; they are structurally resistant to the idea of designing and redesigning themselves and their business dynamically over time. They are built to maintain the status quo.
The ultimate destination of algorithms as of the late twentieth century is computer code. Once knowledge has been pushed to a logical, arithmetic, or computational procedure, it can be reduced to software.
Remember that as an idea moves through the funnel, information is shaved away. Some of that seemingly extraneous information can in fact prove crucial to the solution of the next mystery.
The average manager has been trained and rewarded to look to the past for proof before making the big decisions.
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.
Such organizations inevitably come to see maintenance of the status quo as an end in itself, short-circuiting their ability to design and redesign themselves continuously.
As long as the talent keeps its heuristic shrouded in priestly secrecy, it can bargain successfully for a bigger share of the value it creates. [...] These heuristic-running high priests create a big bottleneck in the middle of the knowledge funnel, blocking the movement forward to algorithm.
But a heuristic takes advanced skill and judgment to operate. The operators of the heuristic form a cognitive elite in their organization, highly valued for their skill, training, and experience in applying the heuristic. But the organization pays a high cost for their elite capabilities. Driving down those costs provides the motivation for applying abductive reasoning once again, toward moving knowledge to the next stage the algorithm.
Some algorithms sit unrecognized and unexploited because they're run by people, not computers.
Designers produce prototypes for feedback, but managers are accustomed to delivering final products.
[...] 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. The team uncovers problems and fixes them in real time, as the process unfolds.
A tough design challenge could be one of the best retention tools a company today has for its best innovators.
Skills and sensitivities tend to grow and deepen in concert. As you repeat a task, you are inclined to build what you learned from the repetition into the next iteration until you develop a consistent technique. An improved technique sharpens your skill, making you faster and more accurate.
Personal knowledge develops as a system because its three elements influence one another. Stance guides tool acquisition, which in turn guides the accumulation of experience. The flow, however, is not one-way. Experiences inform the acquisition of more tools. As experience leads us to acquire new tools, we add depth and clarity to our stance.
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.
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.

ON INNOVATION

Innovation is about seeing the world not as it is, but as it could be. It's about exploring really "wicked problems" whose solutions can't be found in past experience or proven by data.
The main roadblock is the corporate tendency to settle at the current stage in the knowledge funnel.
The conventional ways of thinking [about organizing big companies are not up to this new challenge they] produce organizations that are extremely good at doing predictable things, but terrible at responding well to change.
To exploit that opportunity, a company can choose to redeploy the personnel who successfully tackled the last mystery and advanced knowledge along the funnel. By putting these resources to work on new mysteries, the company both defends its current position and goes on the offensive by exploring new opportunities.
Very few companies balance exploration and exploitation by continuously looking back up the knowledge funnel to the next salient mystery (or back to the original mystery) and driving across the knowledge funnel, in a steadily cycling process.
Product design, he says [Lazaridis], "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,"
“They weren't betting on the future," says Lazaridis. "They were betting on their engine their low-cost, high-volume, global supply chain juggernaut. They were missing the point. There will be no feature phones in the future. It will all be smart phones.”
Delving into mysteries is the most expensive activity along the knowledge funnel, because you literally don't know what you are doing. [...] When first encountering a mystery, design thinkers have to look at everything, because they don't yet know what to leave out. The danger is that what's omitted might be the key to the mystery. [...] Mysteries, then, 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.

