Business design for the visionary within

Roger Martin almost beats a fine idea into submission in this thought-provoking look at the importance of “design thinking” in business. But, as the recent travails of his own client case-studies shows, in large organisations, appeals to visionary thinking tend to fall upon deaf ears.

This is a short book with some big, and very good, ideas. It could have been yet shorter: I felt I’d got the concept from the first chapter, and thereafter Roger Martin does very little with it. This is partly because the idea is self-explanatory, and it’s something you’ll either take to instinctively (if you’re disposed to “design thinking”), or won’t, if you’re not.

Martin’s thesis, broadly stated, is that there are three main “phases” any business proposition:

• Mystery: when an intuition nags at an inventor: the germ of a problem (and, more to the point, its solution) suggests itself and there is no orthodox means for solving it - here is the maximum opportunity for those who can (think of a young Ray Kroc thinking “how do I build scale in my hamburger joint?”);
• Heuristic: when you’ve figured out a potential solution that does the job, but you don’t necessarily understand the full implications, possibilities and boundaries of your solution; and
• Algorithm: where you fully understand both the problem/opportunity and its solution, and you are able to commoditise and automate it and the only remaining question is efficiency. 

Roger Martin’s presentation is a convincing as far as it goes: I dare say the boundaries between the three phases are porous, and Martin is convincing that there is a reflexive quality to the propositions: the more they are solved, and the more the richness of an offering is stripped to its essential superstructure, the lower the barriers to competition, the slimmer the margins, and the more compelling is an entrepreneur’s need to look for some more mysteries to solve.

It won’t do, in other words, to solve your mystery, drive it down the “design funnel” as hard and fast as you can, and relentlessly and mindlessly tweak the algorithm to make it run faster. Your own behaviour, if successful enough, itself will present opportunities for others: witness MacDonald’s versus, say, Subway or Starbucks. 

MacDonald’s algorithm stripped away “extraneous” considerations like healthiness, “coolness”, freshness and so on. So Subway was able to differentiate itself on food quality, and Starbucks on the delightful hipness of actually visiting the store (it seems extraordinary in hindsight, doesn’t it!) MacDonald’s was forced by its competitors to reverse back up the funnel to consider other offerings.

The idea is intuitive and makes a lot of sense. Particularly in large organisations there is a tendency towards “backward looking” data, regression analyses and the tried and true: “no one ever got fired for buying IBM” was a truism when I was a youngster. But the passage of time illustrates the corollary of that truism as well: no-one revolutionised their business by buying IBM either. And that, says Roger Martin, is what design thinking makes possible.

“ ‘no one ever got fired for buying IBM’ was a truism when I was a youngster. But the passage of time illustrates its corollary: no-one revolutionised their business by buying IBM either.”

It is certainly my experience that large organisations tend to “reliability” rather than “validity” thinking, and are so keen on moving to algorithm stage that they are inclined to skip the “heuristic”.

So some gripes: Firstly for a short book with an attractive big idea, it was rather hard to keep focussed on it. Something about Roger’s writing style is disengaging. I’m not entirely sure what it is: partly I think he takes a simple idea and beats it to death with self-serving examples (there are extended case studies of Proctor & Gamble, Target, and Research In Motion, all of which he was closely involved with). RIM in particular seems a poor example: yes, they had a big idea and commoditised it (isn’t that what all successful businesses do?) but their subsequent performance has been underwhelming, as they’ve been unable to withstand the march of the smart phones, and while they’re still the dominant player in the business market, they seem to be slowly but surely withering on the vine in the consumer space. (Talk as I write is that RIM is all but a goner, simply awaiting takeover).

On the other hand, Roger’s take on the underlying philosophy of design and business development is polymath enough to take in pragmatists like Dewey and Charles Sanders Pierce. Being a fan of Richard Rorty and other post-modern philosophers this went down well with me: It is a solid basis for the common sense contained in the book: in a contingent, ironic and pragmatic universe, where priorities, economic conditions, consumer preferences and political orthodoxies change like the wind, big, fast, dumb, inflexible machinery seems like a poor suit to be long in. The relentless preference for algorithms (mechanical, reliable) over heuristics (logical, but requiring interpretation and judgment) seems so blindingly obvious that it’s a wonder so much of corporate enterprise is so blind to it. Then again, being a design thinker is not easy: translating your unorthodox point of view to an anally retentive business analyst requires powers of persuasion not all of us have (“use lots of analogies!” Martin cheerfully advises) and you wonder whether design thinking - utopian an idea though it might be - is one that will generally get nowhere near the beating heart of your average multi-national.

Pity.

On Bankers and Entrepreneurship

So I had a thought about entrepreneurship. Actually, two: the first was, "isn't it funny that entrepreneur - the very watchword of free market capitalism (and, indeed, the very word for free market capitalism - laissez faire) is, of all things, French?". But that was a parochial and borderline xenophobic thought, and I resile from it (whilst secretly finding it pleasing and quite funny).

But my other thought about entrepreneurship was more interesting. It was Bankers what made me think it. Currently, the furore is about overpaid bankers.

I have an interest in this furore because - after a fashion - I'm a banker. Not just any old banker, but the worst kind. An investment banker. Who is into derivatives and that stuff. I say "after a fashion", because I don't actually do derivatives: I just help other people do them. I used to be a banker proper, for a short while, but I decided it was less stressful and more rewarding just helping bankers, rather than actually, properly being one. That's because I'm not especially entrepreneurial - when push comes to shove, I would prefer regular, safe, income to putting that on the line in the gamble for success and a lot of money.

So I'm actually a lawyer, and I just work for a bank. But even though in my mind I'm not really banker, in most people's minds, I totally am. Being a banker, I go to quite a few dinner parties. And it's a bit uncomfortable having to admit I work in a bank. Often, I just lie.

I digress. Real investment bankers, so the theory goes, are entrepreneurs: risk takers: that's why they get paid so well. "You civil servants and teachers aren't putting everything on the line every day: you don't take huge economic risks: people's livelihoods don't depend on you," (I imagine teachers might disagree; but let's park that.) "You don't take as much risk as I do, so therefore your potential reward is commensurately lower."

Which is all fine, if you accept that Investment Bankers are huge risk takers. But the thing is, they're not.

Now I like bankers (well, some of them, as individuals: of course I don't like them unhesitatingly as a class): I work for them, I have done for more than a decade, and I expect to do so for a decade more.

But investment bankers only necessarily take risks with other people's money. That, to me, doesn't count as risk taking. It's not particularly entrepreneurial. Really, that's being rather safe, relying on steady income. It is true that many bankers do put their own capital on the line (in the form of share ownership in their own companies) but generally this will be limited to a small portion of their annual income (between 5 and 30%), and even the most sage investment banker won't put any more than he is contractually obliged to into his own company ("I am already very long on exposure to this bank," he will say, "for I rely on it to pay may wage, and I already have 15% of my income in its stock. It is not wise, economically, to concentrate my investment portfolio by increasing my exposure to this bank. And if there's one person I know who's economically wise, it's me. I'm an investment banker (did I mention that?)".

So investment bankers tend to invest their savings in enterprises other than their own employer.

So when an investment goes horribly wrong for an investment banker, what happens? Does he lose his house and all his possessions?

I hope you won't be disappointed to hear that the answer is "no". Even if things go so disastrously wrong for the Banker that, Nick Leeson style, he manages to bankrupt his entire company, his loss is limited to his future earnings. Stuff that's already in the bank stays there. No one has a claim over his house or his Maserati Quattroporte. (Even if they otherwise would, do you think he wouldn't have had his financial adviser put his assets somewhere they can't be reached?).

This is known in the game as being long a call. Owning a call means that, if the value of the asset you have a call on goes above a pre agreed price, you get the right to "call" it - meaning buy it for that agreed price. Since, by definition, it's worth more than the price you buy if for, you make an instant profit, because you can immediately sell if for more money than you bought it for. If it goes down, you just don't exercise the option to call it. No loss. Except for the price you paid for the right to call in the first place.

A call, in legal parlance, is a right with no accompanying obligation. Note that employees don't pay (as such) for their calls: indeed they are paid for them. The "consideration" an employee gives for the call is his or her time: he or she has to show up, and do the employer's bidding to the exclusion of all else.

A call, by the way, is a sort of derivative.

Entrepreneurs, on the other hand don't just buy calls. Because they own the equity in their company, they take full exposure to gains and the losses of the business. If it goes up, they take the profits. If it goes down, they suffer the losses (because the equity capital, which they own, has decreased in value).

Entrepreneurs,therefore, buy a call and sell a put. (Selling a put is the opposite of buying a call - it means giving someone else the right to sell an asset to you at a pre-determined price. If the asset drops below that price the put holder will always exercise his or her put, and so this is an obligation without an accompanying right.

Bankers don't have that. So should they be paid as if they do?