Distortions and deceptions in strategic decisions 04-26

Companies are vulnerable to misconceptions, biases, and plain old lies. But not hopelessly vulnerable.
          
The chief executive of a large multinational was trying to decide whether to undertake an enormous merger—one that would not only change the direction of his company but also transform its whole industry. He had gathered his top team for a final discussion. The most vocal proponent of the deal—the executive in charge of the company's largest division—extolled its purported strategic advantages, perhaps not coincidentally because if it were to go through he would run an even larger division and thereby be able to position himself as the CEO's undisputed successor. The CFO, by contrast, argued that the underlying forecasts were highly uncertain and that the merger's strategic rationale wasn't financially convincing. Other members of the top team said very little. Given more time to make the decision and less worry that news of the deal might leak out, the CEO doubtless would have requested additional analysis and opinion. Time, however, was tight, and in the end the CEO sided with the division head, a longtime protégé, and proposed the deal to his board, which approved it. The result was a massive destruction of value when the strategic synergies failed to materialize.

Does this composite of several real-life examples sound familiar? These circumstances certainly were not ideal for basing a strategic decision on objective data and sound business judgment. Despite the enormous resources that corporations devote to strategic planning and other decision-making processes, CEOs must often make judgments they cannot reduce to indisputable financial calculations. Much of the time such big decisions depend, in no small part, on the CEO's trust in the people making the proposals.

Strategic decisions are never simple to make, and they sometimes go wrong because of human shortcomings. Behavioral economics teaches us that a host of universal human biases, such as overoptimism about the likelihood of success, can affect strategic decisions. Such decisions are also vulnerable to what economists call the "principal-agent problem": when the incentives of certain employees are misaligned with the interests of their companies, they tend to look out for themselves in deceptive ways.

Most companies know about these pitfalls. Yet few realize that principal-agent problems often compound cognitive imperfections to form intertwined and harmful patterns of distortion and deception throughout the organization. Two distinct approaches can help companies come to grips with these patterns. First, managers can become more aware of how biases can affect their own decision making and then endeavor to counter those biases. Second, companies can better avoid distortions and deceptions by reviewing the way they make decisions and embedding safeguards into their formal decision-making processes and corporate culture.

Distortions and deceptions

Errors in strategic decision making can arise from the cognitive biases we all have as human beings. 1. See Charles Roxburgh, 'Hidden flaws in strategy,' The McKinsey Quarterly, 2003 Number 2, pp. 26–39. These biases, which distort the way people collect and process information, can also arise from interactions in organizational settings, where judgment may be colored by self-interest that leads employees to perpetrate more or less conscious deceptions (Exhibit 1).

Exhibit 1

Sources of error in strategic decisions

Distortions

Of all the documented cognitive distortions, over optimism and loss aversion (the human tendency to experience losses more acutely than gains) are the most likely to lead people who make strategic decisions astray, because decisions with an element of risk—all strategic ones—have two essential components. The first is a judgment about the likelihood of a given outcome, the second a value or utility placed on it.

When judging the likelihood of potentially positive outcomes, human beings have an overwhelming tendency to be overoptimistic or overconfident: they think that the future will be great, especially for them. Almost all of us believe ourselves to be in the top 20 percent of the population when it comes to driving, pleasing a partner, or managing a business. In the making of strategic decisions, optimism not only generates unrealistic forecasts but also leads managers to underestimate future challenges more subtly—for instance, by ignoring the risk of a clash between corporate cultures after a merger.

When probabilities are based on repeated events and can therefore often be well defined, optimism is less of a factor. But loss aversion is still a concern. Research shows that if a 50–50 gamble could cost the gambler $1,000, most people, given an objective assessment of the odds, would demand an upside of $2,000 to $2,500.

2. Daniel Kahneman and Amos Tversky, 'Prospect theory: An analysis of decision under risk,' Econometrica, 1979, Volume 47, Number 2, pp. 263–92. Overoptimism affects judgments of probability and tends to produce overcommitment. Loss aversion influences outcome preferences and leads to inaction and undercommitment. But the fact that overoptimism and loss aversion represent opposing tendencies doesn't mean that they always counteract each other.

Loss aversion wouldn't have such a large effect on decisions made in times of uncertainty if people viewed each gamble not in isolation but as one of many taken during their own lives or the life of an organization. But executives, like all of us, tend to evaluate every option as a change from a reference point—usually the status quo—not as one of many possibilities for gains and losses over time across the organization. From the latter perspective, it makes sense to take more risks. Most of the phenomena commonly grouped under the label of risk aversion actually reflect loss aversion, for if we integrated most gambles into a broader set, we would end up risk neutral for all but the largest risks. This truth has important implications for strategic decision making.

Deceptions

The strategic decisions that companies make result from interactions among their executives: a manager proposes an investment, for example, and an executive committee reviews and evaluates it. In this kind of setting, a conflict of interest often arises between an "agent" (in this case, the manager) and the "principal" (the corporation) on whose behalf the agent acts.

3. Michael C. Jensen and William H. Meckling, 'Theory of the firm: Managerial behavior, agency costs, and ownership structure,' in Michael C. Jensen, A Theory of the Firm: Governance, Residual Claims, and Organizational Forms, Cambridge, MA: Harvard University Press, 2001. Such "agency problems," which occur when the agent's incentives aren't perfectly aligned with the principal's interests, can lead to more or less intentional deceptions—misleading information provided to others—that compound the problem of the agent's unintentional distortions. Recall the CEO who was grappling with the big merger decision: trusting the protégé (the head of the largest division) exposed the CEO to the risk that the merger's proponent was not only overoptimistic but also attempting to further his own career by exaggerating the deal's upside or underestimating its risks.

When companies evaluate strategic decisions, three conditions frequently create agency problems. One is the misalignment of time horizons between individuals and corporations. Several consumer goods companies, for example, have noted that brand managers who rotate quickly in and out of their jobs tend to favor initiatives (such as introducing new product variants) with a short-term payback. These managers' deception, intentional or not, is to advance only certain projects—those aligned with their interests. The development of radically new products or other important projects with longer payback times can rarely succeed without a senior sponsor who is likely to be around longer.

Another problem that can generate harmful deceptions is the differing risk profiles of individuals and organizations. Consider a real-life example. A midlevel executive at a large manufacturing company decided not to propose a capital investment that had a 50–50 chance of either losing the entire $2 million investment or returning $10 million.

Despite his natural loss aversion, the chance of a 5:1 gain should have enticed him into accepting the bet, and his superiors, for the same reasons, would have deemed it attractive. Instead, he worried that if the investment failed, his reputation and career prospects would take a blow, though he didn't anticipate being punished if the investment was forgone. As a result, he decided not to recommend it and thus in effect acted deceptively by not promoting an attractive investment. This asymmetry between results based on action and inaction is called the "omission bias," and here it magnified the executive's loss aversion.

The final agency issue arises from the likelihood that a subordinate knows much more than a superior does about a given issue. Higher-ranking executives must therefore make judgments about not just the merits of a proposal but also their trust in the person advancing it.

This is unavoidable and usually acceptable: after all, what more important decision do CEOs make than choosing their closest associates?

The tendency, however, is to rely too much on signals based on a person's reputation when they are least likely to be predictive: novel, uncertain environments such as that of the multinational that went ahead with the megamerger. We call the tendency to place too much weight on a person's reputation—and thus increase the exposure to deception—the "champion bias."

Furthermore, the multinational's merger decision exhibited an element of "sunflower management": the inclination of people in organizations to align themselves with the leader's real or assumed viewpoint. The CEO had expected to find dissenting voices among his senior executives. But except for the CFO, they believed that the CEO favored the deal and that the merger would proceed no matter what they said and thus kept their doubts to themselves for fear of harming their careers. In effect, they misled the CEO by suppressing what they really thought about the deal.

Improving individual decisions

Knowing that human nature may lead decision making astray, wise executives can use this insight to fortify their judgment when they make important decisions. To do so, however, they must know which bias is most likely to affect the decision at hand. Exhibit 2 offers a road map for the types of decisions where overoptimism or excessive risk aversion will probably be the determining factor.

In general, the key to reducing overoptimism is to improve the learning environment by generating frequent, rapid, and unambiguous feedback. In the absence of such an environment—for instance, when companies face rare and unusual decisions, which, unfortunately, are the most important ones—there is a bias toward optimistic judgments of the odds. The size of a decision determines the appropriate degree of risk aversion. For major ones, a certain amount of it makes sense—nobody wants to bet the farm. For smaller ones, it doesn't, though it often prevails for reasons we'll soon explore.

Companies should see minor decisions as part of a long-term, diversified (and thus risk-mitigating) strategy.

As Exhibit 2 shows, companies don't always rationally factor risk into their decisions. In the large, infrequent ones (for instance, the industry-transforming merger that went horribly wrong) represented in the exhibit's upper-left quadrant there is a tendency to take an overly optimistic view. In essence, faulty judgments lead executives to take risks they would have avoided if they had had an accurate judgment of the odds. Since executives facing such a rare decision can't benefit from their own experience, they should learn from the experience of other companies by collecting case studies of similar decisions to provide a class of reference cases for comparison.

Conversely, excessive risk aversion is usually the dominant bias in the small but common decisions shown in the exhibit's lower-right quadrant: good learning environments temper optimism, and the human reluctance to bet—unless the potential gains are much bigger than the losses—comes to the fore. A key factor in such cases is the tendency of companies not to see individual projects within a stream or pool of similar undertakings. If companies did so, they would move closer to risk neutrality.

Instead they tend to evaluate projects in isolation, which leads them to emphasize a single project's outcome and thus to fear the losses. A complicating factor, as we have already noted, is the possibility that the decision maker expects to be blamed if an investment fails and thus has a more risk-averse attitude than might be rational for a company, which can pool comparable investments into an attractive risk-mitigating portfolio. Senior executives sometimes fail to compensate for this bias, as they could by encouraging a higher degree of risk taking in minor decisions, which are often made in lower levels of the corporate hierarchy.

The remaining two cases in the exhibit are relatively unproblematic. In large, frequent decisions—for example, a private equity firm's deliberations about a new investment or the construction of a new plant using existing technology—a significant degree of risk aversion is sensible and the frequency of the endeavors offers ample learning opportunities. In small, rare decisions optimism and loss aversion may counteract each other, and by definition this class of decision is comparatively unimportant.

Engineering better decision making

Organizations don't all suffer equally from distortions and deceptions; some are better at using tools and techniques to limit their impact and at creating a culture of constructive debate and healthy decision making. Corporate leaders can improve an organization's decision-making ability by identifying the prevalent biases and using the relevant tools to shape a productive decision-making culture.

Identifying the problems

Corporate leaders should first consider which decisions are truly strategic, as well as when and where they are made. Applying process safeguards to key meetings in formal strategic-planning exercises is tempting but not necessarily appropriate. Often the real strategic decision making takes place in other forums, such as R&D committees or brand reviews.

After targeting the crucial decision-making processes, executives should examine them with two goals in mind: determining the company's exposure to human error and pinpointing the real problems. A decision-making safeguard that is useful in one setting could be counterproductive in another—say, because it reinforces a high level of risk aversion by enforcing hard targets for new projects. An objective analysis of past decisions can be a first step: does the company often make overoptimistic projections, for example?

Tools against distortions and deceptions

Once companies undertake this diagnostic process, they can introduce tools that limit the risk of distortions and deceptions. One way of tempering optimism is to track the expectations of individuals against actual outcomes in order to examine the processes (such as sales forecasts) that underlie strategic decisions. Companies should review these processes if forecasts and results differ significantly. They can also provide feedback where necessary and show clearly that they remember forecasts, reward realism, and frown on overoptimism.

A more resource-intensive way of avoiding overoptimistic decisions is to supplement an initial assessment with an independent second opinion. Many companies try to do so by assigning important decisions to committees—for instance, the investment committees of investment firms. If the members have the time and willingness to challenge proposals this approach is effective, but committees depend on the facts brought before them. Some private equity firms address that problem by systematically taking a fresh look: after a partner has supervised a company for a few years, a different partner evaluates it anew. A fresh pair of eyes with no emotional connections can sometimes see things that escape the notice of more knowledgeable colleagues.

Loss aversion, magnified by career-motivated self-censorship of "risky" proposals, has its roots in explicit and implicit organizational incentives. Lower-level managers typically encounter more but smaller risks, so organizations can embed a higher tolerance for them in certain systems—for instance, by using different criteria for the financial analysis of larger and smaller projects.

Financial incentives also can be used to counter distortions and related principal-agent problems. Many companies, for example, find that operating-unit managers tend to optimize short-term performance at the expense of long-term corporate health, partly because their compensation is tied to the former and partly because they might well have moved on by the time long-term decisions bear fruit. Some companies address this problem through "balanced scorecards" that take both dimensions into account. Others tie compensation to the performance of an executive's current and previous business units.

Another technique is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or "next-best" ideas. This approach is useful not only to calibrate the level of a manager's risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.

Finally, the radical way of counteracting the loss aversion of managers is to take risk out of their hands by creating internal venture funds for risky but worthwhile projects or by sheltering such projects in separate organizations, such as those IBM sets up to pursue "emerging business opportunities." The advantage is that norms can change much more easily in small groups than in companies.

Fostering a culture of open debate

It is essential to realize that these tools are just tools. Their effectiveness ultimately depends on the quality of the resulting discussions, which can't be effective unless the organization has a culture of reasonably open and objective debate.

Shaping such a culture starts at the top, as one chief executive discovered. This CEO was eager to encourage debate on the strategic plans of his company's divisions but didn't want to put his direct reports under pressure by publicly challenging them himself. He therefore created a process intended to make all division heads challenge one another in open debate. These managers refrained from voicing any real dissent, however, so the result was a dull and pointless exercise. Later, they made it clear that they had seen no upside in challenging their peers, given the company's nonconfrontational culture and rigid organizational silos.

Although the CEO's experiment failed, he was on the right track. A CEO in a health care company ingeniously solved a similar problem by separating proposals from the proposers. Previously, strategic options for the company's future were closely identified with their most vocal proponents, so it was hard to conduct dispassionate debates.

Instead of having each executive present his or her favorite option, the CEO organized a senior-management seminar where he asked each person to advocate another's preferred strategy. Although everyone knew that the exercise was intentionally artificial, it helped foster rational debate instead of a battle of egos. More important, perhaps, it helped senior executives see the merits of other strategies and led the group to adopt a plan that synthesized aspects of several proposals.

One way to initiate a culture of constructive debate is for the CEO and the top team to reflect collectively on past decisions. A willingness to ask how they emerged—in effect, holding a conversation about conversations—shows that the company can learn from its mistakes.

Another prerequisite of good strategic decision making is the ability to "frame" conversations in order to ensure that the right questions get asked and answered. One key principle, for instance, is clearly distinguishing a discussion meant to reach a decision from one meant to align the team, to increase its commitment, or to support a project champion. This elementary but often overlooked distinction may also change the composition of the group that attends discussions intended to reach decisions.

Once it becomes clear that a meeting has been called to reach a decision, framing the discussion involves understanding the criteria for reaching it and knowing how far the range of options can be expanded, especially if the decision is important and unusual. Thus a well-framed debate includes a set of proposed criteria for making the decision and, when appropriate, an effort to demonstrate their relevance by providing examples and analogies. Some companies also set ground rules, such as the order in which participants voice their opinions or a ban on purely anecdotal arguments or on arguments that invoke a person's reputation rather than the facts.

---

Companies can't afford to ignore the human factor in the making of strategic decisions. They can greatly improve their chances of making good ones by becoming more aware of the way cognitive biases can mislead them, by reviewing their decision-making processes, and by establishing a culture of constructive debate.

D-STEM: Applying design thinking to STEM in academia and industry 07-02

D-STEM: Applying design thinking to STEM in academia and industry

At Inspirefest 2015, the topic of STEM (science, technology, engineering, arts and maths) kept cropping up as technologists, scientists and designers converged on the stage of the Bord Gáis Energy Theatre, Dublin.

This discussion was furthered during a panel on design thinking and its application in both academia and industry, led by Ciarán ÓGaora, founder and director of Zero-G, in association with Irish Design 2015.

In this discussion, IADT director Dr Annie Doona explained how students at the institute are introduced to new perspectives on design and technology, and how a fruitful partnership with IBM has brought separate disciplines together.

Prof Susan Schreibman, national co-ordinator of DARIAH Ireland, is based at Maynooth University and has overseen practical projects working at the intersection of technology and humanities, such as the digitisation of Ireland’s 1901 and 1911 censuses.

Prof Schreibman noted how interdisciplinary work such as has a lot to do with translation, and applying different modes of thinking. ‘Designers as translators’ was a concept introduced by Swrve director Kathryn Parkes, who sees user-centred approaches catching on in business through methodologies like lean start-up.

View at the original source

Design Thinking Students Co-designing Their Own School 07-01

Design Thinking Students Co-designing Their Own School 

The names of the children mentioned in this article have been changed to protect their privacy.
In order to inspire, motivate, and engage students in the learning experience, it is necessary to look at the world through their eyes. When adults pause and consider the world through from the students' perspective, we begin to examine their authentic needs, instead of the needs imposed upon them. Educational models that value and incorporate student input are emerging as empathic to students' needs.

In May 2014, students at The Connect Group School in Los Angeles, CA, began using design thinking to fashion an educational model that meets their needs, gathering regularly throughout the summer to develop their school from the ground up. On August 25, The Connect Group School will pilot the program their students are designing.

With a foundation of freedom and democracy drawn from the Sudbury Valley School model, the students participate in every aspect of school management. Students are involved in hiring, admissions, policy, and budgetary decisions. Like a true democracy, each participant will have a vote in the matters that impact their academic lives..

Design thinking is a dynamic pedagogy for co-learning that cultivates empathy. It is a multidisciplinary approach to solving human-centered problems and an empowering way of addressing needs and concerns. The modes of design thinking promote inquiry, iteration, and prototyping along with critical thinking, communication, teamwork, and making/tinkering. Empathy is highlighted as a mode of its own, wherein the design-thinker attempts to infiltrate and truly come to understand the needs of the end-user..

The design thinking process begins with discovery, moves to ideation and rapid prototyping, and ends with testing and execution. As an evolving process of learning, sharing, dialoguing, and problem solving, design thinking inspires adults and students to learn together. Without a lesson plan as a guide, neither teacher nor student knows where the process will lead. This bi-directional educational process is one I have termed "co-learning"--a human interaction that leads to learning for all parties. These are critical components of learning, because we all start in a place of not knowing, and can all learn something new about old topics.

Design thinking facilitates empathy by encouraging the designer to turn his or her attention towards another person, particularly the end-user being served by the process. In K-12 classrooms, design thinking allows students and staff to engage in challenges and activities that hone their ability to turn attention toward another person, with the intention of learning about needs and experiences outside their own. Design thinking cultivates empathy by training students in attentional skills and by emphasizing the need to help solve problems affecting other people.

By promoting students to a level equivalent to their teacher counterparts, design thinking challenges offer students power and voice that are very motivating. It's a methodology that respects their input in solving challenges and problems that matter.

Students Speak:

Sixteen-year-old David, one of three student co-founders/co-designers of the Connect Group School, said the following about using design thinking to build his school: "I am engaged and motivated to design think because I get to have choices and participate in solving problems that matter."

Allowing students a hand in designing their education helps them feel like active and valued participants. It's a qualitatively different experience than showing up to school on the first day and passively receiving instruction. The quality of difference lies in empathy. Students of The Connect Group School have choices and power in regards to what happens in their school. Their viewpoints, values, and perspectives matter in all areas of school that they wish to engage in.

David continued, "Design thinking gives you experience empathizing with an end-user, not just yourself."

Another student who is contributing to the development of The Connect Group School is Ryan, a 15-year-old male. Ryan said: "I am engaged and motivated to design- think because it's a method of carrying out whatever I want and need."

Ryan's comment highlights the level of empowerment, freedom, and agency that design thinking offers students. Everyone, regardless of age, wants to feel like they can contribute something meaningful, solve their own problems, and meet their own needs. These are aspects of self-agency that need to be taught to youngsters as evidence that we value them as free and capable people. Ultimately, including young people in every aspect of school design and management conveys to them that they matter. At the heart of empathy lies the value that someone matters and is worth our time to understand, from their perspective. Children deserve to be included in this homage of respect.

Twelve-year-old Jill enjoys design thinking because it allows her to move about. She talked about moving around during design thinking challenges and also about the field trips she has taken in the community to learn more about education. Empathic education recognizes children's deep need for free play as a method of learning. Incidentally, design thinking often feels like play time, because it is messy, unpredictable, and rapidly changing.

In the process of design thinking their new school, the students at The Connect Group School participate in the creation of a learning model that is relevant to them. It inspires them to work in the summer months to consider their wants and needs and those of other K-12 students.

This is how empathy as a skill is cultivated through design thinking in the K-12 arena. Planning one's own educational framework is a wonderful empathy-building tool. It stimulates students' engagement and intrinsic motivation while encouraging them to practice self-empathy in service of empathy for others.

View at the original source

Design Thinking 06-26

Design Thinking

Thomas Edison created the electric lightbulb and then wrapped an entire industry around it. The lightbulb is most often thought of as his signature invention, but Edison understood that the bulb was little more than a parlor trick without a system of electric power generation and transmission to make it truly useful. So he created that, too.

Thus Edison’s genius lay in his ability to conceive of a fully developed marketplace, not simply a discrete device. He was able to envision how people would want to use what he made, and he engineered toward that insight. He wasn’t always prescient (he originally believed the phonograph would be used mainly as a business machine for recording and replaying dictation), but he invariably gave great consideration to users’ needs and preferences.

Edison’s approach was an early example of what is now called “design thinking”—a methodology that imbues the full spectrum of innovation activities with a human-centered design ethos. By this I mean that innovation is powered by a thorough understanding, through direct observation, of what people want and need in their lives and what they like or dislike about the way particular products are made, packaged, marketed, sold, and supported.

Many people believe that Edison’s greatest invention was the modern R&D laboratory and methods of experimental investigation. Edison wasn’t a narrowly specialized scientist but a broad generalist with a shrewd business sense. In his Menlo Park, New Jersey, laboratory he surrounded himself with gifted tinkerers, improvisers, and experimenters. 

Indeed, he broke the mold of the “lone genius inventor” by creating a team-based approach to innovation. Although Edison biographers write of the camaraderie enjoyed by this merry band, the process also featured endless rounds of trial and error—the “99% perspiration” in Edison’s famous definition of genius. His approach was intended not to validate preconceived hypotheses but to help experimenters learn something new from each iterative stab. Innovation is hard work; Edison made it a profession that blended art, craft, science, business savvy, and an astute understanding of customers and markets.

Design thinking is a lineal descendant of that tradition. Put simply, it 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. Like Edison’s painstaking innovation process, it often entails a great deal of perspiration.

I believe that design thinking has much to offer a business world in which most management ideas and best practices are freely available to be copied and exploited. Leaders now look to innovation as a principal source of differentiation and competitive advantage; they would do well to incorporate design thinking into all phases of the process.

Getting Beneath the Surface

Historically, design has been treated as a downstream step in the development process—the point where designers, who have played no earlier role in the substantive work of innovation, come along and put a beautiful wrapper around the idea. To be sure, this approach has stimulated market growth in many areas by making new products and technologies aesthetically attractive and therefore more desirable to consumers or by enhancing brand perception through smart, evocative advertising and communication strategies. During the latter half of the twentieth century design became an increasingly valuable competitive asset in, for example, the consumer electronics, automotive, and consumer packaged goods industries. But in most others it remained a late-stage add-on.

Now, however, rather than asking designers to make an already developed idea more attractive to consumers, companies are asking them to create ideas that better meet consumers’ needs and desires. The former role is tactical, and results in limited value creation; the latter is strategic, and leads to dramatic new forms of value.

Moreover, as economies in the developed world shift from industrial manufacturing to knowledge work and service delivery, innovation’s terrain is expanding. Its objectives are no longer just physical products; they are new sorts of processes, services, IT-powered interactions, entertainments, and ways of communicating and collaborating—exactly the kinds of human-centered activities in which design thinking can make a decisive difference. (See the sidebar “A Design Thinker’s Personality Profile.”)

Consider the large health care provider Kaiser Permanente, which sought to improve the overall quality of both patients’ and medical practitioners’ experiences. Businesses in the service sector can often make significant innovations on the front lines of service creation and delivery. By teaching design thinking techniques to nurses, doctors, and administrators, Kaiser hoped to inspire its practitioners to contribute new ideas. Over the course of several months Kaiser teams participated in workshops with the help of my firm, IDEO, and a group of Kaiser coaches. These workshops led to a portfolio of innovations, many of which are being rolled out across the company.

One of them—a project to reengineer nursing-staff shift changes at four Kaiser hospitals—perfectly illustrates both the broader nature of innovation “products” and the value of a holistic design approach. The core project team included a strategist (formerly a nurse), an organizational-development specialist, a technology expert, a process designer, a union representative, and designers from IDEO. This group worked with innovation teams of frontline practitioners in each of the four hospitals.

During the earliest phase of the project, the core team collaborated with nurses to identify a number of problems in the way shift changes occurred. Chief among these was the fact that nurses routinely spent the first 45 minutes of each shift at the nurses’ station debriefing the departing shift about the status of patients. 

Their methods of information exchange were different in every hospital, ranging from recorded dictation to face-to-face conversations. And they compiled the information they needed to serve patients in a variety of ways—scrawling quick notes on the back of any available scrap of paper, for example, or even on their scrubs. 

Despite a significant investment of time, the nurses often failed to learn some of the things that mattered most to patients, such as how they had fared during the previous shift, which family members were with them, and whether or not certain tests or therapies had been administered. For many patients, the team learned, each shift change felt like a hole in their care. Using the insights gleaned from observing these important times of transition, the innovation teams explored potential solutions through brainstorming and rapid prototyping. (Prototypes of a service innovation will of course not be physical, but they must be tangible. Because pictures help us understand what is learned through prototyping, we often videotape the performance of 

Prototyping doesn’t have to be complex and expensive. In another health care project, IDEO helped a group of surgeons develop a new device for sinus surgery. As the surgeons described the ideal physical characteristics of the instrument, one of the designers grabbed a whiteboard marker, a film canister, and a clothespin and taped them together. “Do you mean like this?” he asked. With his rudimentary prototype in hand, the surgeons were able to be much more precise about what the ultimate design should accomplish.

The surgeons described a new device for sinus surgery. One designer grabbed a marker, a film canister, and a clothespin and taped them together. “Do you mean like this?” he asked.

Prototypes should command only as much time, effort, and investment as are needed to generate useful feedback and evolve an idea. The more “finished” a prototype seems, the less likely its creators will be to pay attention to and profit from feedback. The goal of prototyping isn’t to finish. It is to learn about the strengths and weaknesses of the idea and to identify new directions that further prototypes might take.

The design that emerged for shift changes had nurses passing on information in front of the patient rather than at the nurses’ station. In only a week the team built a working prototype that included new procedures and some simple software with which nurses could call up previous shift-change notes and add new ones. They could input patient information throughout a shift rather than scrambling at the end to pass it on. The software collated the data in a simple format customized for each nurse at the start of a shift. The result was both higher-quality knowledge transfer and reduced prep time, permitting much earlier and better-informed contact with patients.

As Kaiser measured the impact of this change over time, it learned that the mean interval between a nurse’s arrival and first interaction with a patient had been more than halved, adding a huge amount of nursing time across the four hospitals. Perhaps just as important was the effect on the quality of the nurses’ work experience. One nurse commented, “I’m an hour ahead, and I’ve only been here 45 minutes.” Another said, “[This is the] first time I’ve ever made it out of here at the end of my shift.”

Thus did a group of nurses significantly improve their patients’ experience while also improving their own job satisfaction and productivity. By applying a human-centered design methodology, they were able to create a relatively small process innovation that produced an outsize impact. The new shift changes are being rolled out across the Kaiser system, and the capacity to reliably record critical patient information is being integrated into an electronic medical records initiative at the company.

What might happen at Kaiser if every nurse, doctor, and administrator in every hospital felt empowered to tackle problems the way this group did? To find out, Kaiser has created the Garfield Innovation Center, which is run by Kaiser’s original core team and acts as a consultancy to the entire organization. The center’s mission is to pursue innovation that enhances the patient experience and, more broadly, to envision Kaiser’s “hospital of the future.” It is introducing tools for design thinking across the Kaiser system.

How Design Thinking Happens

The myth of creative genius is resilient: We believe that great ideas pop fully formed out of brilliant minds, in feats of imagination well beyond the abilities of mere mortals. But what the Kaiser nursing team accomplished was neither a sudden breakthrough nor the lightning strike of genius; it was the result of hard work augmented by a creative human-centered discovery process and followed by iterative cycles of prototyping, testing, and refinement.

The design process is best described metaphorically as a system of spaces rather than a predefined series of orderly steps. The spaces demarcate different sorts of related activities that together form the continuum of innovation. Design thinking can feel chaotic to those experiencing it for the first time. But over the life of a project participants come to see—as they did at Kaiser—that the process makes sense and achieves results, even though its architecture differs from the linear, milestone-based processes typical of other kinds of business activities.

Design projects must ultimately pass through three spaces (see the exhibit “Inspiration, Ideation, Implementation”). We label these “inspiration,” for the circumstances (be they a problem, an opportunity, or both) that motivate the search for solutions; “ideation,” for the process of generating, developing, and testing ideas that may lead to solutions; and “implementation,” for the charting of a path to market. Projects will loop back through these spaces—particularly the first two—more than once as ideas are refined and new directions taken.

Inspiration, Ideation, Implementation

Sometimes the trigger for a project is leadership’s recognition of a serious change in business fortunes. In 2004 Shimano, a Japanese manufacturer of bicycle components, faced flattening growth in its traditional high-end road-racing and mountain-bike segments in the United States. The company had always relied on technology innovations to drive its growth and naturally tried to predict where the next one might come from. This time Shimano thought a high-end casual bike that appealed to boomers would be an interesting area to explore. IDEO was invited to collaborate on the project.

During the inspiration phase, an interdisciplinary team of IDEO and Shimano people—designers, behavioral scientists, marketers, and engineers—worked to identify appropriate constraints for the project. The team began with a hunch that it should focus more broadly than on the high-end market, which might prove to be neither the only nor even the best source of new growth. So it set out to learn why 90% of American adults don’t ride bikes. Looking for new ways to think about the problem, the team members spent time with all kinds of consumers. 

They discovered that nearly everyone they met rode a bike as a child and had happy memories of doing so. They also discovered that many Americans are intimidated by cycling today—by the retail experience (including the young, Lycra-clad athletes who serve as sales staff in most independent bike stores); by the complexity and cost of the bikes, accessories, and specialized clothing; by the danger of cycling on roads not designed for bicycles; and by the demands of maintaining a technically sophisticated bike that is ridden infrequently.

The design team, responsible for every aspect of what was envisioned as a holistic experience, came up with the concept of “Coasting.” Coasting would aim to entice lapsed bikers into an activity that was simple, straightforward, and fun. Coasting bikes, built more for pleasure than for sport, would have no controls on the handlebars, no cables snaking along the frame. As on the earliest bikes many of us rode, the brakes would be applied by backpedaling. With the help of an onboard computer, a minimalist three gears would shift automatically as the bicycle gained speed or slowed. The bikes would feature comfortably padded seats, be easy to operate, and require relatively little maintenance.

This human-centered exploration—which took its insights from people outside Shimano’s core customer base—led to the realization that a whole new category of bicycling might be able to reconnect American consumers to their experiences as children while also dealing with the root causes of their feelings of intimidation—thus revealing a large untapped market.

Three major manufacturers—Trek, Raleigh, and Giant—developed new bikes incorporating innovative components from Shimano. But the design team didn’t stop with the bike itself. In-store retailing strategies were created for independent bike dealers, in part to alleviate the discomfort that biking novices felt in stores designed to serve enthusiasts. The team developed a brand that identified Coasting as a way to enjoy life. (“Chill. Explore. Dawdle. Lollygag. First one there’s a rotten egg.”) And it designed a public relations campaign—in collaboration with local governments and cycling organizations—that identified safe places to ride.

Although many others became involved in the project when it reached the implementation phase, the application of design thinking in the earliest stages of innovation is what led to this complete solution. Indeed, the single thing one would have expected the design team to be responsible for—the look of the bikes—was intentionally deferred to later in the development process, when the team created a reference design to inspire the bike companies’ own design teams. After a successful launch in 2007, seven more bicycle manufacturers signed up to produce Coasting bikes in 2008.

Taking a Systems View

Many of the world’s most successful brands create breakthrough ideas that are inspired by a deep understanding of consumers’ lives and use the principles of design to innovate and build value. Sometimes innovation has to account for vast differences in cultural and socioeconomic conditions. In such cases design thinking can suggest creative alternatives to the assumptions made in developed societies.

India’s Aravind Eye Care System is probably the world’s largest provider of eye care. From April 2006 to March 2007 Aravind served more than 2.3 million patients and performed more than 270,000 surgeries. Founded in 1976 by Dr. G. Venkataswamy, Aravind has as its mission nothing less than the eradication of needless blindness among India’s population, including the rural poor, through the effective delivery of superior ophthalmic care. (One of the company’s slogans is “Quality is for everyone.”) From 11 beds in Dr. Venkataswamy’s home, Aravind has grown to encompass five hospitals (three others are under Aravind management), a plant that manufactures ophthalmic products, a research foundation, and a training center.

Aravind’s execution of its mission and model is in some respects reminiscent of Edison’s holistic concept of electric power delivery. The challenge the company faces is logistic: how best to deliver eye care to populations far removed from the urban centers where Aravind’s hospitals are located. Aravind calls itself an “eye care system” for a reason: Its business goes beyond ophthalmic care per se to transmit expert practice to populations that have historically lacked access. The company saw its network of hospitals as a beginning rather than an end.

Much of its innovative energy has focused on bringing both preventive care and diagnostic screening to the countryside. Since 1990 Aravind has held “eye camps” in India’s rural areas, in an effort to register patients, administer eye exams, teach eye care, and identify people who may require surgery or advanced diagnostic services or who have conditions that warrant monitoring.

In 2006 and early 2007 Aravind eye camps screened more than 500,000 patients, of whom nearly 113,000 required surgery. Access to transportation is a common problem in rural areas, so the company provides buses that take patients needing further treatment to one of its urban facilities and then home again. Over the years it has bolstered its diagnostic capabilities in the field with telemedicine trucks, which enable doctors back at Aravind’s hospitals to participate in care decisions. In recent years Aravind’s analysis of its screening data has led to specialized eye camps for certain demographic groups, such as school-age children and industrial and government workers; the company also holds camps specifically to screen for eye diseases associated with diabetes. All these services are free for the roughly 60% of patients who cannot afford to pay.

In developing its system of care, Aravind has consistently exhibited many characteristics of design thinking. It has used as a creative springboard two constraints: the poverty and remoteness of its clientele and its own lack of access to expensive solutions. For example, a pair of intraocular lenses made in the West costs $200, which severely limited the number of patients Aravind could help. Rather than try to persuade suppliers to change the way they did things, Aravind built its own solution: a manufacturing plant in the basement of one of its hospitals. It eventually discovered that it could use relatively inexpensive technology to produce lenses for $4 a pair.

Throughout its history—defined by the constraints of poverty, ignorance, and an enormous unmet need—Aravind has built a systemic solution to a complex social and medical problem.

Getting Back to the Surface

I argued earlier that design thinking can lead to innovation that goes beyond aesthetics, but that doesn’t mean that form and aesthetics are unimportant. Magazines like to publish photographs of the newest, coolest products for a reason: They are sexy and appeal to our emotions. Great design satisfies both our needs and our desires. Often the emotional connection to a product or an image is what engages us in the first place. Time and again we see successful products that were not necessarily the first to market but were the first to appeal to us emotionallyand functionally. In other words, they do the job and we love them. The iPod was not the first MP3 player, but it was the first to be delightful. Target’s products appeal emotionally through design and functionally through price—simultaneously.

This idea will grow ever more important in the future. As Daniel Pink writes in his book A Whole New Mind, “Abundance has satisfied, and even over-satisfied, the material needs of millions—boosting the significance of beauty and emotion and accelerating individuals’ search for meaning.” As more of our basic needs are met, we increasingly expect sophisticated experiences that are emotionally satisfying and meaningful. These experiences will not be simple products. They will be complex combinations of products, services, spaces, and information. They will be the ways we get educated, the ways we are entertained, the ways we stay healthy, the ways we share and communicate. Design thinking is a tool for imagining these experiences as well as giving them a desirable form.

One example of experiential innovation comes from a financial services company. In late 2005 Bank of America launched a new savings account service called “Keep the Change.” IDEO, working with a team from the bank, helped identify a consumer behavior that many people will recognize: After paying cash for something, we put the coins we received in change into a jar at home. Once the jar is full, we take the coins to the bank and deposit them in a savings account. For many people, it’s an easy way of saving. Bank of America’s innovation was to build this behavior into a debit card account. Customers who use their debit cards to make purchases can now choose to have the total rounded up to the nearest dollar and the difference deposited in their savings accounts.

The success of this innovation lay in its appeal to an instinctive desire we have to put money aside in a painless and invisible way. Keep the Change creates an experience that feels natural because it models behavior that many of us already exhibit. To be sure, Bank of America sweetens the deal by matching 100% of the change saved in the first three months and 5% of annual totals (up to $250) thereafter. This encourages customers to try it out. But the real payoff is emotional: the gratification that comes with monthly statements showing customers they’ve saved money without even trying.

In less than a year the program attracted 2.5 million customers. It is credited with 700,000 new checking accounts and a million new savings accounts. Enrollment now totals more than 5 million people who together have saved more than $500 million. Keep the Change demonstrates that design thinking can identify an aspect of human behavior and then convert it into both a customer benefit and a business value.

Thomas Edison represents what many of us think of as a golden age of American innovation—a time when new ideas transformed every aspect of our lives. The need for transformation is, if anything, greater now than ever before. No matter where we look, we see problems that can be solved only through innovation: unaffordable or unavailable health care, billions of people trying to live on just a few dollars a day, energy usage that outpaces the planet’s ability to support it, education systems that fail many students, companies whose traditional markets are disrupted by new technologies or demographic shifts. These problems all have people at their heart. They require a human-centered, creative, iterative, and practical approach to finding the best ideas and ultimate solutions. Design thinking is just such an approach to innovation.

View at the original sourcer

The Four Phases of Design Thinking 06-25

The Four Phases of Design Thinking

What can people in business learn from studying the ways successful designers solve problems and innovate? On the most basic level, they can learn to question, care, connect, and commit — four of the most important things successful designers do to achieve significant breakthroughs.

Having studied more than a hundred top designers in various fields over the past couple of years (while doing research for a book), I found that there were a few shared behaviors that seemed to be almost second nature to many designers. And these ingrained habits were intrinsically linked to the designer’s ability to bring original ideas into the world as successful innovations. All of which suggests that they merit a closer look.

Question. If you spend any time around designers, you quickly discover this about them: They ask, and raise, a lot of questions. Often this is the starting point in the design process, and it can have a profound influence on everything that follows. Many of the designers I studied, from Bruce Mau to Richard Saul Wurman to Paula Scher, talked about the importance of asking “stupid questions”–the ones that challenge the existing realities and assumptions in a given industry or sector. The persistent tendency of designers to do this is captured in the joke designers tell about themselves. How many designers does it take to change a light bulb? Answer: Does it have to be a light bulb?

In a business setting, asking basic “why” questions can make the questioner seem naïve while putting others on the defensive (as in, “What do you mean ‘Why are we doing it this way?’ We’ve been doing it this way for 22 years!”). But by encouraging people to step back and reconsider old problems or entrenched practices, the designer can begin to re-frame the challenge at hand — which can then steer thinking in new directions. For business in today’s volatile marketplace, the ability to question and rethink basic fundamentals — What business are we really in? What do today’s consumers actually need or expect from us? — has never been more important.

Care. It’s easy for companies to say they care about customer needs. But to really empathize, you have to be willing to do what many of the best designers do: step out of the corporate bubble and actually immerse yourself in the daily lives of people you’re trying to serve. What impressed me about design researchers such as Jane Fulton Suri of IDEO was the dedication to really observing and paying close attention to people — because this is usually the best way to ferret out their deep, unarticulated needs. Focus groups and questionnaires don’t cut it; designers know that you must care enough to actually be present in people’s lives.

Connect. Designers, I discovered, have a knack for synthesizing–for taking existing elements or ideas and mashing them together in fresh new ways. This can be a valuable shortcut to innovation because it means you don’t necessarily have to invent from scratch. By coming up with “smart recombinations” (to use a term coined by the designer John Thackara), Apple has produced some of its most successful hybrid products; and Nike smartly combining a running shoe with an iPod to produce its groundbreaking Nike Plus line (which enables users to program their runs). It isn’t easy to come up with these great combos. Designers know that you must “think laterally” — searching far and wide for ideas and influences — and must also be willing to try connecting ideas that might not seem to go together. This is a way of thinking that can also be embraced by non-designers.

Commit. It’s one thing to dream up original ideas. But designers quickly take those ideas beyond the realm of imagination by giving form to them. Whether it’s a napkin sketch, a prototype carved from foam rubber, or a digital mock-up, the quick-and-rough models that designers constantly create are a critical component of innovation — because when you give form to an idea, you begin to make it real.

But it’s also true that when you commit to an idea early — putting it out into the world while it’s still young and imperfect — you increase the possibility of short-term failure. Designers tend to be much more comfortable with this risk than most of us. They know that innovation often involves an iterative process with setbacks along the way — and those small failures are actually useful because they show the designer what works and what needs fixing. The designer’s ability to “fail forward” is a particularly valuable quality in times of dynamic change. Today, many companies find themselves operating in a test-and-learn business environment that requires rapid prototyping. Which is just one more reason to pay attention to the people who’ve been conducting their work this way all along.

View at the original source