ON DESIGN THINKING

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 a what a viable business strategy can convert into customer value and market opportunity." 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 thinker, in the words of novelist Saul Bellow, is "a first-class noticer." [...] They build their capacity for the unique configuration of designs that transform their insights into viable business offerings.
"Design thinking" focuses on accelerating the pace at which knowledge advances from mystery (an unexplainable problem) to heuristic (a rule of thumb that guides us toward a solution) to algorithm (a replicable success formula).
Design-thinking firms stand apart in their willingness to engage in the task of continuously redesigning their business. They do so with an eye to creating advances in both innovation and efficiency - the combination that produces the most powerful competitive edge
The answer lies in embracing a third form of thinking - design thinking - that helps a company both hone and refine within the existing knowledge stage and generate the leap from stage to stage, continuously, in a process I call the design of business.
The design thinker can add abductive logic to the reasoning repertoire to drive the organization through the knowledge funnel.
Design thinking powers the design of business, the directed movement of a business through the knowledge funnel from mystery to heuristic to algorithm and then the utilization of the resulting efficiencies to tackle the next mystery and the next and the next. The velocity of movement through the knowledge funnel, powered by design thinking, is the most powerful formula for competitive advantage in the twenty-first century.
To become a design thinker, you must develop the stance, tools, and experiences that facilitate design thinking. Stance is your view of the world and your role in it. Tools are the models that you use to understand your world and organize your thinking. Experiences are what build and develop your skills and sensitivities over time.
The design thinker has a stance that seeks the unknown, embraces the possibility of surprise, and is comfortable with wading into complexity not knowing what is on the other side.
The key tools of design thinkers are observation, imagination, and configuration.
[…] the design thinkers need to develop their skills in helping […] to design right-sized experiments that productively turn the future into the past.
Integrative thinking - the subject of that book - and design thinking have much in common. Integrative thinking is the metaskill of being able to face two (or more) opposing ideas or models and instead of choosing one versus the other, to generate a creative resolution of the tension in the form of a better model, which contains elements of each model but is superior to each (or all). Design thinking is the application of integrative thinking to the task of resolving the conflict between reliability and validity, between exploitation and exploration, and between analytical thinking and intuitive thinking. Both ways of thinking require a balance of mastery and originality.

ON LOGIC & THE KNOWLEDGE FUNNEL

Its competitive advantage isn't based on cost leadership or differentiation or a particular resource. The basis of advantage is its speed of movement through the knowledge funnel, which produces perpetual advantage in both cost and innovation.
New ideas came into being, Peirce posited, by way of "logical leaps of the mind." New ideas arose when a thinker a observed data (or even single data point) that didn't fit with the existing model or models.[...] The true first step of reasoning, he concluded, was not observation but wondering. Peirce named his form of reasoning abductive logic.[...]It is modal reasoning; its goal is to posit what could possibly be true.
The 3 phases of the Knowledge Funnel:

i) The route out of a mystery begins with a hunch. Hunches are prelinguistic intuitions.
ii) Heuristics are different from hunches in that they are explicit: they bring intuitions to language.
iii) Algorithms are certified production processes. They guarantee that, in the absence of intervention or complete anomaly, following the sequence of steps they embody will produce a particular result.

[...] organizations that creates value across the knowledge funnel-requires two very different activities: moving across the knowledge stages of the funnel from mystery to heuristic and heuristic to algorithm and operating within each knowledge stage of the funnel by honing and refining an existing heuristic or algorithm.
"the basis of thought is analytical thinking, which harnesses two familiar forms of logic-deductive reasoning and inductive reasoning to declare truths and certainties about the world. The goal of this model is mastery through rigorous, continuously repeated analytical processes.
The opposing school of thought, [...] is centered on the primacy of creativity and innovation. [...] At the heart of this school is intuitive thinking the art of knowing without reasoning. This is the world of originality and invention.
management theorist James March, who posited that organizations may engage primarily in exploration, the search for new knowledge (in our terms, seeking movement across the knowledge stages), or exploitation, the maximization of payoff from existing knowledge (refinement within a knowledge stage).
As such, abductive logic sits squarely between the past-data driven world of analytical thinking and the knowing-without reasoning world of intuitive thinking.
The problem is with the long term. For the company to prosper - or even survive - in the long term, it needs a steady stream of insights to push through the knowledge funnel. Only then will it gain the efficiencies that fund the exploration of new mysteries.

FUTURENATIVE - THINK BETTER. BUILD BETTER.

I very occasionally send out an email recapping some thoughts, learnings and ideas typically centred around a thesis & approach I call being “FUTURENATIVE”.

In short, the thesis states: FUTURENATIVE individuals and organization find a unique way to leverage apparent tensions and blend both discovery & execution work, in order to unlock massive impact.

You can sign up here to learn more: